Treatment of Preliminary Expenses

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Gaurav Garg (Querist)
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09 August 2008 A pvt. ltd. company formed in February 2008 and got the certificate of business commencement in 15.05.2008, has the following positions as at 31.03.08:
a)No expenses have been incurred except preliminary expenses,
b)It has purchased furniture for office on 13.03.08 and incurred preliminary expenses,
c)It has placed order for purchase of Raw Material to manufacture a product on 5.05.2008, purchased furniture and incurred preliminary expenses during the year.

My queries are as below:
i) Whether company can be said to have commenced business as at 31.03.08 in any of the situation?
ii) What should be the accounting treatment in each situation for-
a) Preliminary Expenses
b) Purchase of Furniture
iii) Do I have to prepare P & L Account for the year ending on 31.03.2008.

I have a opinion that P&L A/c should not be prepared until business is commenced. But then a problem arises what would happen to the depreciation on furniture and audit fees paid to CA for the year 2007-08.

Further I am confused because as per para 51 of AS- 26 expenses which does not bring into existence any intangible asset should be charged to P&L A/c.Hence preliminary expenses should be charged in P&L A/c.

Please answer in detail as I Have to finalise the Balance Sheet of such company.

S.Srinivasaraghavan

S.Srinivasaraghavan (Expert)
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09 August 2008 i)yes.
ii)Preliminary expenses:
Only those expenses connected with capital issues and legal and formation expenses are classified as preliminary expenses.Other expences after formation but before commencing operations are preoperative expenses to be capitalised. Purchase of furniture is to be capitalised
P&L comes into picture only after commencing operations.

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