Deferred Revenue expenditure

Deferred Revenue expenditure

Meaning- Sometimes any revenue expenditure is such that its amount is more and its usefulness remains for many years, such expenditure is called ‘deferred revenue expenditure’. Such expenses are not charged to the profit and loss account of the year in which they are incurred, they are charged to the profit and loss account of several years. Example- (i) Preliminary Expenses, (ii) Deduction and commission on issue of shares and debentures, (iii) Huge advertisement expenditure etc., (iv) If there is an extraordinary loss then it is considered as deferred revenue expenditure.

Features — Following are the characteristics of deferred revenue expenditure.1. It is a capital revenue expenditure.

2. Its profits are not used in the year to which they relate.

3. It is a sudden and usually large amount of money.

4. They are not written off from the profit of one year. A part of the expenses is written off in the profit and loss account of the respective year. The remaining part of this expenditure is shown in the balance sheet as miscellaneous expenditure.
Accounting Treatment
(1) Since deferred revenue expenditure yields future benefits also, its entire amount is not charged to the profit and loss account in the current accounting year, but is treated as capital.

(2) It is generally written off in 3 to 5 years.

(3) That part of deferred revenue expenditure which is written off in the accounting year is treated as ‘Expense’ and transferred to Profit & Loss A/c.

(4) That part of deferred revenue expenditure which is not written off at the end of the accounting year (which is to be written off in subsequent years), is shown in the assets part of the balance sheet.

1. DeferredRevenueexpenditure
Meaning-Sometimesanyrevenueexpenditureissuchthatitsamountismoreandits
usefulnessremainsformanyyears,suchexpenditureiscalled‘deferredrevenue
expenditure’.Suchexpensesarenotchargedtotheprofitandlossaccountoftheyearin
whichtheyareincurred,theyarechargedtotheprofitandlossaccountofseveralyears.
Example-(i)PreliminaryExpenses,(ii)Deductionandcommissiononissueofsharesand
debentures,(iii)Hugeadvertisementexpenditureetc.,(iv)Ifthereisanextraordinaryloss
thenitisconsideredasdeferredrevenueexpenditure.
Features—Followingarethecharacteristicsofdeferredrevenueexpenditure.1.Itisa
capitalrevenueexpenditure.
2.Itsprofitsarenotusedintheyeartowhichtheyrelate.
3.Itisasuddenandusuallylargeamountofmoney.
4.Theyarenotwrittenofffromtheprofitofoneyear.Apartoftheexpensesiswrittenoffin
theprofitandlossaccountoftherespectiveyear.Theremainingpartofthisexpenditureis
showninthebalancesheetasmiscellaneousexpenditure.
AccountingTreatment
(1)Sincedeferredrevenueexpenditureyieldsfuturebenefitsalso,itsentireamountisnot
chargedtotheprofitandlossaccountinthecurrentaccountingyear,butistreatedas
capital.
(2)Itisgenerallywrittenoffin3to5years.
(3)Thatpartofdeferredrevenueexpenditurewhichiswrittenoffintheaccountingyearis
treatedas‘Expense’andtransferredtoProfit&LossA/c.
(4)Thatpartofdeferredrevenueexpenditurewhichisnotwrittenoffattheendofthe
accountingyear(whichistobewrittenoffinsubsequentyears),isshownintheassetspart
ofthebalancesheet.

