What is the accounting treatment of preoperative expenses incurred for setting up of new project?
Dear Puja, As far as your question is concerned that What is the accounting treatment of preoperative expenses incurred for setting up of new project, let us first of all understand what is meant by preoperative expenses. Administration and other general overhead expenses are usually excluded from the cost of fixed assets because they do not relate to a specific fixed asset. However, in some circumstances, such expenses as are specifically attributable to construction of a project or to the acquisition of a fixed asset or bringing it to its working condition, may be included as part of the cost of the construction project or as a part of the cost of the fixed asset. These Administration and other general overhead expenses identified for capitalisation is called as preoperative expenses. The expenditure incurred on start-up and commissioning of the project, including the expenditure incurred on test runs and experimental production, is usually capitalised as an indirect element of the construction cost. However, the expenditure incurred after the plant has begun commercial production, i.e., production intended for sale or captive consumption, is not capitalised and is treated as revenue expenditure even though the contract may stipulate that the plant will not be finally taken over until after the satisfactory completion. Regards