Deferred Revenue Expenditures

Deferred revenue expenditures represent certain types of assets whose usefulness does not
expire in the year of their occurrence but generally expires in the near future. These types of
expenditures are carried forward and are written off in future accounting periods. Sometimes,
we make some revenue expenditure but it eventually becomes a capital asset (generally of an
intangible nature). If one undertake substantial repairs to the existing building, the deterioration
of the premises may be avoided. We may employ our own employees to do that work and
pay them at prevailing wage-rate, which is of a revenue nature. If this expenditure is treated as
a revenue expenditure and the current year’s-profit is charged with these expenses, we should
be making the current year absorb the entire expenses, the benefit of which will be enjoyed for
a number of accounting years. To overcome this difficulty, the entire expenditure is capitalised
and is added to the asset account. Another example is an insurance policy. A business can pay
insurance premium in advance, say, for a 3 year period. The right does not expire in the accounting
period in which it is paid but will expire within a fairly short period of time (3 years).
Only a portion of the total premium paid should be treated as a revenue expenditure (portion
pertaining to the current period) and the balance should be carried forward as an asset to be
written off in subsequent years.