All expenses whose benefits are received over the years or the expenses or losses that are to be written off over the years are classified as Deferred revenue expenses. It includes fictitious expenses like preliminary expenses, loss on issue of debentures, advertising expenses, loss due to unusual oRead more
All expenses whose benefits are received over the years or the expenses or losses that are to be written off over the years are classified as Deferred revenue expenses. It includes fictitious expenses like preliminary expenses, loss on issue of debentures, advertising expenses, loss due to unusual occurrences like loss due to fire, theft, and research and development expenses, etc.Â
DEFERRED REVENUE EXPENSES
There are certain expenses which are revenue in nature (i.e. expenses incurred to maintain the earning capacity of the firm and generate revenue) but whose benefits are received over a period of years generally between 3 to 7 years. It means its benefit is received not only in the current accounting period but over a few consecutive accounting periods.
CHARACTERISTICS
- Revenue in nature
- Benefits received for more than one accounting period.
- Huge expenditure (large amount is involved)
- Affects the profitability of the business (since a large amount is involved if charged in the same accounting period, then it will decrease the profitability for the year)
- Written off over the years either partially or entirely.
- Fictitious asset It doesn’t result in the creation of any asset but is shown as an asset (fictitious asset) on the Balance Sheet till fully written off.
EXAMPLES
ADVERTISING EXPENSES refers to the expenses incurred for promoting the goods or services of the firm through various channels like TV, Social media, Hoardings, etc.
As the benefit of advertising is not received not only in the period when such expenses were incurred but also in the coming few years, it is classified as Deferred revenue expense.
For example –Â Suppose the company incurred $10 lakh on advertising to introduce a new product in the market and estimated that its benefit will last for 4 years. In this case, $250,000 will be written off every year, for 4 consecutive years.
EXCEPTIONAL LOSSESÂ are losses that are incurred because of some unusual event and don’t happen regularly like loss from fire, theft, earthquake, flood or any other natural disaster, confiscation of property, etc.
Since these losses can’t be written off in the year they occurred they are also treated as Deferred revenue expenditure and are written off over the years.
RESEARCH AND DEVELOPMENT EXPENSESÂ are expenses incurred on researching and developing new products or improving the existing ones. Its benefits are received for many years and thus are classified as Deferred revenue expenses.
For example –Â Expenses incurred on the creation of intangible assets like patents, copyrights, etc.
PRELIMINARY EXPENSESÂ are those expenses which are incurred before the incorporation and commencement of the business. It includes legal fees, registration fees, stamp duty, printing expenses, etc.
These expenses are fictitious assets and are written off over the years.
TREATMENT
It is debited to the P&L amount (amount written off that year) and the remaining amount on the Aeest side of the Balance Sheet.
In the above example of advertising expenses, in Year 1, $250,000 will be debited in the P&L A/c and the remaining amount of $750,000 is shown on the Asset side of the Balance Sheet.
In Year 2, $250,00 in P&L A/c and the remaining $500,000 in Balance Sheet.
In Year 3, $250,000 in P&L A/c and the remaining $250,000 in the Balance Sheet and in the last Year 4, only the remaining amount of $250,000 in P&L A/c and nothing in the Balance Sheet.
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A bills receivable book is a subsidiary book that shows the details of various bills receivables drawn on customers. It shows the amount, due date, date when the bill was drawn, name of the acceptor, and various other details pertaining to each bill. A bills payable book is a subsidiary book that shRead more
A bills receivable book is a subsidiary book that shows the details of various bills receivables drawn on customers. It shows the amount, due date, date when the bill was drawn, name of the acceptor, and various other details pertaining to each bill.
A bills payable book is a subsidiary book that shows the details of various bills that suppliers have drawn on the business. It shows the amount, due date, date when the bill was drawn, name of the drawer and various other details pertaining to each bill.
The total of both these books is ultimately transferred to the general ledger. From there, it is used in drafting the balance sheet.
Importance of bills receivable and bills payable books
Bills receivable books help us know the amount that each customer is liable to pay us on specific dates while bills payable books help us know the amounts that we have to pay our various suppliers on certain dates.
Together these books help us handle our cash flows in an efficient manner.
We can evaluate our credit cycle. Bills receivable books help us avoid bad debts while bills payable books help us to avoid defaults.
Difference between bills receivable and bills payable
These are the primary differences between bills payable and bills receivable:
We can conclude that both bills receivable and bills payable books are subsidiary books. Bills receivable shows the details of every bill that the business has drawn on each credit customer. Bills payable show the details of every bill that each credit supplier has drawn on the business.
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