06 July 2024
As per the new balance sheet schedule under the Companies Act, preliminary expenses are classified under "Other Non-Current Assets." These are expenses incurred before the commencement of business operations or before the project is ready to generate revenue.
Here's how preliminary expenses are typically classified in the balance sheet:
- **Initial Recognition:** Preliminary expenses are initially recognized as an asset when incurred. - **Amortization:** These expenses are then amortized (written off) over a period of time (usually not exceeding 5 years) or over the period it is expected to derive future economic benefits. - **Disclosure:** They are disclosed separately under the relevant asset category in the balance sheet to provide clarity on the nature and amount of such expenses.
### Example Entry:
If an LLP or company incurs preliminary expenses amounting to ₹1,00,000, the initial accounting entry would be:
- **Accounting Entry:** - Debit: Preliminary Expenses Account - ₹1,00,000 - Credit: Bank Account or Cash Account - ₹1,00,000
Subsequently, these expenses would be amortized and the amortization expense recognized in the income statement over the useful life or as per the company's accounting policy.
### Importance of Proper Accounting:
Proper classification and treatment of preliminary expenses are crucial for accurate financial reporting and compliance with accounting standards. It ensures transparency in the financial statements and provides stakeholders with a clear understanding of the company's financial position.
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