Deferred revenue expenditure Journal Entry refers to expenses that are incurred in one accounting period but are expected to benefit future periods. These expenditures are initially recorded as assets and then amortized over the periods they benefit.
What is Deferred Revenue Expenditure?
Deferred revenue expenditure includes costs that provide benefits over multiple accounting periods. Examples include extensive advertising campaigns, major repairs, or research and development costs. These expenditures are capitalized and gradually expensed over the periods they benefit.
Journal Entry for Deferred Revenue Expenditure
When recording deferred revenue expenditure, two main entries are made:
- Initial Recording: The expenditure is recorded as an asset.
- Amortization: The expenditure is gradually expensed over the periods it benefits.
Initial Recording of Deferred Revenue Expenditure:
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| DD-MM-YYYY | Deferred Revenue Expenditure | Amount | Record the deferred expenditure | |
| DD-MM-YYYY | To Cash/Bank | Amount | Payment for the expenditure |
Amortization of Deferred Revenue Expenditure:
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| DD-MM-YYYY | Amortization Expense | Amount | Amortize the deferred expenditure | |
| DD-MM-YYYY | To Deferred Revenue Expenditure | Amount | Reduce the deferred expenditure |
Example of a Deferred Revenue Expenditure Journal Entry
Let’s say on 01-01-2023, a business spends ₹100,000 on an extensive advertising campaign expected to benefit the business for 5 years. The expenditure will be amortized over the next 5 years.
Initial Recording:
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 01-01-2023 | Deferred Revenue Expenditure | 100,000 | Record advertising campaign cost | |
| 01-01-2023 | To Cash/Bank | 100,000 | Payment for advertising campaign |
Annual Amortization (for the first year):
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 31-12-2023 | Amortization Expense | 20,000 | Amortize advertising campaign cost | |
| 31-12-2023 | To Deferred Revenue Expenditure | 20,000 | Reduce deferred expenditure |
In this example:
- Deferred Revenue Expenditure account is initially debited for the full amount of the advertising campaign.
- To Cash/Bank account is credited for the payment made.
- Amortization Expense account is debited annually for the portion of the expenditure being expensed.
- To Deferred Revenue Expenditure account is credited to reduce the deferred expenditure.
Why Record Deferred Revenue Expenditure?
- Accurate Financial Statements: Ensures that expenses are matched with the periods they benefit, providing a true picture of the business’s financial performance.
- Expense Management: Helps in spreading the cost of significant expenditures over multiple periods.
- Asset Recognition: Reflects the deferred expenditure as an asset until it is fully amortized.
Steps to Record Deferred Revenue Expenditure
- Identify the Expenditure: Determine the amount of the expenditure that will benefit future periods.
- Create the Initial Journal Entry: Debit the deferred revenue expenditure account and credit the cash or bank account.
- Amortize the Expenditure: Debit the amortization expense account and credit the deferred revenue expenditure account over the periods benefited.
- Adjust Financial Statements: Ensure the deferred expenditure and its amortization are reflected in the financial statements.
Conclusion
Recording deferred revenue expenditure accurately is crucial for maintaining reliable financial records and ensuring the financial statements reflect the true financial position of the business. By understanding how to create the journal entry for deferred revenue expenditure, businesses can manage their expenses and assets effectively.