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Difference between prepaid expense and deferred revenue expenditure ?

Hello sir. Please explain difference between prepaid expense and deferred revenue expenditure. And also why prepaid expense are treated as current assets but deferred revenue expenditure are treated as fictitious assets,however, we derive value from both of them in future.
Like prepaid insurance(current asset) and advertisement expenditure(deff. rev. exp)

asked Mar 1, 2017 in Terminology in Accounts by caankitjain (8 points) 1,115 views
edited Mar 22, 2017 by caankitjain

1 Answer

+1 vote
Similarity between Prepaid Expense and Deferred Revenue Expenditure is that both the expenses are of revenue nature.  Prepaid expenses are expenses which are paid during an accounting year but it is not fully consumed during the accounting year and we have the right to consume it in the next accounting period.  In such a case the value of unconsumed part of expenses is carried forward to the next accounting year and is treated as a current asset in the balance sheet.  In case the unconsumed benefit spreads over more than one accounting period, then it should be classified as a non-current asset.  A good example of this is insurance.  Normally we get insurance of vehicle etc. for one year.  If insusrance is done on 1.1.2016 by paying a premium of Rs.12,000 and the acccounting year of the firm is from April to March, then insurance will run for 9 months in the next accounting year i.e. 2016-2017.  In the Balance Sheet of 2015-2016 Rs.9000 will be treated as Prepaid Insurance, a current asset.

Certain expenses though of revenue nature but likely to give benefit for more than one accounting year are treated as Deferred Revenue Expenditure like Advertisement expenses.  These expenses are written off over a period of 3-4 years and till they are written off, they are depicted in the balance sheet as non-current assets.  These expenses are treated as fictitious because these are not actual assets.  In such cases the benefit may or may not be derived from the deferred revenue expense.  Basically it is an unusually heavy expense, which management wants to write off over more than one accounting period.
answered Mar 25, 2017 by jbsclasses (3,971 points)
Thank you sir for the answer.
Sir it means, due to uncertainty about the benefit will be derived or not from advertisement expenditure, it is treated as deferred revenue expenditure.. And due to certainty of benefit, prepaid insurance is treated as current asset.?
Basically in case of deferred revenue expenditure, the expense is relatively heavy and management does not wish to write of that in one accounting period,  Hence it is written of over a period of 2-3 years.  Whether benefit is derived or not later is a secondary matter.  For example discount on issue of shares and  preliminary expenses are also deferred revenue expenditure but amount has already been spent and there is not going to be any future benefit.  So in conclusion it can be said that it is purely a management decision in case of certain heavy revenue expenditure to write them of over more than one accounting year.
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