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. 

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 – 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 LOSSES 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 EXPENSES 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 – Expenses incurred on the creation of intangible assets like patents, copyrights, etc.

PRELIMINARY EXPENSES 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.

Yes, Accounts Payable can have a Debit balance. Accounts payable is a liability and thus, has a credit balance but can have a debit balance in case the creditor is overpaid or when there is purchase return (for already-paid goods)

ACCOUNTS PAYABLE

Accounts payable refers to all short-term liabilities of the business that are to be paid. These are usually paid within a duration of  90 days. It includes both Trade payable (goods and services purchased on credit) as well as expenses payable (used but payment not made yet) like rent payable, electricity bill, etc.

Businesses cannot make every payment on the spot. There can be cases when the business is facing a shortage of funds, can have funds but doesn’t have enough cash (or liquid funds) to make payment or simply doesn’t want to make payment on the spot to reduce its capital requirement.

So, like us businessmen also purchase goods on credit or use services for which payment is to be made soon. All these are liabilities for the business.

However, they must be related to the business to be considered as accounts payable.

DEBIT BALANCE OF ACCOUNTS PAYABLE 

Debit balance of accounts payable means money owed by others. There is Debit balance when

OVERPAYMENT is made to the creditors or the supplier. It happens when the wrong amount is paid or payment is made twice for the same transaction.

Suppose you need to pay $10,000 as rent within 30 days. After 25 days you mistakenly made a payment of $12,000.

In this case,

• Firstly, you will record the transaction by crediting Accounts payable (as liability increased) by $10,000
• When payment is made after 25 days, Accounts Payable is debited by $12,000 (as liability decreased)
• So, there will be a debit balance of $2,000 (which means the creditor owes you) till the creditor returns the excess amount.

PURCHASE RETURN of already paid goods also result in debit balance of Accounts Payable.

Suppose you bought goods worth $50,000 from Mr A on credit and paid for the same. Later, you returned all the goods because they were defective. Now, there will be Debit balance of Accounts Payable till there is a full refund of $50,000 by Mr A.

How is Accounts Payable Treated Normally?

Accounts Payable are the current liabilities of the firm and are shown under the head Current Liabilities in the Balance Sheet. Its liability, thus has a credit balance which represents the amount owed by the firm to others. It is credited when increases and debited when decreases.

For example – Suppose you purchased goods worth $30,000 and agreed to pay after 30 days. So, Accounts payable will be credited by $30,000 and purchases will be debited by $30,000.

Purchases A/c – $30,000 (debit)

To Accounts Payable A/c – $30,000

After 30 days payment is made in cash, which means the liability decreased. So, Accounts Payable A/c will be debited.

Accounts Payable A/c – $30,00

To Cash – $30,000