In business, not all income and costs directly match up with the goods and services sold or the assets purchased. In many cases, the value received is actually delayed over time. According to generally accepted accounting principles, money and value should be matched whenever possible. This means that a business must account not only for depreciation of assets, but also other expenditures that may not immediately generate profit.
Revenue expenditure refers to the money that a business receives from cash flows and then spends on operations. For example, if a business receives $1,000 from sales, that counts as revenue on the income statement. If the business turns around and spends $700 of that money to pay for a training program, that counts as a revenue expenditure. The business is spending the revenue to fund operations, expand or add value to the experience of the customers.
Deferred Revenue Expenditure
While revenue expenditure is a simple concept, deferred revenue expenditure is slightly more complicated. In this case, the value received from the expenditure is not immediate. Buying a training program may add skills to office labor forces over just a few days, but not all effects occur so quickly. Sometimes the benefit is delayed over months or even years. In this case, the business creates a deferred revenue expenditure account to match up the expense with the value received, similar to depreciation accounts but for a different set of activities.
A common example for deferred revenue expenditures is in marketing. Advertising, according to many theories, has a delayed effect. This means that the business can spend money on an advertising campaign, but not realize increased sales until several months down the line when customers absorb the full impact of the ads. Some theories disagree that advertising is so delayed, but if the business accounts for it then it will create a deferred revenue expenditure account in order to match up the delayed value with the amortized costs of the advertising.
Deferred revenue should not be confused with deferred revenue expenditure. Deferred revenue occurs when a business is paid for a service before actually performing that service. The revenue is collected ahead of time and held by the business until the service is complete and it can be counted as cash received. It has nothing to do with expenses.