Vinu: Manu, I’ve heard of both "deferred revenue expenditure" and "prepaid expense," but I’m not sure what the difference is. Can you help me understand?

Manu: Sure, Vinu! Let me explain it to you. First, let’s talk about deferred revenue expenditure. This refers to expenses that are paid in advance for future periods but are not fully charged to the Profit and Loss account in the current period. Instead, these expenses are written off over multiple years. This is typically applicable when the benefit of an expenditure lasts for a long time.

Vinu: Oh, I see! So, it’s an expense paid today, but its benefit is spread out over the future. Can you give me an example?

Manu: Absolutely! Let’s take the example of advertising expenses. Suppose a company pays ₹1,00,000 for a big advertising campaign that lasts for five years. In this case, the company won’t expense the entire ₹1,00,000 in one year. Instead, it will allocate ₹20,000 each year as a deferred revenue expenditure over the five-year period.

Vinu: Got it! So, the company is spreading out the expense over five years. But what about prepaid expense? How is that different?

Manu: Good question! Prepaid expense, on the other hand, refers to payments made in advance for goods or services that will be received in the future. This is recorded as an asset initially, as the company hasn’t yet received the goods or services. Once the goods or services are received, the expense is recognized and recorded in the Profit and Loss account.

Vinu: Hmm, so prepaid expense is when a company pays upfront for something but hasn’t yet received the benefit. Can you give me an example of that?

Manu: Sure! Let’s say a company pays ₹12,000 in advance for a one-year insurance policy in January. Since the insurance coverage will be received over the next 12 months, the company will initially record this as a prepaid expense (an asset). As each month passes, it will gradually recognize ₹1,000 as an expense in the Profit and Loss account.

Vinu: I see now! Deferred revenue expenditure is related to expenses spread over time, while prepaid expense is when money is paid upfront for services or goods to be received in the future. Thanks, Manu! This really clears things up.

Manu: You're welcome, Vinu! Glad it makes sense now.