Preliminary expense & pre operative expense

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

27 July 2012 Sir,

I wanted to Know the Exact Treatment of Preliminary Expense and Preoperative Expense which are being Brought Forward from Previous Years and Those which have been Created During the Current Year as per Revised Schedule - VI for Private Limited COmpany.

Would there be any change in treatment for Public Limited Company.

Thank you well in advance

Amol S Joglekar

Amol S Joglekar (Expert)
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27 July 2012 Preliminary expenses go by Miscellaneous expenses. Pre operative may be treated as deferred expenses by capitalising the same.

Querist : Anonymous

Querist : Anonymous (Querist)

27 July 2012 Dear Expert,
As you said Preliminary Expense go by Miscellaneous Expense, so exactly it means we need to treat whole of the balance i.e. Brought Forward and Created during the year as Revenue expenditure and Nullify the balance of the same.

For Preoperative Expense under which head do we need to Capitalise the same because it is not for any specified Asset.

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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10 August 2024 The treatment of **preliminary expenses** and **preoperative expenses** has implications for both private and public companies. Revised Schedule VI (now replaced by Schedule III under the Companies Act, 2013) provided guidance on the treatment of these expenses. Here’s a detailed look at the treatment for both private and public companies:

### **1. Preliminary Expenses**

**Definition:**
Preliminary expenses are costs incurred during the formation and establishment of a company, including incorporation fees, legal fees, and other initial costs.

**Treatment under Revised Schedule VI (Now Schedule III):**

- **Private and Public Companies:**
- **Accounting Treatment:** Preliminary expenses are generally not capitalized under accounting standards. Instead, they are expensed in the year they are incurred. Revised Schedule VI and Schedule III do not allow for the capitalization of preliminary expenses. These should be written off as per the accounting policies and principles.
- **Disclosure:** In the balance sheet, there is no separate disclosure for preliminary expenses under Schedule III. Instead, these expenses should be shown as part of the Profit and Loss Account and written off in the period they are incurred.

**Changes under Companies Act, 2013:**
- There is no significant change in the treatment of preliminary expenses under the Companies Act, 2013 compared to the previous regulations. The treatment remains consistent with the accounting standards which require that such expenses be written off.

### **2. Preoperative Expenses**

**Definition:**
Preoperative expenses are costs incurred during the period when the company is setting up its operations but before the business commences. This includes costs like salaries, rent, utilities, etc., incurred to prepare the company for commercial activities.

**Treatment under Revised Schedule VI (Now Schedule III):**

- **Private and Public Companies:**
- **Accounting Treatment:** According to accounting standards, preoperative expenses should be capitalized as part of the cost of the assets if they are directly attributable to the acquisition or construction of the assets. For example, if preoperative expenses are related to setting up a factory, they should be capitalized as part of the cost of the factory.
- **Disclosure:** Preoperative expenses should be disclosed in the balance sheet under the relevant asset categories, capitalized as part of the cost of fixed assets or construction in progress.

**Changes under Companies Act, 2013:**
- Under the Companies Act, 2013, the treatment of preoperative expenses remains similar to that under Revised Schedule VI. These expenses should be capitalized and disclosed as part of the cost of fixed assets or construction in progress, rather than being expensed immediately.

### **Key Points:**

1. **Preliminary Expenses:**
- Should be expensed in the year incurred.
- Not capitalized or separately disclosed in the balance sheet.

2. **Preoperative Expenses:**
- Can be capitalized if they are directly attributable to the acquisition or construction of assets.
- Should be disclosed as part of the cost of fixed assets or construction in progress.

### **Impact on Different Types of Companies:**

- **Private Limited Companies:** The treatment of preliminary and preoperative expenses remains consistent with the guidance under Schedule III of the Companies Act, 2013. Preliminary expenses should be written off, while preoperative expenses should be capitalized if they relate to asset acquisition or construction.

- **Public Limited Companies:** The treatment is similar to that of private limited companies. Public companies also need to follow the accounting standards and Companies Act provisions, where preliminary expenses are written off, and preoperative expenses are capitalized if they are directly related to asset creation.

**Conclusion:**

For both private and public companies, the general principle is:
- **Preliminary expenses** are expensed in the period they are incurred and should not be capitalized.
- **Preoperative expenses** should be capitalized if they directly relate to the acquisition or construction of assets and should be disclosed accordingly in the financial statements.

Ensure to review the latest accounting standards and the Companies Act provisions for any updates or changes in the treatment of these expenses.

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