Preliminary and Preoperative Expenses

Preliminary and Preoperative Expenses
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What is Preliminary and Pre -Operative Expense -Discuss in detail with examples. Definition of project : A sequence of activities strategically planned and executed within a pre -determined time frame & cost schedule to achieve a targeted goal in fulfillment of a vision . Cost estimating is one of the most important steps in project management. A cost estimate establishes the base line of the project cost at different stages of development of the project. A cost estimate at a given stage of project development represents a prediction provided by the cost engineer or estimator on the basis of available data. [1] So, we need to frame a consistent and justifiable budget that is realistic. A budget is one of those pivotal tools that is used across many departments within a company. For the developers, it dictates how much time to spend on specific areas of the application. For the project manager, it's a baseline used to determine whether the project is on track. For sales or the client, it correlates d irectly to the success of the effort. It's no surprise that one of the biggest issues in creating a budget is interpretation. [2] Preliminary Expenses: Preliminary Expenses are the expenses incurred before the commencement of the company that are beared by the promoters of the company for its incorporation. Preliminary expenses are the expenses relating to the formation of an enterprise. These expenses are huge in amount,are nonrecurring and are not related with the day-today opretions.[3] As it is considered as one of the fictitious asset of the company and is treated as deffered revenue expenditure because it derives benefits in the long run. Every year a protion of them are written off out Securities Premium Account or it may be written off out of th e Profit & Loss A/c gradually over some period. In th e Balance Sheet the total amount of preliminary expenses is reduced by the amount of expenses written off. The balance left of preliminary expenses is to be shown in the asset side of the balance sheet of the company under the heading of Miscellaneous Expenditure .
For example, in the case of a company, preliminary expenses would normally include the following. a) Legal cost and professional charges paid for drafting the memorandum and articles of association. b) Professional charges for consultation in incorporating the company
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c) Fees for registration of the company fee paid to the Registrar of Companies (RoC) for incorporation. d) Cost of printing of the memorandum and articles of association and statutor y books of the company. e) stamp duty for the documents f) Any other expenses incurred to bring into exis tence the corporate structure of the company. [4]
Accounting Standard on preliminary expenses: AS 26 dealing with intangible assets covers preliminary expenses as well. The period over which these preliminary expenses are to be amortised is best left to the judgment of the directors of the company. AS 26 suggests writing off intangible assets over a period of 10 years, though a different period is permissible if it is justified in the opinion of the management. It is a common practice to write off these preliminary expenses in a period of five years, though there is no legal provision to this effect. A company can as well write off its preliminary expenses in the same year as it incurs.
Audit of a company in the first year of its incorporation involves audit of preliminary expenses. Over the next few years, the only matter to be concerned with is write off of preliminary expenses. The Income Tax Act provides fo r amortisation of preliminary expenses. Section 35 D specifies the expenditure to be included in preliminary expenditure, which under the I-T Act is allowable for all types of assesses. [5] Pre-operative Expenses: Preoperative expense, on the other hand, i s a wider term, the expenses incurred after company formation but prior to commercial production, including the normal expenses such as salary and rent incurred. Pre-operative expenses are those which are connected with actions that are required for start up of operations. Pre-operative expendiure can therefore be capitalised by apportionment/allocation to assets which are the subject matter of operation. Pre-Operative expenses of Capital Nature are to be capitalised with the cost of fixed assets in relation to which they have been incurred which would be the case with salary of engineers and technicians engaged in installation of plant. Whereas, pre operative expenses if Revenue Nature are to be charged against the profits of the company in the year in which business has commenced. [6] The pre-operative expenses incurred by a company include the following: a) Cost of Man Power involved in project selection/project sizing. b) Cost of Technology Selection. c) Cost of getting budgetary cost estimation or data.
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d) Cost of estimation of preliminary data for land, power & other utilities. e) Cost of Location finalisation-surveying various areas. f) Cost of Travelling.
These are miscellaneous expenses that are incurred before the project takes shape and starts commercial production. The following expenses come under this head. y Investigation fee, service charge etc., to banks/financing institutions. y Commitment charges payable on loans offered by banks/financial institutions.
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1. http://pmbook.ce.cmu. edu/05_C os t_Es timation. html 2. http://www. builderau. com. au/s trategy /projectmanagement/soa/Creating -your-project-budget-Where-to-begin-/0,339028292,320265341,00.htm 3. http://www. allinterv iew. com/s howanswers/65232. html 4. http://www. caalley .com/gn/adt_me. html 5. http://www. thehindubusines sline. com/mentor/2006/01/23/s tories/20060 12300081100.htm 6. http://elagaan. com/india -tax-forum/how-differentiate-preliminaryexpenses-preoperative-expenses 7. http://www. feeleminds . com/forum/v iewtopic. php?f=6&t=1507

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Preliminary and Preoperative Expenses

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