Definition of Deferred Revenue Expenditure
Deferred revenue expenditure is expenditure incurred in the given accounting period; however, a benefit that is getting derived from the same will last for more than one accounting period. Such expenditure will be paid up front; however, the benefit will be kept on getting earned by the entity.
Expenditure which will give benefit to an organisation for the future period is termed as deferred revenue expenditure. Deferred revenue expenditures are of revenue in nature; however, benefits that can be derived from that will last for many years. A portion of expenditure will be written off every year in proportion to the benefit derived from the same. Generally, whenever deferred revenue expenditure is incurred, it will be disclosed on the asset side, and every year portion of it will be written off in the income statement. Such expenditure which is of revenue in nature; however, its benefit is likely to be available in more than one 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 of revenue in nature
- The benefit of such expenditure will be earned for the period of more than one accounting year.
- It is in the nature of investment incurred one time, and benefits will keep on coming.
- The amount of such expenditure will be very huge, so one needs to identify it separately.
- Disclosure of deferred revenue expenditure plays a very important role because it will directly impact the profitability of the entity.
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 cost is needed to be incurred today; as a result benefit of the same can be earned in the coming years. Such advertisement cost will be huge, and such cost incurred does not match with only one year. So in order to comply with the matching principle as well, such heavy expenditure will be disclosed on the balance sheet and will be 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 due to extraordinary natural calamities which are not in control. Any entity cannot face such loss in one year. Such loss needed to be spread to multiple years, based on the estimate of the years within which the entity is expecting to get recover its position.
3. Research and Development Cost
Research gives long term sustainability to the business. Such research cost will give benefit for many years to the organisation. Hence to match the benefit from such research, the cost must be allocated over the years.
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 benefit of the same will be derived for more than one accounting period.||Capital Expenditure is expenses incurred to boost the existing capacity of the entity.|
|Example||Advertisement campaign undertaken by the entity to make the public aware about the products, the benefit of such campaign will be available for further 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 in maintaining 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 be converted to cash. It’s similar to sunk cost.||Such expenses can be converted to cash. It enhances the capacity, which will increase the production.|
|Purpose||For sales promotion and advertising activities||The purpose is to create the asset.|
|Benefits prevail unto||Generally, benefit from such expenses are ranging from 3 to 5 years||Generally, benefit from such expenses is of pro longed duration like more than 10 years|
|Written off||Based on the duration of 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 getting 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 the deferred revenue expenditures:
- In Income Statement
Income statement for the period ended on……….
|To Deferred revenue expenditure w/o||XXX|
Periodic written off the 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 in complying with the accounting principle of the matching concept. All Cost should be booked 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. A portion of Cost is getting booked equivalent to benefits getting derived for the given period of time. This ensures that the correct profit is getting calculated and not getting understated.
- 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 incurred to ensure that the business keeps on 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 as well. Any understatement or overstatement of such expenditure will have a direct impact over 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 along with examples and importance. You may also have a look at the following articles to learn more –