Costs incurred in the formation of a firm, and in advertising, promotional activities, employee training, etc., before the firm can open its doors for business. Also called preliminary expenses or start up expenses.
Treatment of Preliminary Expenses
When we start a company level business, its promoters pay some expenses like legal fees, company registration fees and MOA and AOA making fees and others which are helpful to incorporate the company. So, preliminary expenses are those primary expenses which are paid before the incorporation of company. So, when company comes into existence after incorporation, it is the duty of company to repay all these expenses to its promoters. So, after paying all these expenses, we treat all these preliminary expenses with following ways : -
1. When company repays preliminary expenses
Preliminary expenses account Dr.
Cash or Bank account Cr.
2. Treatment in financial statements of company
Only written off part preliminary expenses will show in expenses side of profit and loss account and balance sheet will show as balance part in asset side because it is a capital item, so we will not whole preliminary expenses in profit and loss account.
3. We divide it with five years or others years as per your company rules and one part of these expenses are written off by transferring it to profit and loss account.
4. Expenses on share issue will not be included in preliminary expenses.
5. It is the duty of company auditor to check preliminary expenses whether these are paid by promoters and have bill or receipt for this.
6. Treatment of Preliminary expenses as per company law
1. When company repays preliminary expenses
Preliminary expenses account Dr.
Cash or Bank account Cr.
2. Treatment in financial statements of company
Only written off part preliminary expenses will show in expenses side of profit and loss account and balance sheet will show as balance part in asset side because it is a capital item, so we will not whole preliminary expenses in profit and loss account.
3. We divide it with five years or others years as per your company rules and one part of these expenses are written off by transferring it to profit and loss account.
4. Expenses on share issue will not be included in preliminary expenses.
5. It is the duty of company auditor to check preliminary expenses whether these are paid by promoters and have bill or receipt for this.
6. Treatment of Preliminary expenses as per company law
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.
