Preliminary Expenses Meaning
Auditor's Duties Relating to Preliminary Expenses
Preliminary Expenses 2017
Expenses incurred to the formation of a company are called ‘Preliminary Expenses’. Preliminary expenses include the following:
a)
Expenses incurred in order to get the
company registered.
b)
Expenses incurred for the preparation,
printing and issue of prospectus.
c)
Cost of preliminary books and Common
Seal.
d)
Duty payable on Authorized Capital.
e)
Underwriting Commission etc.
Preliminary
Expenses are to be written off out Securities Premium Account or it may be
written off out of the Profit & Loss A/c gradually over some period. 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’.
Auditor’s Duties regarding Preliminary Expenses
1.
To verify the following on the
basis of documentary evidence and to see that preliminary expenses do not
include these:
a)
Loss incurred in the first year
of the life of the company;
b)
Brokerage, commission etc. for
selling or underwriting or for placing shares;
c)
Once the company begins to earn
revenue, the current expenditure should not be debited to preliminary expenses
account (Baidya Nath Biswas v. Emperor).
2.
To see that the company is
charged only with expenses appropriately payable by it.
3.
To examine the contracts
relating to these expenses and vouch the mode of payment.
4.
To see that expenses of capital
nature but unsupported by available assets, be written off as soon as possible
out of the revenue. According to Sec. 52 such expenses can be charged against
share premium.
5.
To see that these are disclosed
in the prospectus, statutory report and balance sheet.
6. To see that the preliminary expenses not written off yet have been shown separately under ‘Miscellaneous Expenditure’ in the Balance Sheet.
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