ASC 720-15 Start-Up Costs: Capitalization and Amortization Transaction Explained with Journal Entries

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Start-up costs are the expenses incurred by a company during the initial stages of its operations. These costs are crucial for businesses as they lay the foundation for future growth and success. In this article, we will delve into the Accounting Standards Codification (ASC) 720-15, which deals with the treatment of start-up costs in financial accounting, and discuss the capitalization and amortization of these costs. We will also provide journal entries to help better understand the process.

 

ASC 720-15: Start-Up Costs - Overview

The Financial Accounting Standards Board (FASB) has laid out specific guidelines for start-up costs in the ASC 720-15. According to these guidelines, all start-up costs must be expensed as incurred. This means that businesses should recognize start-up costs in their income statements in the period they are incurred, rather than capitalizing them as assets and amortizing them over time. The primary reason for this treatment is that start-up costs often provide no direct future economic benefits to the company. Instead, they are considered as one-time expenses that are necessary for the company's establishment.

 

Examples of Start-Up Costs

Some common examples of start-up costs include:

 

1. Organizational costs, such as legal and accounting fees for company formation.
    

2. Research and development costs.
    

3. Expenses related to obtaining licenses or permits.
    

4. Advertising and promotional costs for the launch of the business.
    

5. Employee training expenses during the initial stages.
   
    

Capitalization and Amortization of Start-Up Costs

As mentioned earlier, ASC 720-15 dictates that start-up costs should be expensed as incurred. However, some specific start-up costs, like organization costs or those associated with tangible or intangible assets, can be capitalized and subsequently amortized over their useful lives.

 

Journal Entries for Start-Up Costs

To understand the accounting treatment of start-up costs, let's consider the following example:

XYZ Company is a start-up that incurs the following costs during its first month of operations:

 

1. Legal and accounting fees for incorporation: $5,000
    

2. Research and development costs: $10,000
    

3. Marketing expenses for the launch: $4,000
    

4. Employee training expenses: $2,000
    

Journal entries for these costs would be:
 

1. Legal and Accounting Fees:

        Dr. Start-Up Expense - Legal and Accounting Fees: $5,000

        Cr. Accounts Payable/Cash: $5,000

 

2. Research and Development Costs:

       Dr. Start-Up Expense - R&D Costs: $10,000

       Cr. Accounts Payable/Cash: $10,000

 

3. Marketing Expenses:

       Dr. Start-Up Expense - Marketing: $4,000

       Cr. Accounts Payable/Cash: $4,000

 

4.  Employee Training Expenses:

       Dr. Start-Up Expense - Employee Training: $2,000

       Cr. Accounts Payable/Cash: $2,000
 

As per ASC 720-15, these costs will be recognized as expenses in the income statement for the period in which they are incurred.

Understanding the treatment of start-up costs under ASC 720-15 is essential for businesses during their initial stages. By recognizing these costs as expenses and recording them in the appropriate period, companies can maintain transparency in their financial reporting, which is crucial for investors, lenders, and other stakeholders.