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unit-6-concepts-relating-to-final-accounts

Unit-6 Concepts Relating to Final Accounts

In this unit you will learn about basic concepts which guide the preparation of final accounts properly.

What is deferred revenue expenditure? Give three examples.




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Written on Apr 16, 2019 3:36:51 PM

  • Sometimes, certain expenditure which is normally treated as revenue may be unusually heavy and its benefit is likely to be available for more than one year.
  • In such a situation, it is considered appropriate to spread the cost of the expenditure over a number of accounting years.
  • Hence, it is capitalized and only a portion of the total amount spent is charged to the Profit and Loss Account of the current year.
  • The balance is shown as an asset which will be when off during the subsequent amounting years.
  • Such expenditure is called a Deferred Revenue Expenditure because its charge to Profit and Loss Account has been deferred to future years. Some examples of such expenditure are: 1) Expenditure incurred on advertising campaign to introduce a new product in the market. 2) Expenditure incurred on formation of a new company (preliminary expenses). 3) Brokerage charges, underwriting commission paid and other expenses incurred in connection with the issue of shares and debentures. 4) Cost of shifting the plant and machinery to a new site which may involve dismantling, removing and re-erection of the plant and machinery.
  • Let us take the case of expenditure on advertising campaign. It is not a routine advertisement and the amount involved is unusually heavy.
  • Its benefit will not completely exhaust in one accounting year but will continue over two to three years.
  • Hence, it is not proper to charge such expenditure to the Profit and Loss Account of one year.
  • It is better to distribute it carefully over three years.
  • So, in the first year we may charge one-third of the amount spent to the Profit and Loss Account and show the balance in the Balance Sheet as an asset.
  • In the second year again we may charge a similar amount to the Profit and Loss Account and show the balance as an asset.
  • In the third year, we may charge this balance to the Profit and Loss Account.
  • Every expenditure which is regarded as deferred revenue is treated in this way in the final accounts.