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Accounting treatment of pre-operative expenses


OUR COMPANY HAS INCURRED SOME PRE-OPERATIVE EXPENSES LIKE SALARIES, ADVERTISMENT, AND FRANCHISEE FEE ETC BEFORE COMMENCEMENT OF OPERATIONS. THE COMPANY STARTED OPERATIONS IN THE SAME YEAR.

WHAT IS THE ACCOUNTING TREATMENT OF PRE-OPERATIVE EXPENSES WHICH ARE NOT ATTRIBUTABLE TO ANY FIXED ASSETS.

ALSO ADVISE ME ON TAX TREATMENT OF THESE EXPENDITURE.

 
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done B.com(hons.) CA-Final Group I Cleared

Dear krishna..Expenses incurred even before start of operations are called preliminary expenses.Preliminary expenses are to be write off over a period of 5 years from the start of the business.So all you have to do is just take the total of all the expenses incurred by your co. and divide the calculated sum by 5 and debit the amount in P&L A/c.These are deductible expenses from tax point of view.

 
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As per Accounting Standard-26 , preliminary expenses & pre operating expenses has to be  written off in the same year in which such amount is incurreed. Read para 56 to para 59.

This is clearly indicated that assets is:

Recognise if, and only if,
Probability of flow of future economic benefits
Cost can be reliably measured
Power to obtain future economic benefits.
Legal rights over the use of assets.

 

 
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