Treatment of preliminary expenses in accounting

Preliminary expenses:

The term preliminary expense signifies the expenses which are associated with and required to be incurred in connection with formation of a company till the stage of obtaining certificate of incorporation.  In short, it comprises the expenses incidental to the creation and floatation of a company. These expenses include the filing fees, legal expenses, cost of drafting Memorandum of Association and Articles of Association, payment of salaries and wages etc. Such expenses are accumulated under the head “preliminary expenses” and written off as deferred revenue expenditure over a period of three to five years once the company commences the business and starts earning revenue.

Pre- operative expenses are expenses incurred by a company after the stage of incorporation till the time it is in a position to start its operations and earn revenue.  These expenses are also accumulated and treated as deferred revenue expenditure and recovered through Profit and Loss Account over a period of three to five years (10 years at the most).