What is Deferred Revenue Expenditure?
Deferred revenue expenditure is an expenditure which is incurred in the present accounting period but its benefits are incurred in the following or the future accounting periods. This expenditure might be written off in the same financial year or over a period of a few years.
Let us take an example of deferred revenue expenditure. In the case of a startup company, the firm invests heavily in marketing and advertisement in the beginning to capture some position in the market and amongst the competitors. This expense is done in the beginning but the benefits are reaped over several years.
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Examples of Deferred Revenue Expenditure
- Prepaid Expenses: The firm makes a heavy investment in certain activities like sales promotion activities – the benefit for which will be incurred over the number of accounting periods but the expenditure is incurred in the same year. This expenditure will be written off over the number of periods.
- Exceptional Losses: Expenditure relating to exceptional losses by for example by earthquake, floods or unforeseen losses by loss or confiscation of property.
- Services Rendered: Since the expenditure for the services rendered cannot be allocated to one year only and also there be no asset created with such expenditure. For example the cost of research and development for the company.
- Fictitious Asset: Deferred revenue expenditure is considered as fictitious assets in cases, whose benefit is derived over a long period of time.
- Expenditure is characterized by revenue and its features.
- The benefit of the expenditure is accrued for more than one year of an accounting period.
- The amount of expense is huge since its a one-time investment for the business and is therefore deferred over a period of time, which is more than one accounting period.
- Deferred Revenue Expenditure accrues over the future years, either partially or completely.
Differences between Capital Expenditure and Deferred Revenue Expenditure
- The capital expenditure is written off using depreciation expense. However, in case of deferred revenue expenditure, it is written off over the following 3 to 5 years from the year incurred.
- The benefits from capital expenditure accrue for a longer period in the business for like 10 years or more. On the other hand, the benefits from deferred revenue expenditure are reaped between 3 to 5 years of the business.
- Capital expenditure is incurred which helps in the creation of the asset. Since the investment done helps in the creation of assets, these can be created into cash as and when required by the business. These revenue expenditures are incurred mostly on sales promotion and advertising activities, and therefore, cannot be converted to cash.
- Capital Expenditure is done towards any investment which increases the earning capacity of a business. This may mean to purchase an asset for the business like the purchase of a plant, machinery, building, copyrights, etc. On the other hand, revenue expenditures mean to make an investment that maintains the earning capacity of the business. The company would derive the benefit from this revenue expenditure over the period of one accounting period to some 3 to 5 years.
This has been a guide to Deferred Revenue Expenditure and its definition. Here we discuss deferred revenue expenditure examples and its differences from capital expenditure. You can learn more about accounting from following articles –