Accounting Training

Blog

Blog Archive


2017

Important Accounting Terminologies - 'Deferred Revenue Expenditure'

Important Accounting Terminologies - "Deferred Revenue Expenditure"

The modern accounting system of double entry book keeping is based on certain principles and standards. One of them is the concept of matching costs with the revenue or benefits derived from such costs. However, in real life business scenario, not all income and costs directly match up with the goods and services sold or the assets purchased. In many cases, the cost is incurred at present but value received from such expenditure is actually delayed over time. According to generally accepted accounting principles, money and value should be matched whenever possible. This means that a business must account for expenditures that may not immediately generate profit in the current accounting period. 

While revenue expenditure is a simple concept, deferred revenue expenditure is slightly more complicated. In this case, the value received from the expenditure is not immediate.

What is “Deferred Revenue Expenditure”?

It will be easier to understand the meaning of deferred revenue expenditure, if you know the word deferred, which means “Holding something back for a later time”.
Deferred Revenue Expenditure is an expenditure which is revenue in nature and incurred during an accounting period, but its benefits are to be derived over a number of following accounting periods. These expenses are unusually large in amount and, essentially, the benefits are not consumed within the same accounting period.
Sometimes the benefit is delayed over months or even years. In this case, the business creates a deferred revenue expenditure account to match up the expense with the value received, similar to depreciation accounts but for a different set of activities.

Examples of Deferred Revenue Expenditure:

A common example for deferred revenue expenditure is in marketing. Advertising, according to many theories, has a delayed effect. This means that the business can spend money on an advertising campaign, but not realize increased sales until several months down the line when customers absorb the full impact of the ads.
Let’s suppose that a company is introducing a new product to the market and decides to spend a large amount on its advertising in the current accounting period. This marketing spend is supposed to draw benefits beyond the current accounting period, hence, it is a better idea not to charge the entire amount in the current year’s P&L Account and spread it over multiple periods.

Sometimes even a big loss, arising from an accident or other unforeseen circumstances, may be spread over 3 or 4 years instead of being charged off wholly against the revenues of the year in which the loss is actually suffered. The loss of building because of an earthquake may be treated on this manner. This type of loss is treated as revenue expenditure. It may be note here that the amount which has not been charged off to the profit and loss account is shown in the balance sheet as a sort of asset.

Treatment in the books of Accounts:

The part of the amount which is charged to the profit and loss account in the current accounting period is reduced from the total expenditure and the rest is shown in the balance sheet as an asset (fictitious asset, i.e. it is not really an asset). Similarly, every year a part of the total expenditure is credited from the total expenditure and is shown in the P&L A/c. the balance of the expenditure is shown in the Balance Sheet.

Treatment in Tally ERP 9:

Tally ERP 9 provides a special group for deferred revenue expenditure namely “Misc. Expenses (ASSET)”. All expenditures which a business wishes to defer over a period of more than one accounting cycle.

Financial Management