Sometimes, the benefits from revenue expenditure are not restricted to only one year but are extended over many years. Such a class of revenue expenditure is regarded as deferred revenue expenditure. Such revenue expenditure involves the payment of a huge amount. Therefore, instead of charging the total amount of expenditure from the Profit and Loss Account, the expenditure is written off over certain years.
The expenditure written-off in the current accounting year is shown on the debit side of the Profit and Loss Account and the remaining expenditure is shown on the Assets side of the Balance Sheet as deferred revenue expenditure.
For example, heavy expenditure of say Rs 90,000 is incurred on an advertisement campaign the benefit of which is likely to be availed for a period of five years. In this case, the whole amount of Rs 90,000 is not charged from the profits of the current accounting year. Rather, expenditure will be spread over the period of 5 years. This implies that Rs 18,000 will be charged each year as revenue expenditure for a period of 5 years. Thus, Rs 18,000 will be recorded as an advertising expense on the debit side of the Profit and Loss Account, and the remaining portion of expenditure i.e. Rs 72,000 (90,000 – 18,000) will be shown as Deferred Revenue expenditure on the Assets Side of the Balance Sheet.
It should be noted that deferred revenue expenditure is a fictitious asset. Some of the examples of such expenditure are preliminary expenses, huge advertisement expenditure, underwriting commission, etc.
Features of Deferred Revenue Expenditure
The given below are some features of deferred revenue expenditure.
i. The benefit of this expenditure continues for more than one year.
ii. Amount of this expenditure is huge.
iii. Total expenditure is spread over certain years.
iv. It is a fictitious asset and is shown in the Balance Sheet on the Assets side.
The capital expenditure results in an income or benefits for a longer period that extends for a period of more than a year. This expenditure is shown in the Balance Sheet
A promissory note is an unconditional promise in writing given by the buyer (or creditor) to the seller (or debtor) to pay the amount of money specified therein to the seller or to the order of seller or to bearer.
The reserves that are created out of the capital profits of a business are known as Capital reserves. Capital profits are the profits that are not earned in normal business activities.
Secret reserves are those reserves that exist in the business to strengthen its financial position but are not disclosed in the Balance Sheet.