PRELIMINARY EXPENSES :

Preliminary expenses refer to those expenses which are incurred in forming a joint stock company. These comprise the expenses incidental to the creation and floatation of a company and the following items are usually included therein:

(i) Stamp duty and fees payable on registration of the company and stamp papers purchased for preliminary contracts of the company.

(ii) The legal charges for preparing the Prospectus, Memorandum and Articles of Association and contracts and of the registration of the company.

(iii) Accountants’ and Valuers’ fees for reports, certificates, etc.

(iv) Cost of printing the Memorandum and Articles of Association, printing, advertising and issuing the prospectus.

(v) Cost of preparing, printing and stamping letters of allotment and share certificates.

(vi) Cost of preparing printing and stamping Debenture Trust Deed, if any.

(vii) Cost of company’s seal and books of account, statutory books and statistical books.

But preliminary expenses should not include the following expenses which are incurred before commencement of business:

(i) Cost of preparation of the feasibility report.
(ii) Cost of preparation of the project report.
(iii) Cost of conducting market survey or any other survey necessary for the business of the company.
(iv) Consultancy fees payable for engineering services in connection with the business.

Generally, a limit is prescribed in the Articles or Prospectus or the Statement in lieu of Prospectus upto which any amount would be spent on preliminary expenses. But sanction of the shareholders is necessary if the amount spent on preliminary expenses exceeds the said limit. The accounting for preliminary expenses will be as follows:

Preliminary Expenses A/c                                                            Dr.                             with the amount of expenditure

                                                       To Cash or Bank A/c

Strictly speaking preliminary expenses are of capital nature and as such should be shown on the assets side of the Balance Sheet under the heading “Miscellaneous Expenditure”.

Although, there is no legal compulsion to write off the amount of preliminary expenses, it is prudent to write it off as soon as possible since it is unrepresented by assets. Preliminary expenses being of capital nature, may be written off against capital profits.

Alternatively, such expenses may be treated as deferred revenue expenditure and written off gradually over a number of years by transfer to Profit and Loss Account. For income-tax purposes, such expenses can be written off over a period of 10 years. Until completely written off, Preliminary expenses have to be shown on the assets side of the Balance Sheet under the heading ‘Miscellaneous Expenditure’.