Question

A portion of this type of expenditure is debited to the Profit and Loss Account in the current year, and the remaining portion is shown as an asset in the Balance Sheet.

Identify the type of expenditure. Give two examples.

Answer 1

1. The expenditure described is known as deferred revenue expenditure. It is a revenue expenditure whose benefit extends over several accounting periods.
2. It does not result in the acquisition of a permanent fixed asset, but its benefits are received for more than one year.
3. Therefore, only a part of the expenditure is charged to the Profit and Loss Account of the current year.
4. The remaining unexpired portion is carried forward and shown as an asset in the Balance Sheet.
5. This treatment ensures that the expenditure is matched with the accounting periods that receive its benefits.
6. Examples of deferred revenue expenditure include heavy advertising expenditure incurred for launching a new product and preliminary research expenses incurred before the commencement of normal business operations.
7. Such expenditure is written off gradually over future years instead of being fully charged in the year in which it is incurred.