2. DifferencebetweenDeferredRevenueExpenditureandPrepaidExpenditure
Expenditurewhoseamountismoreandtheirutilityisspreadoveranumberofyearsandnot
tillthecurrentyear,iscalleddeferredrevenueexpenditure.Onlyaportionoftheseexpenses
areconsideredrevenueexpensesfortheaccountingperiod.Example,afirmspent₹
1,00,000onadvertisinganewproduct.Thebenefitofthisadvertisementwillbeavailablefor
5years.Therefore,1/5thofthisexpenditurei.e.₹20,000willbewrittenoffintheprofitand
lossaccountconsideringitasrevenueexpenditurefortheyearandtheremainingdeferred
revenueexpenditurewillbeshowninthebalancesheet.
Expenseswhicharepaidinoneaccountingperiodbuttheirbenefitistakeninthenext
accountingperiod,suchexpensesarecalledprepaidexpenses.Theperiodofbenefitof
prepaidexpensescanbeeasilyestimatedbutnotofdeferredrevenueexpenditurebecause
itisdifficulttoestimatethebenefitofdeferredrevenueexpenditureformanyyears.
RevenueLoss
Meaning–Ingeneral,thelossduetodepreciationinthevalueoffixedassetsofthe
businessiscalledlossofincome.
Revenuelossisatermsimilartorevenueexpenditureasitisshownintheprofitandloss
accountofthebusinessinthesamewayasrevenueexpenditure.
Butthewordexpenseisdifferentfromloss.Expensereferstoasituationinwhichthefirm
receivessomeprofit,whilelossreferstoasituationinwhichthefirmdoesnotreceiveany
benefit.
Example:1.Lossincaseofbaddebts,
2.Lossduetofire,
3.Lossduetotheft.
ClassificationofReceipts
Receiptsareoftwotypes–

3. (a)capitalreceipts,and
(b)revenuereceipts.
Meaning—Capitalreceiptsrefertosuchreceiptswhicharisefromsomecontingentor
non-recurringtransactionsandnotfromthenormaloperationsofthebusiness.Inother
words,receiptswhicharenotrevenuearecalledcapitalreceipts.
Features—Followingarethefeaturesofcapitalreceipts
(i)Capitalgainsarenotreceivedinthecourseofordinarybusinessoperations.
(ii)Capitalreceiptsaregenerallyofnon-recurringnature.
(iii)Capitalreceiptsareshownintheliabilitiessideofthebalancesheet.
(iv)Capitalreceiptsareforaspecificpurpose.
Examples::
(i)Capitalemployedbytheowner.
(ii)Takingloanfromthebank.
(iii)Amountreceivedbythecompanyfromissueofshares.
(iv)Compensationforsurrenderofanyright.
(v)Valueoffixedassetsevenifreceivedininstalments.
(vi)Amountofcompensationonaccountofpriorbreachofanysettlement/arrangement.
(vii)Proceedsfromthesaleoffixedassets.
AccountingTreatment
(1)Capitalreceiptsarecreditedtotherespectiveaccount.
(2)Theyareshownintheliabilitiessideofthebalancesheet.
RevenueReceipts
Meaning—RevenueReceiptsrefertothosereceiptsthatarisefromnormalbusiness
activities.
Features—Themainfeaturesofrevenuereceiptsareasfollows:
(a)Revenuereceiptsareofrecurringnature,thatis,theyarereceivedagainandagain.

4. (b)Revenuereceiptsrelatetothenormalbusinessoftheundertakingintheaccountingyear.
(c)Revenuereceiptsarenotforanyspecificpurpose.
(d)Revenuereceiptsareshownasincomeintheprofitandlossaccount.Theseareusedto
calculatethenetprofitandlossfortheaccountingyear.
Example::
(i)compensationreceivedinrespectoflossofstock,
(ii)theamountreceivedfromthesaleofgoods,
(iii)saleofbuilding,landbyadealerinrealestate,
(iv)subsidyorcashassistanceforexportpromotionreceivedfromtheGovernment,
(v)interestreceivedfrombankdepositsorinvestments,(vi)Dividendreceivedonshares,
etc.
AccountingTreatment–Revenuereceiptsareshowninthecreditsideofthetradingor
profitandlossaccount.
DifferencebetweenCapitalReceiptsandRevenueReceipts
No.Base Capitalgain Incomereceipt
1.Nature Capitalreceiptsaregenerallyof
non-recurringnatureofincome
Incomereceiptsare
generallyofrecurring
nature.
2.AccountingItisshownintheliabilitypartofthe
positionstatement
Itisshownintheincome
statement(i.e.tradingor
profitandlossaccount
3.Normal
Business
Operations
Capitalreceiptsarethosereceipts
thatarenotreceivedfrom
normalbusinessactivities.
Revenuereceiptsare
derivedfromnormal
businessactivities
TestforDeterminingCapitalReceiptsAndRevenue
Wecangetenoughhelpinknowingthedifferenceonthebasisofthefollowingrulesand
facts:
(1)CirculatingCapitalandFixedcapital/FixedAssets—-Theamountreceivedfrom
movableorcurrentcapitaliscalledincomereceipt,whereastheamountreceivedfromfixed
capitalorfixedassetsiscalledcapitalreceipt.Keepinmind,itispossiblethatanitemwhich

