Deferred Revenue Expenditure in detail

While revenue expenditure is a simple concept, deferred revenue expenditure is slightly more complicated. Deferred revenue expenditure  is an expenditure which is incurred in the present accounting period but its benefits are incurred in the following or the future accounting periods.

This expenditure might be written off in the same financial year or over a period of a few years.

For example, revenue used for advertisement is deferred revenue expenditure because it will keep showing its benefits over the period of two to three years.

Although the benefit of these expenses lasts for a number of years, these do not fall under the Capital expenditure. Because these are heavy expenses but do not result in the acquisition of an asset.

FEATURES OF DEFERRED REVENUE EXPENDITURE

The following are the main features of deferred expenditure –

  1. The benefit of the expenditure is accrued for more than one year of an accounting period.
  2. It is not fully written off in the year of actual expenditure. It is written off over a period of certain years.
  3. The balance available after writing off (i.e., Actual expenditure – Amount written off) is shown on the assets side balance sheet.
  4. The practice of deferring expenditures usually applies to larger, more expensive investments that will be consumed over time.

CLASSIFICATION OF DEFERRED REVENUE EXPENDITURE

It is classified in following 3 categories :

  • Expenditure partly paid in advance :-  It is when the firm derives a portion of the benefit in the current accounting year and will reap the balance in the future years. Thus, it shows the balance of the benefit that it will reap in future on the Assets of the Balance Sheet. For example , advertising expenditure.
  • Services Rendered :Since the expenditure for the services rendered cannot be allocated to one year only, and also there be no asset created with such expenditure—for example, the cost of research and development for the company.
  • Exceptional Losses :Exceptional losses such as earthquake, tsunamis etc. are also treated as deferred expenditure.

 

Thus, in simple words the expenditure which is huge in value and is written off over a period of more than a year by considering it to be an asset is known as deferred revenue expenditure

Accounting & Finance for Banking

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