Accounting for startup costs
/What are Startup Costs?
Startup costs are the expenditures associated with organizing a new business or introducing a new product. Once the startup period has been completed, these costs should go away. Examples of startup costs are as follows:
Accounting and legal startup costs
Employee salary-related costs
Employee training
Feasibility studies
Recruiting costs
Travel costs
Accounting for Startup Costs
The accounting for startup activities is to expense them as incurred. While the guidance is simple enough, the key issue is not to assume that other costs similar to start-up costs should be treated in the same way. Thus, you must review other elements of GAAP to find the proper treatment of other costs, such as customer acquisition costs, loan origination costs, research and development costs, and the cost of internally developed assets. In some cases, these other costs should be capitalized over a number of years.
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Example of the Accounting for Startup Costs
A new coffee shop, Brew & Bean Co., begins operations in January. Before opening, the owners incur various startup costs, including $4,000 for market research, $6,000 in legal and consulting fees for business formation, and $10,000 in staff training and pre-opening advertising. These costs total $20,000 and are necessary to get the business up and running, but they are not tied to the purchase of long-term assets.
According to U.S. GAAP, these startup costs must be expensed as incurred, meaning Brew & Bean Co. will record them as expenses in the period in which they were incurred. The journal entry would debit "Startup Expenses" for $20,000 and credit "Cash" or "Accounts Payable," depending on whether the payments were made immediately or still owed.
This treatment reflects the principle that these costs do not provide future economic benefits beyond the startup phase. Unlike assets such as equipment or buildings, startup costs are not capitalized and depreciated over time. As a result, the company will report a higher net loss in its first year, which is typical for new businesses.