What is Deferred Revenue Expenditure?
Deferred Revenue Expenditure implies the expenditure incurred in the course of business during the current accounting period but the benefits arising out of it can be enjoyed over the years in the future. That is why, the total expenditure is written off in the subsequent number of years for which the benefit is available and the remaining amount which not written off is shown as an asset in the position statement, i.e. Balance Sheet.
The objective is to avoid unduly heavy charges on a single accounting period. Thus, the postponement of charging off operation is because of the nature of expenses and the advantages arising from that.
It is basically a cost to the company, which has been paid in the current period but its effect on the company’s profit and loss will be reflected in the coming years, based on its utilization. As per the accrual basis of accounting, recording deferred revenues and expenses as and when they are earned and incurred, helps in matching incomes and expenses for the period.
Concept of Deferred Revenue Expenditure
The term ‘deferred’ simply means ‘postponing something for a later time’. Deferred revenue expenditure is based on the presumption that the usefulness of certain assets does not expire in the year in which they take place.
If a firm carries out substantial repairs to the existing plant and machinery, it can be prevented from being deteriorated. If such expenditure is treated as revenue expenditure and deducted from the current year’s gain, what we do is we are making the current year’s profit to absorb all the expenditure, whose benefit will be received over the years. So instead of charging the entire expenditure in the year in which expense is made, the expenditure is divided into parts and written off over the period.
Therefore, it includes non-recurring heavy expenditure made for specific purposes, whose amount is not completely exhausted in the current financial year in which the expenditure is incurred, because the benefit will last for more than one year and so the unexhausted portion of the expenditure is carried forward for the subsequent years.
Hence, a certain portion of the expenditure will be adjusted every year just like a revenue expenditure.
Features of Deferred Revenue Expenditure
The pointers given below explain the features of deferred revenue expenditure:
- Revenue expenditure of capital nature: Expenditure made by the company for promotion, development, improvement is generally revenue expenditure. However, they are treated as capital expenditures.
- Written off in parts: Deferred revenue expenditures are not written off in the year in which payment for the expense has been made or the liability is incurred, rather they are split over the period, and then it is written off accordingly.
- Appears on the asset side of Balance Sheet: It is treated as an asset, (Fictitious asset), and so it appears on the asset side of the Balance sheet.
- Fictitious Asset: It must be noted that the part of the amount which is charged to the profit and loss account of the present financial year is deducted from the actual amount of expenditure and the remaining amount is shown in the balance sheet as a fictitious asset.
Examples of Deferred Revenue Expenditure
Some common examples of deferred revenue expenditure are:
- Preliminary Expenses
- Advertisement Expenses
- Underwriting commission
- Redecoration Expenses
- Expenses on a scientific experiment
- Discount allowed on the issue of shares and debentures
- Development expenditure on mines and minerals
- Cost of issue of shares and debentures
- Loss on the issue of shares and debentures
- Legal Expenses
Accounting Treatment of Deferred Revenue Expenditure
As these expenditures are utilized over the years, so they are treated as assets in the balance sheet, just like all other assets. And because these are not tangible assets, they need to be written off over the period. Henceforth, as a certain portion of this expenditure is charged against the profit and loss account, debit is made in the profit and loss account and specific asset’s account will be credited simultaneously.
The amount written off will also be reduced from the book value of the assets and it will be treated in the same way depreciation is treated in the books of accounts.
What are Fictitious Assets?
Assets that do not exist in tangible form and have no real value are called fictitious assets. Typically, these are not real assets, however, they are treated as assets on legal and technical grounds. Such assets are revenue expenditures of capital nature, whose value is spread and written off over the years.
Deferred Revenue Expenditure can be understood as the expenditure whose payment is already made or liability has been incurred, however, the amount is carried forward, presuming that it is likely to give benefit for more than one accounting period.
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Thanks for the Article. I really liked detailing a list of examples to get a comprehensive understanding. It’s helpful. Keep up the great work!