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Preliminary expenses before commencement of business operations

Stranger (.) (5531 Points)

09 December 2013

Respected Members,

As per para 56 of AS 26, preliminary expenses if not related to fixed assets, then it can't be recognized & thus should be written-off. Moreover,it can't be shown as per Revised Schedule VI, in Balance Sheet under head "Miscellaneous Expenditures" now. In case, some expenses related to rent, electricity charges, etc have been incurred before the commencement of operations of a new business, then should it be reduced from Reserves & Surplus as Profit & Loss Account cannot be prepared before the commencement of business operations?

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2 Replies

VIKASH KUMAR JAIN (Audit Executive) (711 Points)
Replied 09 December 2013

Any expenditure incurred before commencement of operation in the business is called as Pre-operative expenditure.Hence whatever rent, electricity etc. expenditure are incurred before commencement of operation of business should be initialy debited to p/l account.However as and when operation get commenced these pre-operative expenditure needs to be capitalized in the ratio of fixed assets held on that day.

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CA. Mayur (Service) (147 Points)
Replied 11 December 2013

I understand you are referring preliminary expenses and not preoperative expenses. Preliminary expenses in nature of electricity or rent paid should be charged to reserves and surplus.

Further it should be noted that preliminary expenses in nature of ancillary borrowing cost, discount or premium relating to borrowing (under AS 16) and share issue expenses, discount on shares being special nature items are excluded from AS 26 and its business practise to amortised this expenses over the period of 3-5 years. These expenses should be shown under "other current/non current assets" under revised schedule VI.