What is Deferred Revenue Expenditure?

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.

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).

 

Example

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.

The below image shows a company spending 150K on advertising, which is unusually large as compared to the size of their business. The company decides to divide the expense over 3 yearly payments of 50K each as the benefits from the spend are expected to be derived for 3 years.

 

Image explaining Deferred revenue expenditure

50K will be shown in current P&L

 

*Large losses originating from unforeseen circumstances, such as a natural disaster or fire, etc., may also be treated like a deferred revenue expenditure.

 

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