A company is an artificial person but it is a legal entity. When a company is formed there are lots of expenditures which are done before the incorporation of company or before the certificate of incorporation is issued by the registrar of companies. Since the company is not in existence then these expenses are done by the promoters of the company. All these expenses before the formation of company, are called the preliminary exp. Preliminary expenses includes cost of stationery, salary to staff, rent of office, traveling and conveyance expenses, registration fees, legal and professional fees paid in respect of formation of company and other expenditures.
Preliminary expenses are not written in the same year. These expenses are written off in certain period of time.
Treatment of Preliminary Expenses in Final Accounts
The written off portion of preliminary expenses is shown in expenses side of profit and loss account and the balance amount of preliminary expenses is carried forward in next year and is shown in assets side of balance sheet.
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