The expenses that are incurred in connection with the formation of a company are called:

Question

Accepted Answer

The correct option is 2:
Preliminary Expenses are the specific expenses incurred by the promoters of a company before and during the process of its incorporation and the commencement of its business. These are the foundational costs essential for bringing the company into legal existence. Examples include the cost of drafting and printing the Memorandum of Association (MoA) and Articles of Association (AoA), stamp duties and registration fees paid to the Registrar of Companies, and fees for legal or technical consultants involved in the initial setup. Since these expenses are incurred to acquire an asset (the company itself) that will yield benefits over many years, they are eventually treated in the balance sheet as an intangible asset or a deferred revenue expenditure, and are systematically written off against profits over a period of time.

The incorrect option is 1:
Capital Expenditure refers to any expenditure whose benefit extends beyond the current accounting period and is incurred either to acquire a fixed asset (like land, building, or machinery) or to increase the earning capacity of an existing asset. While a newly formed company will undoubtedly incur capital expenditure later on, the formation costs themselves are administrative and legal in nature and do not result in a tangible, income-generating fixed asset; therefore, they are distinct from routine capital expenditure.

The incorrect option is 3:
Expenses on Issue of Shares and Debentures are costs related specifically to the process of raising funds from the public. This includes expenses such as underwriting commissions, brokerage, cost of printing prospectuses, and advertising. These expenses are incurred *after* the company has been formed, during the capital subscription stage, and are thus separate from the initial, pre-incorporation expenses related to the company's legal birth.

The incorrect option is 4:
Revenue Expenditure represents expenses incurred in the normal, day-to-day running of the business to maintain its earning capacity, such as rent, salaries, or utility bills. These expenses are completely consumed within the current accounting period and are matched against the revenue of that period in the Profit and Loss account. Since the formation costs provide a long-term benefit for the entire life of the company, they cannot be classified as simple, period-specific revenue expenditure.