Like all accounting activity of a company, pre-operating expenses are also subject to the audit carried out by the relevant tax institution. You are allowed to expense Rs4,000 (viz 20,000/5) in one year. It is to be debited to Profit and Loss account. Preliminary expenses account Dr. Cash or Bank account Cr. The treatment isn't same in the case of The Income Tax Act, 1961. The expenditure on preliminary expenses shall not be carried forward in the balance sheet to be written off in subsequent accounting periods. then ‘Preliminary Expenses’ Account is debited and Share Capital account is credited. So considering this, preliminary expense will not be shown in balance sheet. 2. However, pre-operating expenses can be tax deducted because they correspond to expenses generated in a period prior to the commencement of a company's operations. Income Tax Act makes it mandatory for the preliminary expenses to get amortized on equal terms within the time frame of around 5 years. In most of the cases these preliminary expenses are treated as intangible asset and shown on the asset side of the balance sheet under head miscellaneous asset. These expenses will be written off in 5 equal year installment in profit and loss A/c. Treatment in Financial Statements. Preliminary expenses already shown in the balance sheet on the date the Standard is first applied would be required to be accounted for in accordance with the requirements laid down by paragraph 99 of AS 26 – Treatment of Profit Prior to Incorporation, Preoperative and Preliminary Expenses – Preparation of Final Accounts under Company Law 4. Accounting related to Preliminary Expenses. Section 35D of Income tax Act directs to write off preliminary expenses in 5 years. The Entry is Preliminary Expenses […] ADVERTISEMENTS: In case promoters have been issued fully paid up shares for the expenses incurred on the formation of company such as: preparation and printing of memorandum and articles of association, feasibility report, registration fees, legal fees etc. Accounting for preliminary Expenses: The benefit of the preliminary expenses is long-term so it is treated as intangible asset and shown in Balance sheet under Missilinous assets. So, for income tax calculations, in the previous example, you can't expense full Rs20,000 in 1 year. Corporate Restructuring – Concept and Accounting Treatment as per AS – Methods of Amalgamations Accounting – The Pooling of Interests Method – The Purchase Method – Consideration Meanwhile, the accounting treatment has a preference to have the amortization fully in the same year. In case the value of preliminary expenses is less we write off the same at once however, they are shown as an intangible asset in the balance sheet and written off at regular intervals over a fiscal period when the value of the expenses is high. As per AS 26 Intangible assets, Preliminary expenses are to be written off as and when incurred. Now it becomes important to think that how to treat these expenses that is what must be the treatment of preliminary expenses. IAS 8 - Accounting Policies, Changes in Accounting Estimates and Errors (7) IAS 10 - Events After the Reporting Period (6) IAS 11 - Construction Contracts (3) IAS 12 - Income Taxes (12) IAS 16 - Property, Plant and Equipment (84) IAS 17 - Leases (11) IAS 18 - Revenue (25) IAS 19 - Employee Benefits (18) IAS 20 - Accounting for Government Grants (9) The Key Differences between the Accounting Treatment and the Income Tax Act According To the AS22.
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