Last editedMar 20222 min read
How can your company account for business expenses that don’t immediately create cash revenue? Deferred revenue expenditure offers a way to describe these expenses in your profit and loss accounts across fiscal years. Here’s a closer look at deferred revenue and expenses, as well as what they mean for your business.
Deferred revenue expenditure explained
When we talk about deferred revenue and expenses, both terms describe a delay between cost or sale and resulting payment.
Deferred expenses are costs paid by a company that don’t impact its accounts until later.
Deferred revenue describes payments received by a company before it has delivered goods or services.
So, what is deferred revenue expenditure? This term refers to money spent during one accounting period with the intention of creating revenue in a future accounting period. You pay the initial expense upfront to see benefits earned in the future. It’s important to recognise deferred revenue expenditure because a portion of it can be written off each year in relation to the benefits earned.
Here are a few defining characteristics of deferred revenue expenditure:
It describes money spent by a business that will create future revenue
The revenue earned will cover more than one accounting year
It’s usually a one-time expense that creates ongoing benefits
It’s important to disclose deferred revenue expenditure on financial statements
Deferred revenue expenditure example
One common deferred revenue expenditure example is the cost of an advertising campaign. A company might pay a hefty lump sum for an advertising package. Although this money is paid upfront, the results of the campaign won’t be immediately seen. Advertisements attract new leads who move through the marketing funnel to eventually make a sale, at which point revenue is earned. This isn’t a one-time process; it’s ongoing, as more potential customers view advertisements and make a purchase. As a result, the benefit of the initial expense could be seen spread out over several accounting years.
Additional examples of deferred revenue expenditure include things like the cost of market research and product development. These require a large initial investment which in turn produces future revenue.
Deferred revenue expenditure accounting treatment
As with deferred revenue and expenses, a deferred revenue expenditure should be initially recorded on the balance sheet. Revenue is then recognised over time as it’s earned, with expenses written off accordingly.
Deferred revenue expenditure accounting treatment is based on generally accepted accounting principles (GAAP). Specifically, it helps businesses comply with the matching principle in accounting, which states that revenue and expenses should be recorded in the same accounting period. Costs should only appear on the income statement when the related revenues can also be reported at the same time.
By deferring expenses in relation to revenue, you also ensure that you’re not writing off more business expenses than you’re entitled to. It helps ensure that profits aren’t being distorted by a large expense making its way to the income statement without its matching revenue.
Deferred revenue and expenses tax treatment
Taking care with your deferred revenue expenditure accounting treatment also trickles down into your tax returns. According to HMRC, the GAAP permits expenditure to be deferred across accounts of more than one tax year. There’s no specific tax law that dictates when a business must deduct the expenditure – instead, it can be deducted once the ‘expenditure is charged to the profit and loss account in accordance with GAAP’.
As with any accounting and tax related issue, it might be a good idea to speak to a tax consultant before you make any large investment like a new advertising campaign. This ensures you’ll record the income and expenses at the most appropriate time, according to GAAP and UK tax law. Ultimately, deferred revenue expenditure gives you the chance to grow your business and state profit more accurately over the long term.
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