5. isfixedcapitalforonebusiness,thesameitemisconsideredascurrentcapitalinanother
business.
Example-Foracardealer,theincomereceivedfromthesaleofacarisarevenuereceipt,
whiletheincomereceivedfromthemotorcarsoldbyBharatiPustakSadanisacapitalgain
forhim.
(2)Receiptinthehandsofrecipientismaterial—-Inthehandsofarecipient,which
receiptiscapitalandwhichisrevenue,itisdeterminedbyitsnatureornature.Itisnot
importantfromwhichsourceitispaid.
Example–Salaryreceivedbyanemployeeishisincomereceiptevenifhisemployerhas
paidhimoutofhisowncapital.Theamountreceivedbyashareholderinexchangeforhis
preferencesharesiscalledcapitalgain,irrespectiveofthesourcefromwhichitisgiven.
(3)Payer’smotiveIrrelevant—-Todeterminewhetherareceiptisofcapitalnatureorof
incomenature,itisuselesstolookattheobjectofthepayer.
(4)ReceiptinLieuofIncome—-Theamountreceivedinexchangeforthesourceof
incomeisacapitalreceipt,whiletheamount(amount)receivedinexchangeforincomeisa
revenuereceipt.
Example-Theamountofcompensationgiventoanemployeeonhisremovalfromthejob
bytheemployerisacapitalgain.Onthecontrary,theamountofcompensationpayableby
theemployerfortemporaryincapacitytoworkisarevenuereceipt.
(5)Lum–sumpPayment—-Inordertodeterminewhetherareceiptisacapitalreceiptor
arevenuereceipt,itisnotaquestionofconsiderationwhetheritisalumpsumpaymentora
lumpsumpaymentoraperiodicpayment.
(6)IncomeOfWastingAsset—-Incomefromcapitaldestroyedorexhaustedorusedup
duringtheprocessofrealisationisincome.Therefore,incomefromminesandfisheriesis
revenuereceipt.
(7)ReceiptontheSacrificeorRights—-Whenanyamountisreceivedonrelinquishment
ofanyrights,itisconsideredascapitalgain.Onthecontrary,theamountreceivedinlieuof
lossoffutureprofitsisrevenuereceipt
Example-Atthetimeofseparationfromafirm,Mohanundertakesnottocarryonany
businesssimilartothatofthefirmfor5years.Inreturnforthispromise,hegets₹10,000.
Thisisacapitalgain.
(8)NatureAndMotiveofReceipt—-Thedeterminationofwhetherareceiptiscapitalor
revenuealsodependsonthenatureofthereceiptandthepurposeforwhichitisreceived.If
apropertyispurchasedwiththeintentionofearningaprofitbysellingit,thentheamount
receivedfromthesaleofsuchacquiredpropertywillbecalledincomebecauseitisa
businessactivity,butwhenapropertyisnotpurchasedwiththeintentionorpurposeof

6. sellingitataprofit.Butifitissoldlater,thentheamountreceivedfromthesalewillbecalled
capitalgain.
FrequentlyAskedQuestions
Qs1.Whereisdeferredrevenueexpenditureshowninbalancesheet?
Ans.recordedasaliability
Qs2.Isdeferredrevenueacurrentassetorliability?
Ans.liability
Qs3.Isdepreciationadeferredrevenueexpenditure?
Ans.Depreciationoffixedassetsisconsideredasarevenueexpenditure
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