Thursday, 10 May 2012

What are Preliminary expenses and Accounting for preliminary expenses?


Before incorporation and commencement of business, company and the promoters of the company may incurred so many types of expenses like statuary fees and company logo designing, in some cases rent for the office premises during the time of incorporation not after incorporation etc... These are all comes under preliminary expenses .in simple words preliminary expenses are the expenses that spent by the promoters before the incorporation of company.
Examples:
  • Expenses paid for CA for incorporation of company
  • Expenses paid for name approve of the company
  • Expenses for printing of statutory documents like MOA, AOA
  • Stamp duties paid
  • Any other expenses paid to take the company into existence
  • Expenses for raising initial share capital

Accounting for preliminary Expenses:

The benefit of the preliminary expenses is long-term so it is treated as intangible asset and shown in Balance sheet under Missilinous assets. These expenses will be written off in 5 equal year installment in profit and loss A/c. you can also transfer whole amount in single year but for income tax purpose 1/5 of the amount will consider.
Accounting Entries:
1. Preliminary Expense - Dr (Current Asset)
                             To Cash\Bank
                             
2. Preliminary Expenses Written Off - Dr (Indirect Expenses)
                                        To Preliminary Expenses

3. Profit & Loss A\c. - Dr
                To Preliminary Expenses


Pre commencement expenses:

These are the expenses that are incurred by the company after incorporation and before commencement of business. For example a private company and a public ltd company without share capital can commence business after getting certificate of incorporation from ROC. But a public company having share capital is not allowed to commencement of business until it get certificate if commencement of business. In this mean time they can inure some expenses like recruiting employees etc… these expenses are called as pre commencement expense. The company will written off this expenses in that year only

10 comments:

  1. Replies
    1. how many months we can go back to claim preliminary expenses

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    2. as per law in india....u can go back 5yrs

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  2. This comment has been removed by the author.

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  3. Good explanation of preliminary exp

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  4. Doubt.

    A Company has incurred expense in two different years in 2013 & 2014. Their incorporation was in April of 2014. So do they have to record Prelimenary expense in two different years or can they club it toegther to the last month before commencement. In this case March 2014?

    Please Answer. Thank you fin advance.

    Regards,

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    Replies
    1. really a very interesting question, could anyone help by answering this one please....

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