Capital and Revenue Items

Deferred Revenue Expenditure

In business, Deferred Revenue Expenditure is an expense which is incurred while accounting period. And the result and benefits of this expenditure are obtained over the multiple years in the future. 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. Thus, the profit and loss account statement is prepared as a periodic statement. Let us learn more about it in greater detail.

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Deferred Revenue Expenditure  

Capital expenditure leads to the purchase of an asset or which increases the earning capacity of the business. The organization derives benefit from such expenditure for a long-term.

For example, the purchase of building, plant and machinery, furniture, copyrights, etc.

On the other hand, revenue expenditure is that from which the organization derives benefit only for a period of one year and it only helps in maintaining the earning capacity of the business.

For example, the cost of raw materials, labour expenses, depreciation on assets, etc. However, there is also one more category of expenses, often referred to as Deferred Revenue Expenditure.

These expenses are revenue in nature but the business derives benefits from these expenses for a period of more than one year.

Though 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.

The charge of these expenses is proportionately deferred over the period for which its benefits are derived. This is as per the Matching Principle.

For example, a huge amount of advertising or marketing expenses in order to introduce a new product or to enter a new market, loss by an earthquake, flood, etc.

The practice to write off these expenses may vary from firm to firm. Usually, we write them off over a period of 3 to 5 years.

However, when this expenditure is appropriated to a specific item then it has to be written off over the useful life of that item.

We show the balance amount of the expense on the Assets side of the Balance Sheet. However, the joint stock company shows it as a deduction from the Reserves.

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Characteristics of Deferred Revenue Expenditure

  1. It is revenue in nature.
  2. The benefit of this expenditure lasts for a period of more than one accounting year.
  3. It pertains wholly or partly for the future years.
  4. It is a huge amount of expense and thus, is deferred over a period of time.

deferred revenue

(Source: freepik.com)

Classification of Deferred Revenue Expenditure

  1. Expenses 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 eg. advertising expenditure.
  2. Expenditure in respect of services rendered: Such expenditure is considered as an asset as it cannot be allocated to one accounting year. For example, discount on issue of debentures, the cost of research and experiments, etc.
  3. Amount relating to exceptional loss: We treat the exceptional losses also as deferred revenue expenditure. For eg. Loss by earthquake or floods, loss by confiscation of property, etc.

Solved Example on Deferred Revenue

Question: Differentiate between Capital and Deferred Revenue Expenditure.

Ans.

Basis of difference Capital Expenditure Deferred Revenue Expenditure
1. Benefit period Its benefits accrue for a long time to the business, say for 10 to 15 years. Its benefits accrue to the business for a future period, say for 3 to 5 years.
2. Conversion into Cash It can be converted into cash at any time as these are usually investments in assets. We can never convert these into cash.
3. Writing off We do not write off them over a period of time. We write off these over a period of 3 to 5 years.

 

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