Saturday, 21 July 2012

Deferred Revenue Expenditure

Deferred Revenue Expenditure:
Simply an expenditure of revenue nature is a Deferred Revenue Expenditure and the  benefit of a revenue expenditure may be available for period of two or three or even more years. Such expenditure is then known as "Deferred Revenue Expenditure" and is written off over a period of a few years and not wholly in the year in which it is incurred. 

For example, a new firm may advertise very heavily in the beginning to capture a position in the market. The benefit of this advertising campaign will last quite a few years. It will be better to write off the expenditure in there or four and not in the first year.

Accounting Treatment: 
Deferred revenue expenditure is the expenditure which is originally revenue in nature but the amount spent is so large that the benefit is received for not a year but for many years. 
A proportionate amount is charged to profit and loss account of each year and balance is carried forward to subsequent years as deferred revenue expenditure. It is shown as an asset in the balance sheet, e.g., heavy expenditure incurred on advertisements.  

Heavy advertisement expenses , because this is for promotion of sale so, it is revenue expenses but because amount is too large so it is also capital expenditure. Now, it will include in deferred revenue expenditure. 


Example:
If we fix the target of getting benefit for this advertisement is 10 years and advertising cost $ 500000. Now $ 500000 is divided by10 years and we get $ 50000 and it will show as revenue expense which is debited to  profit and loss account and balance amount of $ 450000 will show in balance sheet as a fictitious asset.  i.e., although it is shown on the assets side if the balance sheet, it is not really an asset at all.

Every year one tenth part of Original and total advertising expenses will go to profit and loss account. This deferred revenue account will close in 10th year when there will not be any balance for showing as asset in balance sheet .

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