Priliminary expances are kind of huge expences(Ex.- project appraisal,
documentation, legal charges,cunsultancy fees etc.) which occured before the
business started functing. These expences are for the standing of business unit
and off course, the benefit of which will be ripe continuously in future. It has a
special nature of an asset in financial statements and as per prudent accounting
principal should be write off in P&L A/c in a defferd way over the years.
Preliminary expenses, which incurred for before
commencement of business. For setting up of any undertaking
or business (Preparation of feasibility report, project
report or for conducting market survey or any other survey
or engineering services relating to the business and Legal
charges for drafting any agreement for setting up or for
conduct of any business).
For Income tax purpose the following is the permissibe
(a)In case of company, 5% of Cost of Project or Capital
(b)In case of any other business, 5% of the Cost of Project.
It will be allowed as deduction in 5 equal installments.
Preliminary expenses which those exepenses during at the
time of formation of a new company such as preparation of
feasibility report, survey exp., preparation of memorandum
and Articules of Association, legal fees, advertisement
Preliminary expenses are the expense mhich are paid in the
processing of company formulation. in other world they are
paid for bringing the company into existance.
As these expenses
1)are huge in amount,
2)are nonrecurring and
3)are not related with the day-today opretions
therefore it is not fair to treat it as revenue
expenditure.The total amount paid for such expenses are
first capitalised and shown in the balance sheet.thereafter
from this some portion is written off each year.