We all know the very reason for starting a business is to earn Profit. In order to earn profit every business has to incur expenditure in some or the other form. Expenditure can be either Revenue Expenditure or Capital Expenditure. Revenue expenditure is a cost that is charged to expense as soon as the cost is incurred. For example Salaries, Rent etc. On the other hand Capital Expenditure is an expense where the benefit continues over a long period. Such expenditures are non-recurring in nature. For example, acquisition of fixed assets and other capital assets.
But sometimes, it may happen that the business enterprise may incur revenue expenditure, but the amount is so huge that the benefit of the same would last for number of years. In such a case, the concerned expenditure should be capitalised and treated as Deferred Revenue Expenditure. Deferred Revenue Expenditure is an expenditure which is revenue in nature and incurred during an accounting period, but its benefits are to be derived over a number of following accounting periods.
Recording the whole expenditure in the same accounting year in which that expenditure was spent would decrease the profits of that year heavily. Hence it seems more practical to distribute this expense and spread it over the number of accounting years over which the benefit is likely to occur.Also, as per the matching principle, the whole expenditure should be apportioned over a number of accounting years and only that portion should be charged to revenue during current year which has facilitated the enterprise to earn revenues during the current year.Remaining balance shouldbe carried forward to the next year. The portion of such expenditure which has been treated as revenue shall be debited in the Profit and Loss Account and the balance amount should be shown under the Assets side of the Balance Sheet.