Deferred Revenue Expenditure refers to those expenditures which are essentially of a revenue nature but their benefits are derived over a period of time, typically more than one accounting period. Unlike regular revenue expenditure, which is fully charged to the profit and loss account in the year of occurrence, deferred revenue expenditure is spread out and written off over several accounting periods.
Examples of Deferred Revenue Expenditure:
- Heavy advertising costs for a product launch that will benefit the business over several years.
- Preliminary expenses incurred during the formation of a company.
- Expenditure on research and development that is expected to generate benefits over multiple years.
- Major repair costs of machinery that significantly extend the asset’s useful life.
Characteristics of Deferred Revenue Expenditure
- Revenue Nature: The expenditure is related to day-to-day business operations and is not meant for acquiring or improving fixed assets.
- Long-term Benefit: The key feature of deferred revenue expenditure is that while it is incurred in the current year, the benefits are expected to be reaped over future accounting periods.
- Gradual Write-off: The expenditure is not fully charged to the income statement in one year. Instead, a portion is written off each year, reflecting the benefit derived in each period.
Accounting Treatment
Deferred revenue expenditure is initially recorded as an asset on the balance sheet under the heading “Miscellaneous Expenditure” or “Deferred Expenditure.” This is because the business is expected to receive benefits from the expense over several years. It is gradually written off (amortized) over time by transferring a portion of the expenditure to the profit and loss account each year.
For example, if a company incurs a heavy advertising cost of ₹10,00,000 that is expected to benefit the company over five years, instead of charging the entire ₹10,00,000 to the profit and loss account in the first year, the company may write off ₹2,00,000 each year for five years.
Importance of Deferred Revenue Expenditure
- Smoother Profit Reporting: Writing off deferred revenue expenditure over multiple years helps businesses avoid large one-time hits to profitability. This leads to more accurate reporting of profits, reflecting a steady financial performance.
- Better Matching of Costs and Revenues: Since the benefits of deferred revenue expenditures accrue over time, spreading out the expense allows for a better match between the cost incurred and the revenue generated from it.
- Enhanced Financial Planning: By deferring the expense over time, companies can plan their finances and cash flows more effectively.
Download as PDF
Go back to Financial Accounting Course
Checkout Full B Com Study Material