Preliminary expenses in accounting- Know all about it

Preliminary expenses

The field of accounting and finance is a very important one as there are a lot of people into this field who want to know a lot about accounting and the facets related to it like preliminary expenses is one of them so that they can excel more and more in this field and acquire better knowledge of their field.

In this article we will discuss all the things about preliminary expenses which is as we know a very important part of accounting and related jobs and works.

What is preliminary expenses?

Now the first and the most significant question here is that what is preliminary expenses in balance sheets and how this thing is very closely related to accounting and related fields.

The costs related and incidental to the formation of a company are termed as preliminary expenses. All the different types of costs such as the cost of printing and circulating the memorandum and articles of company and prospectus, the registration charges and stamp duties, the printing or share certificate and all the legal charges are included under the preliminary expenses.

As all the costs are covered under the preliminary expenses that is why these preliminary expenses written off as really important for any company related to their business.

All the preliminary expenses treatment is done differently by every different company. Preliminary expenses are a type of capital expenditure which may be written off over a period of years by any company.

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Preliminary expenses examples

There is a need to know more about the different preliminary expenses through examples. Following are the different examples of preliminary expenses.

  • Charges paid to the top chartered accountants for forming a business comes under preliminary expenses.
  • Printing of memorandum expenses and article of association and its related circulation charges.
  • Legal charges paid before incorporation.
  • Amount paid for stamp duties.
  • Marketing survey charges and feasibility study expenses.
  • Professional and consultation charges paid for the incorporation of company.

Accounting related to Preliminary Expenses

Now it becomes important to think that how to treat these expenses that is what must be the treatment of preliminary expenses. In most of the cases these preliminary expenses are treated as intangible asset and shown on the asset side of the balance sheet under head miscellaneous asset.

For accounting purpose and purpose of income tax of India these preliminary expenses are written off in five years time. As per the accounting standard this time is ten years. However there is no time for writing off these expenses.

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Other important points to note

Now if the amount of preliminary expenses is small then it may be debited to P&L Account. If the amount is high then it is spread over a number of years. The account and balance in shown on the balance sheet.

Preliminary expenses entries for accounting is done under these types.

  • Preliminary expenses incurred
  • Preliminary expenses written off entry
  • Closing entry

These all the most important things about preliminary expenses.