Deferred Revenue Expenditure
A special type of expenditure that doesn't fit neatly into Capital or Revenue categories.
What is Deferred Revenue Expenditure?
Definition: Heavy revenue expenditure whose benefit extends over multiple years, so it's written off over those years instead of all at once.
Nature: Revenue in nature, but treated like capital for spreading
Examples:
- Heavy advertising campaign for new product launch (₹50 Lakhs)
- Preliminary expenses for starting company (₹10 Lakhs)
- Discount on issue of debentures
- Research & Development costs
Why "Deferred"?
Scenario: You spend ₹1 Crore on advertising for a new product in Year 1.
Option 1 (Normal Revenue Expenditure):
- Show entire ₹1 Cr as expense in Year 1
- Huge loss in Year 1
- But benefit will come in Years 2, 3, 4 also
Option 2 (Deferred Revenue Expenditure):
- Spread ₹1 Cr over 5 years
- Year 1: ₹20 Lakhs expense
- Year 2: ₹20 Lakhs expense
- And so on...
- Matches expense with benefit!
Treatment
Year 1:
- Total spent: ₹1,00,00,000
- Shown in P&L: ₹20,00,000
- Balance Sheet: ₹80,00,000 (as "Deferred Revenue Expenditure" on Assets side)
Year 2:
- Shown in P&L: ₹20,00,000
- Balance Sheet: ₹60,00,000
And so on until fully written off
Examples with Treatment
Example 1: Advertising
Spent ₹50,00,000 on advertising. Benefit expected for 5 years.
Annual write-off: ₹50,00,000 ÷ 5 = ₹10,00,000
Example 2: Preliminary Expenses
Spent ₹5,00,000 on company formation. Write off over 5 years.
Annual write-off: ₹5,00,000 ÷ 5 = ₹1,00,000
Quiz
Test Your Knowledge
Question 1 of 3
1. Deferred Revenue Expenditure is:
💡 Final Wisdom: "Deferred Revenue Expenditure = Paying for a 5-year gym membership upfront, but counting the cost month by month!"