Preliminary expense treatment in accounting.i am working on a new startup company.now here all expenses incurred from capital amount.how treat that entries in accounting?
For your new startup company, the accounting treatment of preliminary expenses will depend on the accounting framework you are following. There are two main approaches:
- Generally Accepted Accounting Principles (GAAP):
Under GAAP, preliminary expenses are typically expensed as incurred. This means they are immediately recognized as expenses in your income statement rather than being capitalized as assets. The reasoning is that these costs do not represent future economic benefits, but rather costs associated with setting up the business.
Example journal entry:
Debit: Preliminary Expenses (Expense account)
Credit: Cash/Bank (Asset account)
2. International Financial Reporting Standards (IFRS):
Under IFRS, there is some flexibility in the treatment of preliminary expenses. They can be either:
Expensed as incurred: Similar to GAAP, the expenses are recognized immediately in the income statement.
Capitalized as an intangible asset: If certain criteria are met, such as the expenses being directly attributable to the creation of a new business and having future economic benefits, they can be capitalized. However, capitalized expenses must be amortized over their useful life, which is usually quite short.
Example journal entry (capitalization):
Debit: Preliminary Expenses (Intangible asset account)
Credit: Cash/Bank (Asset account)
Example journal entry (amortization):
Debit: Amortization Expense (Expense account)
Credit: Accumulated Amortization - Preliminary Expenses (Contra-asset account)
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There are rules regarding this in every tax jurisdiction. Consult your tax authority.
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I am working in uae
So contact the UAE tax authority.