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Treatment of profit and loss

Sai Srinivas (Audiit Assistant) (22 Points)

20 February 2017

Please explain, how to recongise the revenue expenses to profit and loss account before commencement of commercial operations.

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9 Replies

Venkatesh Dangeti (CA Final) (881 Points)
Replied 20 February 2017

i think, we should treat it as preliminary expenses

(Guest)

It is preliminary expenses it includs company formation expense roc fees ect

Venkatesh Dangeti (CA Final) (881 Points)
Replied 20 February 2017

there is a conflict between income tax act and accounting standards regarding the same

Venkatesh Dangeti (CA Final) (881 Points)
Replied 20 February 2017

i prefer to write off all preliminary exp in the first year itself so as to avoid differred tax assets

ASHWANI KUMAR TIWARI (CA Student) (27 Points)
Replied 21 February 2017

IN MY VIEW IT SHOULD BE TREATED AS A PRILIMINERY EXPENSES

Sanjay S (Chartered Accountant) (1375 Points)
Replied 21 February 2017

Well, revenue expenditure incurred by promoters prior to commencement of operations can have treatments as follows:

Accounting Aspects:

The same may be charged off as 'Preliminary Expenditure written off'. You CANNOT write it off over a period exceeding 1 year since 'AS 26 - Intangible Assets' has prohibited the concept of 'Deferred Revenue Expenditure' half a decade ago. Hence all preliminary expenses have to written off in 1st year itself.

Hence the entry to be passed may be:

Preliminary Expense written off A/c Dr. (full amount)

To Payable to Promoters A/c (since the entire amount was borne by the promoters)

Taxation Aspects:

Its a whole new sight when one steps into the land of taxes. The preliminary expenses falling within the scope of Section 35D needs to charged off over a period of 5 years. (You have to be an eligible assessee who has incurred some eligible expenditure - check section for more clarity). Also the maximum allowable amount is 5% of the Cost of project/ Capital Employed, as the case may be.

Hence only 1/5th of such expense can be claimed as expense in the 1st year of operation.

Hope this helps.

Other views & suggestions are invited.

Sanjay S (Chartered Accountant) (1375 Points)
Replied 21 February 2017

ASHWANI KUMAR TIWARI (CA Student) (27 Points)
Replied 25 March 2017

in my opnion it should be treated as preliminary expenses under miscellinious expenses (assets) and should be charge to profit and loss a/c when it incure while as per section 35d of income tax act it should be written in 5 year while as per AS - 26 it does not meet the criteria for an assets as well as as per para 55 of said AS it should be recognise as expenses when it incure and deffered tax as per AS - 22 shuold be created.