Deferred Revenue Expenditure MCQs Quiz | Class 10

Understanding Deferred Revenue Expenditure

Deferred Revenue Expenditure represents a unique category of expenditure that, while revenue in nature, provides benefits over several future accounting periods. Unlike regular revenue expenditure, which is fully expensed in the year it is incurred, or capital expenditure, which creates an asset, deferred revenue expenditure is written off over the period during which its benefits are expected to be realized.

Key Characteristics:

• Nature: Essentially revenue expenditure, but incurred for a large amount.
• Benefit Period: Its benefits extend beyond the current accounting period, typically for 3-7 years.
• Accounting Treatment: Not treated as an asset, but a portion is written off (charged to profit and loss account) each year, and the unwritten off portion is shown on the asset side of the balance sheet as “Deferred Revenue Expenditure.”
• Objective: Incurred to derive long-term advantage or improve profitability over an extended period.

Examples of Deferred Revenue Expenditure:

The most common example is a heavy expenditure on advertising to launch a new product or penetrate a new market. While advertising is generally a revenue expense, a massive, initial advertising campaign aimed at building brand awareness for years falls under deferred revenue expenditure. Other examples include:

• Large preliminary expenses (though often treated as capital in practice, conceptually can be deferred).
• Expenses on research and development not leading to specific patents/assets.
• Expenditure on shifting an entire factory.
• Major repairs and renovations that significantly enhance the life or capacity of an existing asset without being a capital improvement.

Distinction from Capital and Revenue Expenditure:

Quick Revision Points:

• Deferred Revenue Expenditure provides benefits over multiple accounting periods.
• It is significant in amount and non-recurring.
• A part is charged to the Profit & Loss A/c annually, and the balance is shown as an asset (fictitious asset) in the Balance Sheet.
• Heavy advertising for a new product launch is a classic example.
• Its purpose is to generate long-term profitability or advantage.

Practice Questions:

1. Which of the following expenditures is NOT typically classified as Deferred Revenue Expenditure?
1. Heavy advertisement for a new product
2. Expenses on shifting the factory to a new location
3. Research and development expenses not leading to patents
4. Regular monthly rent payment
2. The unwritten off portion of Deferred Revenue Expenditure appears on which side of the Balance Sheet?
1. Liability side
2. Asset side
3. Capital side
4. Revenue side
3. If a company incurs INR 5,00,000 on a major advertising campaign expected to benefit for 5 years, how much will be charged to the Profit & Loss Account in the first year (assuming straight-line write-off)?
1. INR 5,00,000
2. INR 1,00,000
3. INR 0
4. INR 2,50,000
4. Deferred Revenue Expenditure is revenue in nature but provides benefits for:
1. Only the current accounting period
2. A very short period (less than 6 months)
3. Multiple accounting periods
4. Only the next accounting period
5. Which term best describes the nature of Deferred Revenue Expenditure shown on the asset side of the Balance Sheet?
1. Tangible asset
2. Intangible asset
3. Current asset
4. Fictitious asset