Preliminary expenses

Preliminary expenses are the initial costs incurred by a company before it starts operating.
Updated: Jun 19, 2024

3 key takeaways

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  • Preliminary expenses are incurred before a company starts its operations.
  • These costs include legal fees, registration charges, and costs of feasibility studies.
  • They are usually recorded as intangible assets and amortized over time.

What are preliminary expenses?

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Preliminary expenses, also known as pre-operating expenses, are the costs that a company incurs during its formation and early stages before it starts its regular business operations. These expenses are essential for setting up the company and ensuring that it is legally compliant and ready to operate.

Examples of preliminary expenses

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Preliminary expenses typically include:

  • Legal fees: Costs for legal services such as drafting incorporation documents, agreements, and other necessary legal paperwork.
  • Registration charges: Fees paid for registering the company with the relevant government authorities.
  • Feasibility studies: Costs associated with conducting research and analysis to determine the viability of the business idea.
  • Professional fees: Payments to consultants and advisors who assist in setting up the business structure.
  • Marketing expenses: Initial marketing and promotional activities to create awareness about the new company.

Treatment of preliminary expenses

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Preliminary expenses are often recorded as intangible assets on the balance sheet. This is because they are not directly linked to the production of goods or services but are necessary for the business’s establishment. These costs are then amortized over a period, usually over five years, in line with accounting standards.

The amortization of preliminary expenses helps in spreading the cost over multiple years, matching the expenses with the revenue generated by the company once it starts operations. This accounting treatment ensures that the financial statements provide a fair view of the company’s financial position.

For more on these topics, consider reading about intangible assets, amortization, and business startup costs. Understanding these concepts can help in effectively managing and recording initial business expenses.

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