What is meant by deferred revenue expenditure?

Question

Answer

Deferred Revenue Expenditure is an expenditure which is revenue in nature and incurred during an accounting period, but its benefits are to be derived in multiple future accounting periods.

examples of deferred expenses are:

Interest costs that are capitalized as part of a fixed asset for which the costs were incurred.

Insurance paid in advance for coverage in future months.

The cost of a fixed asset that is charged to expense over its useful life in the form of depreciation.

Answer

Answer

Deferred Revenue Expenditure

Deferred revenue expenditure is an expense which is incurred during an accounting period but its benefit is received over multiple accounting periods. The expenditure is capitalized and then written off over the course of its useful life.

Examples of Deferred Revenue Expenditure

Advertisement expenditure

Preliminary expenditure

Research and Development expenditure

Training expenditure

Software development expenditure

Accounting Treatment for Deferred Revenue Expenditure

Deferred revenue expenditure is treated as an asset and is capitalized on the balance sheet. It is then written off over time, based on its useful life. The accounting treatment for deferred revenue expenditure is as follows:

Debit the expenditure account (e.g. Advertising Expenditure) and credit the Deferred Revenue Expenditure account.

At the end of the accounting period, transfer the balance of the Deferred Revenue Expenditure account to the balance sheet as an asset.

Write off the balance of the Deferred Revenue Expenditure account over its useful life, debiting the Profit and Loss account and crediting the Deferred Revenue Expenditure account.

Advantages of Deferred Revenue Expenditure

It allows a company to spread the cost of an expense over multiple accounting periods, which can help to improve cash flow.

It can help to improve profitability by reducing the amount of expenses that are incurred in a single accounting period.

Disadvantages of Deferred Revenue Expenditure

It can distort the profit and loss statement by reducing expenses in the current accounting period and increasing expenses in future accounting periods.

It can be difficult to accurately estimate the useful life of a deferred revenue expenditure, which can lead to errors in the accounting treatment.

Answer

Deferred revenue expenditure are those expenditures which are revenue in nature and are incurred during an accounting period , but its benefits are to be derived in future accounting years also.

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