What is Deferred Revenue Expenditure? Deferred Revenue Expenditure is an expenditure which is revenue in nature and incurred during an accounting period, but its benefits are to be derived in multiple future accounting periods. Such expenditure is then known as “Deferred Revenue Expenditure” and is Written off over a period of a few years and not wholly in the year in which it is incurred. So, the question is: What type of Deferred Revenue Expenditure is added to Accounting?
The Concept of Accounting explains the type of Deferred Revenue Expenditure is added.
It will be easier to understand the meaning of deferred revenue expenditure if you know the word deferred. Which means “Holding something back for a later time”. In some cases, the benefit of revenue expenditure may be available for a period of two or three or even more years. These expenses are unusually large in amount and, essentially, the benefits are not consumed within the same accounting period. Part of the amount which is charged to profit and loss account in the current accounting period is reduced from total expenditure and rest is shown in the balance sheet as an asset.
A new firm may advertise very heavily in the beginning to capture a position in the market. The benefit of this advertising campaign will last quite a few years. It will be better to write off the expenditure in three or four years and not only in the first year. When loss of a specially heavy and exceptional nature is sustained, it can also be treated as deferred revenue expenditure. If a building is destroyed by fire or earthquake, the loss may be written off in three or four years.
The amount not yet written off appears in the balance sheet. But, it should be noted, loss resulting from transactions entered into. Such as a speculative purchase or sale of a large number of commodities. Cannot be treated as deferred revenue expenditure. Only loss arising from circumstances beyond one’s control can be so treated. Suppose, at the end of 2010-2011, a company owed $ 1, 00,000, expressed in rupees at Rs 48, 00,000. Suppose in 2011-2012 the rupee was devalued to Rs 49.50 per dollar raising the liability in terms of rupees to Rs 49, 50,000. This increase is a loss unless it relates to a specific asset; it can be treated as deferred revenue expenditure and spread over a few years.
Then it is called deferred revenue expenditure. For example:
- Preliminary expenses at the time of formation of new limited companies.
- Heavy advertisement expenses.
- Heavy Research and development expenses.
- Commission on the issue of shares and debentures.
- Major repair expenses.
- Discount on issue of shares or debentures, and.
- Expenses relating to shifting the business premises from one place to another place.
Understand Another Example,
Let’s suppose that a company is introducing a new product to the market and decides to spend a large amount on its advertising in the current accounting period. This marketing spend is supposed to draw benefits beyond the current accounting period. It is a better idea not to charge the entire amount in the current year’s P&L Account and amortize it over multiple periods.
The image shows a company spending 150K on advertising. Which is unusually large as compared to the size of their business. The company decides to divide the expense over 3 yearly payments of 50K. Each as the benefits from the spend is expected to be derived for 3 years.