Treatment of Preliminary Expenses

This query is : Resolved 

24 April 2011

1.Preliminary expenses of Rs.75,000 are incurred for incorporation of company in FY 2008-09 what entry need to be passed ?

2.Whether the whole of expenses to be charged to P/L or can only 1/5 is to be charged to P/L & remaining is to be shown in B/S?

CMA. CS. Sanjay Gupta (Expert)

24 April 2011

Preliminary Exp A/c Dr
(under Misc Exp. Assets)

To Bank....

When Write of 1/5th-----

Prelim Exp Written off A/c DR.

To Preliminary Exp A/c

1/5 is to be charged to P/L & remaining is to be shown in B/S

24 April 2011

As regards part 1 of your question Mr Sanjay Gupta is correct.

But as regards part 2 of your question my opinion is that it should be written off in one year only because as per Accounting Standard 26 Preliminary expenses do not meet the definition of assets and must be expensed with in the year of incurring.

Tareq Imam (Expert)
24 April 2011

prel expenses to be written off in 5 years
1/5 in each year

25 April 2011

I will again request Mr Tareq Imam to read AS 26 and let me know whether writing off Preliminery Expenses in 5 years is correct treatment as per this accounting standard. This was definitely correct before this AS but the Institute has also clarified that preliminery expenses should be written off in one go as per this accounting standard which is mandatory for all companies in India.

CA Gaurav Agarwal (Expert)
25 January 2013

As per AS 26 Preliminiary exp. if fully written off in the Ist year of Company incorporation...

Criteria of 1/5th is in Income Tax Act not in A.standard.

and for the same deferred tax is req. to calculate..

Thank You

Best Regards

CA Gaurav Agarwal

Tareq Imam (Expert)
31 January 2013

But As per income tax act we can claim 1/5 th deduction each year

01 February 2013

You are correct that as per it 1/5 is allowed every year. But as per accounting standard you have to write off full amount in first year. Moreover in accounts you have to recognise deferred tax on this account.

CA. Astaf Mansuri (Expert)
23 April 2013

what about if the debit balance of profit & loss in balance sheet ? should the concern wait to set off same against the profit in future ?

CA. Gireesh Tawri (Expert)
13 June 2015

As per section 35D of the Income Tax Act, Preliminary expense to write off 1/5 in every year

AS 26 suggests writing off intangible assets over a period of 10 years, though a different period is permissible if it is justified in the opinion of the management. It is a common practice to write off these preliminary expenses in a period of five years, though there is no legal provision to this effect. A company can as well write off its preliminary expenses in the same year as it incurs.

My opinion is to write-off preliminary expense in the same year.

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