Question

How deferred revenue expenditure is treated in accounts? Give examples.

Answer 1

The two examples of deferred revenue expenditure and their treatment in final accounts are as follows:

Example 1:

When a new company enters the market, it launches a large-scale advertising campaign. This investment will likely yield benefits in the future. This cost should not be charged solely to the profit and loss statement for the current year. Spread the expenditure over the period when the advantage is likely to be lost. Assume this expenditure will last 10 years. As a result, one-tenth of all expenditures must be charged to the Profit and Loss Account each year.

Illustration: Heavy advertising expenses are both revenue and capital expenditure, as they promote sales and are costly. This will now be included in deferred revenue expenditures. Assuming a 10-year benefit period and a 5,00,000 advertising budget. Divide 5,00,000 by 10 years to get 50,000. This will be recorded as revenue expenses in the profit and loss account, with a balance of 4,50,000 on the balance sheet. Each year, 10% of original and total advertising expenses will be allocated to the profit and loss account. The deferred revenue account will terminate in the tenth year when there is no balance to reflect as an asset on the balance sheet.

Example 2:

A large loss due to an accident or unanticipated circumstances can be stretched across 3-4 years instead of being assessed against the current year's profits. This approach can be applied to building losses caused by earthquakes. This form of loss is categorised as revenue expense. It's worth noting that uncharged amounts in the profit and loss account are considered assets on the balance sheet.