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Accountin Treatment for Pre-operative expenses at the end of FY

Pradeep Kumar Sarangi (Account Executive) (121 Points)

14 April 2023

what is the accounting treatment for Pre-operative expenses paid such as Salary, Rent, Canteen, Electricity, Security, Legal charges etc. occured during construction of company at the end of financial year. Except the fixed assets or CWIP what will be the treatment for indirect expenses ?

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8 Replies

Yasaswi Gomes new (Finance ) (4514 Points)
Replied 14 April 2023

AS 26:56a, it's an expense.

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sabyasachi mukherjee (27574 Points)
Replied 15 April 2023

Pre operative expense may be capitalized.

Pradeep Kumar Sarangi (Account Executive) (121 Points)
Replied 15 April 2023

Pre operative expenses should be capitalised in the part of capital goods in nature but what will be the treatment for administrative relating expenses occured during the periods except the capital. it will be treated as expenditure or any other treatment for same.

like- security exp., salary, guest house exp, rent, telephone exp, legal fees, etc

Yasaswi Gomes new (Finance ) (4514 Points)
Replied 15 April 2023

Administrative like the example you have given is an expense because they are indirect expenses. after research costs are expensed, development costs are capitalised due to the economic benefit inflow and accurate measurability critea. As you know fixed assets are capitalised. But they are not operative costs. After the factory starts, all day to day operating expenses are expensed.

Pradeep Kumar Sarangi (Account Executive) (121 Points)
Replied 15 April 2023

Sir, but the such expenses are occured during in construction period of company which is accounting under Pre-operative expenses. but the actual query was that what is the accounting treatment of such Pre-operative expenses after completion of project and date of first commercial production in the end of FY ? it will treated as expenditure or any else ?

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Yasaswi Gomes new (Finance ) (4514 Points)
Replied 15 April 2023

Thanks for your clarity, as per the standard it is expensed by the end of fy

Dr. Preoperative expenses

Cr. Bank

This is a valid entry because even before the company construction started, capital is gathered. So in the trial balance include Dr. Preoperative expenses 100. In the cr. Balance put capital 1000. Then in bank put 1000.

This way, when you post the values in the financial statements, atbthe year end

Bank balance will be 900

Capital will be 900

Preoperative expenses will be 100 in the statements. If I come up with easy ways, I'll contact tomorrow

sabyasachi mukherjee (27574 Points)
Replied 18 April 2023

Pre operative expenses are transferred to capital work in progress and then amortized.

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Yasaswi Gomes new (Finance ) (4514 Points)
Replied 18 April 2023

Paragraph 9.2 of AS 10,Administration and other general overhead expenses are usually excluded from the cost of fixed assets because they do not relate to a specific fixed asset. However, in some circumstances, such expenses as are specifically attributable to construction of a project or to the acquisition of a fixed asset or bringing it to its working condition, may be included as part of the cost of the construction project or as a part of the cost of the fixed asset.

Expenses incurred on formation of an entity cannot be said to be attributable to bringing an asset/project into existence and, therefore, cannot also be included as part of cost of fixed assets.

Now is it constructing project or building a factory? Treat it accordingly.