Those expenses which incurred to formation and flow of the
company.example advertising exp.,issuing shares,producing
prospectus etc which has not yet been written off are shown
in the balance sheet of a company because as per schedule
vi of the companies act.
these are expenses will be come under
When we start a company level business, its promoters pay
some expenses like legal fees, company registration fees and
MOA and AOA making fees and others which are helpful to
incorporate the company. So, preliminary expenses are those
primary expenses which are paid before the incorporation of
company. So, when company comes into existence after
incorporation, it is the duty of company to repay all these
expenses to its promoters. So, after paying all these
expenses, we treat all these preliminary expenses with
following ways : -
1. When company repays preliminary expenses
Preliminary expenses account Dr.
Cash or Bank account Cr.
2. Treatment in financial statements of company
Only written off part preliminary expenses will show in
expenses side of profit and loss account and balance sheet
will show as balance part in asset side because it is a
capital item, so we will not whole preliminary expenses in
profit and loss account.
3. We divide it with five years or others years as per your
company rules and one part of these expenses are written off
by transferring it to profit and loss account.
4. Expenses on share issue will not be included in
5. It is the duty of company auditor to check preliminary
expenses whether these are paid by promoters and have bill
or receipt for this.
6. Treatment of Preliminary expenses as per company law
1. Schedule VI - Payment of preliminary expenses may be in
the form of issue of shares.
2. Section 227 (I) of company law - Written off of
3. Section 226 (3) of company law - Auditor can not take
shares for his services to the company before incorporation.