Definition

Heavy expenditure of a revenue nature, the benefit of which is available for a period of two or three (or even more) years, is known as capitalized or deferred revenue expenditure.

Explanation

This expenditure is not written off from the profits of the year in which it was incurred; instead, it is spread over the number of years for which the benefit is expected to last.

To maintain steady growth, it is advisable to spread this expenditure equally over the number of years for which it is anticipated that the benefit will be enjoyed by the business.

Examples

Examples of capitalized or deferred revenue expenditure include:

  • Exceptional repairs of a non-recurring nature by way of overhauling of the plant and machinery
  • Advertising payments made under a contract extending over a period of more than one year
  • Large amount allocated to advertisements in one year to popularize a new product

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