Preliminary expense

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shinu (Querist)

14 January 2021 Sir,

company was incorporated on 2018 and thy filed the annual forms for the year 2018-19.But they haven't shown any preliminary expenses for the particular period. Now in 2019-20 can we show the same? how to record the same?

Aashok Kumar Sharma online

Aashok Kumar Sharma

(Expert)

10 July 2024 Incorporation costs or preliminary expenses typically refer to expenses incurred before a company starts its normal business operations. These expenses can include costs like incorporation fees, legal fees, registration fees, etc. According to accounting principles, these expenses are usually capitalized and amortized (spread out) over a certain period (often 3-5 years) rather than expensed immediately.

Here’s how you can address the situation for your company:

### 1. **Capitalization of Preliminary Expenses:**
- Since your company was incorporated in 2018 but did not show any preliminary expenses in the financial statements for the year 2018-19, you can still capitalize these expenses in the subsequent year (2019-20).
- Preliminary expenses incurred before the commencement of business are generally recognized as an intangible asset on the balance sheet and amortized (expensed) over their useful life.

### 2. **Recording the Preliminary Expenses:**
- **Identify the Expenses:** Gather all relevant invoices and documentation that substantiate the preliminary expenses incurred during the incorporation period.
- **Record as Intangible Asset:** Create an intangible asset account on your balance sheet titled "Preliminary Expenses" or "Incorporation Costs."
- **Amortization:** Decide on an appropriate amortization period. The usual practice is to amortize these costs over 3 to 5 years. Choose a method (straight-line is common) and calculate the annual amortization expense.

### 3. **Financial Statements Impact:**
- **Balance Sheet:** Record the preliminary expenses as an intangible asset under long-term assets.
- **Income Statement:** Amortization expense should be recorded in the income statement under operating expenses. This amortization expense should be recognized annually until the preliminary expenses are fully amortized.

### Example Journal Entries:
- When recording the preliminary expenses initially:
```
Dr. Preliminary Expenses (Intangible Asset) xxx
Cr. Cash/Bank or Accounts Payable xxx
```
- For annual amortization:
```
Dr. Amortization Expense xxx
Cr. Preliminary Expenses (Intangible Asset) xxx
```

### Final Considerations:
Ensure compliance with local accounting standards and regulations regarding the treatment and amortization of preliminary expenses. If you are unsure about the specifics or if your company operates under specific regulations (such as tax laws governing intangible assets), consider consulting with a qualified accountant or financial advisor for tailored guidance.

By properly recording and amortizing preliminary expenses, you maintain accurate financial reporting and ensure adherence to accounting principles, which is crucial for transparency and compliance in business operations.

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