PRELIMINARY EXPENSES AND ITS ACCOUNTING TREATMENT?

PRELIMINARY EXPENSES

INTRODUCE

There are some expenditures that incurred before incorporation and commencement of business, company and the promoters of the company like Statuary Fees and Company logo designing, Survey & Development fees, Project & Planning fees  etc . These are all comes under preliminary expenses.

Simply says Preliminary Expenses are the expenses that only be spent by the proprietor/owner before the incorporation of company/firm. Expenses made after incorporation of the company/firm will not be considered as preliminary expenses.

Examples of preliminary expenses:-

1.     Expenses made towards Feasibility Report of company

2.      Expenses made towards Preparation of Project Report of company

3.     Expenses made towards conducting market and any other survey of company

4.     Legal charges

5.     Expenses made/incurred on the printing of Memorandum and Articles of Association;

6.     Registering Fees for the Company under Companies Act, 1956;

7.    Issuance of Public subscription of shares and debentures of the company, being underwriting commission, brokerage and charges of drafting, for typing, printing and advertisement of the prospectus.

8.     Expenses made towards Statutory Matters like Stamp Duty

9.     Expenses made towards Land Development, survey, project report etc.

10. Other related expenses that made to take business into existence.

Accounting treatment of preliminary expenses: - The benefit of Preliminary Expenses provides long term benefit accordingly it is treated as intangible assets and shown in balance sheet under the head of Miscellaneous Assets:-

1.  Preliminary Expenses are made/incurred /paid;

Preliminary expense (Miscellaneous Assets-Current Assets) A/c………….Dr.

Cash/Bank A/c……………………………………………………………………..…………….Cr.

2.  Part of Preliminary Expenses are considered as Indirect Expense:-

Preliminary Expenses written off A/c………Dr.

Preliminary expenses A/c…………………..……Cr.

3. Deduction of preliminary expenses:-

Profit & Loss A/c……………..…..Dr.

Preliminary expenses A/c…….Cr.

Eligible Deduction of Preliminary Expenses U/s 35D of I. Tax:- An Indian company or a person (other than company) resident in India only can claim deduction of Preliminary Expenses that shall not be exceeds 5% of the “Project Cost” or “Capital Employed”.

The Expenditures shall be divided in 5 equal installments for five successive previous years beginning with the previous year in which business commences.