Deferred Revenue Expenditure

There is another category of expenditure which is intermediate between capital and revenue expenditures. By nature they are revenue expenditure but its benefits are likely to be derived offer a number of further years. Revenue expenditure incurred during current year but susceptible to be considered as paid as advance (expenditure) for the coming year(s) is called DEFERRED REVENUE EXPENDITURE. Examples are : advertising compaigns, major or complete overhauls of a machine; converting the front room of a house as the consulting room of a medical practitioner member of the house, etc. The P & L A/c of each year is charged with its due proportion of the expenditure incurred; and the rest of the amount is carried forward to the next year and is shown in the balance sheet as at the end of the year. (Usually, only proportionate values are shown and the concept of Capital Recovery Factor is not invoked. For example, if the benefits of the advertisement may continue for five years, one-fifth is charged as Revenue Expenditure in each year and the unexpired balance is taken in the BS from this year to next year.) Such expenditure is called also as capitalised expenditure. 

Exceptions are also recognised. Extra-ordinary losses, say by Fire, Flooding, other natural events like Earthquake, due to political disturbances and riots, heavy losses in trading, etc. however heavy the loss, are not to be camed forward and should be completely charged against the revenue of the year (even if the net result is not a profit but a loss). 

[Note : Opinions differ in case of Fire and Natural events - some allowing the losses as deferred revenue expenditure. But the snag is : The unwritten down portion of the asset value that is came over is a worthless and fictitious asset and the information carried in the Final Accounts suffers the stigma of contradicting 

the essential principles, concepts and convention of accounting.] 

In short, these are revenue expenditure of a capital nature (no contradiction in terminology is to be read in this). That the carried over-portion of the expenditure is treated as an asset should be noted.