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Treatment of Preliminary Expenses

>> January 31, 2011

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. Schedule VI  - Payment of preliminary expenses may be in the form of issue of shares.

2. Section 227 (I) of company law - Written off of preliminary expenses.

3. Section 226 (3) of company law - Auditor can not take shares for his services to the company before incorporation.

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