The preliminary expenses are in the nature of expense which provides future economics benefits to the enterprise. But no physical or tangible assets are created or acquired according standard 10 deals with preliminary expenses according to that the expenses incurred towards startup activities which may consist of expenses incurred in establishing a legal entity such as legal fee, secretarial fee, govt fee, travelling and meeting expenses while the entity is under creation. The broader understanding is to include the following expenses under preliminary expenses.
In view of facts that the preliminary expenses does not result into any physical or tangible assets, thereby taking away any possibility of depreciation to be recorded in the books. For the useful life of the assets. The Companies Act & Schedule VI provides for recognition of 1/5th of the total preliminary expenses each year for five consecutive years. To record this transaction following accounting entries are passed.
As explained above the preliminary expenses can be written off within five years however as per Section 35 of The Income Tax Act 1961, the total preliminary expenses cannot be more than 5 % of the capital employed, which can be amortised in five equal installments, this also means that a company cannot write off preliminary expense more than 1 % of the capital employed in one year. At the time of computation of the taxable income the assese must add the preliminary expense written off in the balance sheet which is prepared by following the provisions of The Companies Act 2013 and deduct the preliminary expenses as 1/5th of the 5% of the capital employed.