What are Preliminary Expenses (with Journal Entry)?


Preliminary expenses

The expenses incurred when a company is formed and before the start of any business operations are termed as preliminary expenses, they are a good example of fictitious assets which are written off every year from the profits earned by the business.

Some examples of such expenses incurred before business incorporation are; Legal cost, Professional fees, Stamp duty, Printing fees, etc.

Also known as pre-operative expenses, they are shown on the asset side of the balance sheet and are preferably amortized within the same year (depending on local laws).

image showing preliminary expenses

They should not be confused with pre-commencement costs; they incurred immediately before the commencement of business, however, the business incorporation is already done.

Such expenses are directly charged to the current period’s income statement. Example – Employee recruitment expenses, etc.

 

Journal Entry for Preliminary Expenses & Written Off

Stage – I – At the time of payment (Opening Entry)

Company-A incurs a total of 100K as expenses before the start of business operations, the below entry will be used to book all such expenses.

Preliminary Expenses A/c Debit
 To Bank/Cash A/c Credit

 

Stage – II – Preliminary Expenses Written Off (Indirect Expenses)

As per local laws, Company-A decides to write off 1/5th each year out of the total expenditure of 100K, the below entry would be passed and 1/5th of the amount will be journalized. (20K Only)

The rest of the balance is shown in the balance sheet temporarily.

Preliminary Exp. Written Off A/c Debit
 To Preliminary Expenses A/c Credit

 

Stage III – Charging to Income Statement (Closing Entry)

Company-A then charges the related expense in the current period’s Profit and Loss Account.

The same entry is repeated every year if the amortization is being done in multiple accounting periods

Profit and Loss A/c Debit
 To Preliminary Expenses A/c Credit

 

>Read Deferred Revenue Expenditure



 

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