Updated July 14, 2023
Definition of Deferred Revenue Expenditure
Deferred revenue expenditure is incurred in the given accounting period; however, a benefit derived from the same will last for more than one accounting period. Such expenditure will be paid upfront; however, the entity will keep earning the benefit.
Deferred revenue expenditure refers to the expenditure incurred by an organization that will provide benefits in future periods. Deferred revenue expenditures are revenue in nature; however, benefits that can be derived from them will last for many years. A portion of expenditure will be written off yearly in proportion to the benefit derived from the same. Generally, whenever It is incurred, it will disclose on the asset side, and every year portion of it will be written off in the income statement. Such expenditure is revenue; however, its benefit will likely be available in over a year. It will be appropriate to cover the cost of such expenditure equivalent to accounting years till its benefit can be ripped.
Characteristics of Deferred Revenue Expenditure
- Deferred Revenue Expenditure is revenue in nature.
- The benefit of such expenditure will earn for more than one accounting year.
- It is akin to making an investment that incurs costs initially but continues to generate ongoing benefits.
- Such expenditure will be huge, so one needs to identify it separately.
- Disclosure of deferred revenue expenditure is important because it will directly impact the entity’s profitability.
Examples of Deferred Revenue Expenditure
Following are the examples of deferred revenue expenditures:
1. Heavy Advertisement Expenditures
Advertisement campaign is the key for the marketing department. Such advertisement costs need to incur today; as a result, the benefit of the same can earn in the coming years. Such advertisement costs will be huge, not matching only one year. So to comply with the matching principle, such heavy expenditures will disclose on the balance sheet and written off proportionately.
2. Exceptional Losses
Business is all about uncertainties. There are full chances that losses can be incurred due to normal movement of the economic cycle or to extraordinary natural calamities that are not in control. Any entity cannot face such a loss in one year. Based on the estimated years the entity expects to recover its position, such loss needed to spare over multiple years.
3. Research and Development Cost
Research gives long term sustainability to the business. Such research costs will give benefit for many years to the organization. Hence, the cost must be allocated over the years to match the benefit of such research.
Difference Between Deferred Revenue Expenditure and Capital expenditure
|Point||Deferred Revenue Expenditure||Capital Expenditure|
|Definition||Deferred revenue expenditure is incurred in one period, but the same benefit will be derived for more than one accounting period.||Capital Expenditure is expenses incurred to boost the existing capacity of the entity.|
|Example||Advertisement campaigns undertaken by the entity to make the public aware of the products and the benefits of such campaigns will be available for many years.||Purchasing of an asset by the entity for the business like plant machinery, building, copyrights, etc., which will increase the production/supply of services and able to cater to more needs|
|Enhancement in earning capacity||Such expenses help maintain the earning capacity of the entity.||Such expenses help in Increasing the earning capacity of the entity|
|Nature of revenue||Such expenditure is revenue in nature||Such expenditure is capital in nature|
|Convertibility to cash||Such expenses cannot convert to cash. It’s similar to sunk cost.||Such expenses can convert to cash. It enhances the capacity, which will increase production.|
|Purpose||For sales promotion and advertising activities||The purpose is to create the asset.|
|Benefits prevail unto||Generally, benefits from such expenses range from 3 to 5 years||Generally, the benefit from such expenses is of prolonged duration, like more than 10 years|
|Written off||Based on the duration of the benefit, such expenses are getting written off over a period of 3 to 5 years in the income statement.||Capital Expenditures are getting written off in the income statement in the form of Depreciation. The duration of such depreciation will be based on the generally accepted accounting principles.|
Disclosure in Financial Statements
Disclosure of any financial item is undertaken based on the generally accepted accounted principles and the accounting standards issued by the local financial bodies. Given below is the most prevailing accounting treatment for deferred revenue expenditures:
- In Income Statement
Income statement for the period ended on……….
|To Deferred revenue expenditure w/o||XXX|
Periodic written off amount of deferred revenue expenditure will be debited to the Profit and Loss account.
- In Balance Sheet
Balance sheet as on………..
|To Deferred revenue expenditure w/o||XXX|
|(un written off portion)|
Importance of Deferred Revenue Expenditure
Some of the importance is given below:
- Matching Principle: Deferred revenue expenditure helps comply with the matching concept’s accounting principle. All Costs should be in the income statement only when relevant revenues can be booked and vice versa.
- Ensures Correct Profit Is Disclosed: Expenditures are getting deferred; as a result, the cost is not getting overstated. We book a portion of the cost equivalent to the benefits derived for the given period. This ensures that we calculate the correct profit and avoid understating it.
- Maintains the Earning Capacity: Such expenditure helps the business in running mode. It works as a lubricant for business. It ensures that the public remains aware of a business’s product or services, which will maintain the earning capacity of the business.
Thus Deferred revenue expenditure is incurred to ensure that the business keeps moving. Such expenditure is very much necessary in today’s highly competitive market. Moreover, disclosure of such expenditure is of the utmost importance from the statutory perspective. Any understatement or overstatement of such expenditure will directly impact profitability. Thus, correct disclosure with adequate justification ensures the correct profit ratio of the business.
This is a guide to Deferred Revenue Expenditure. Here we also discuss the definition and characteristics of deferred revenue expenditure, examples, and importance. You may also have a look at the following articles to learn more –