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DEFERRED REVENUE EXPENDITURE

DEFERRED REVENUE EXPENDITURE

Deferred Revenue Expenditure is the expenditure which is revenue in nature but the benefit of which is likely to be derived over a number of years. The benefit of these expenditures generally last from 3-7 years. That is why the full amount of deferred revenue expenditure is not debited to Profit and Loss Account of the current year but it is spread over the years for which the benefit is likely to last. So, only a part of deferred revenue expenditure is charged to the Profit and Loss Account or Income Statement of the current year. The amount left uncharged in the current year is posted on the Assets side of Balance Sheet.

FOR INSTANCE

A firm spent a huge amount of ₹2,00,000 on advertising to introduce a new product in the market. It is estimated that the benefit of ₹2,00,000 will last for 4 years. In this case, ₹50,000 (2,00,000/4) will be charged to the Profit and Loss Account or Income Statement of consecutively 4 years.

In the first year: ₹50,000 will be shown on the debit side of Profit and Loss Account and the balance of ₹1,50,000 will be shown on the Assets side of Balance Sheet.

In the second year: Again, ₹50,000 will be shown on the debit side of Profit and Loss Account and the balance of ₹1,00,000 will be shown on the Assets side of Balance Sheet.

In the third year: Again, ₹50,000 will be shown on the debit side of Profit and Loss Account and the balance of ₹50,000 will be shown on the Assets side of Balance Sheet.

In the fourth or last year: Again, ₹50,000 will be shown on the debit side of Profit and Loss Account and no balance will be shown on the Assets side of Balance Sheet.

In this way, the whole advertisement expenditure is written off over the useful life of expenditure.

EXAMPLES OF DEFERRED REVENEUE EXPENDITURE

  • Preliminary expenses
  • Brokerage on issue of shares and debentures
  • Underwriting commission
  • Discount on issue of debentures
  • Exceptional heavy expenditure on machinery repairs
  • Research and development expenses
  • Heavy expenditure on special advertising campaign
  • Cost of removal of works from one place to another favourable place
  • Cost of dismantling and removal and re-installing of machinery
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Author: commerceiets
Educator (Masters of Commerce, Bachelor of Commerce)

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