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Why prepaid expense are treated as current assets but deferred revenue expenditure are treated as fictitious assets?

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posted Jul 14 by Naveen Kumar

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imilarity 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.

answer Jul 15 by Shamita
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