Startup Costs: Definition, What They Are, Accounting, Journal Entry, Examples

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Startups incur various costs they must account for following the relevant accounting standards. However, the accounting treatment is not as straightforward. Before discussing that, it is crucial to know what startup costs are.

What are Startup Costs?

Startup costs (or initial or setup costs) represent the financial outlays associated with launching a new business venture. These expenses encompass a broad spectrum, from legal and regulatory compliance, such as business entity registration and licenses, to practical considerations like renting office space, purchasing equipment, and conducting market research.

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As businesses are in their infancy during this phase, allocating funds to create a robust foundation is vital. It includes investments in technology, marketing and advertising efforts, employee recruitment and training, and any unique expenses pertinent to the specific industry. Startup costs are the upfront investments that pave the way for a business to begin operations and grow.

What do Startup Costs include?

Startup costs can vary depending on the nature of the business and its specific needs. However, there are some prevalent startup costs that every company incurs. These include the following.

  • Legal and regulatory costs
  • Market research and feasibility studies
  • Business plan development
  • Office space and utilities
  • Equipment and supplies
  • Inventory
  • Marketing and advertising
  • Employee hiring and training
  • Technology and software
  • Professional services
  • Insurance
  • Travel and transportation
  • Rent and lease payments

Startup costs can include any expenses a company or business needs to get its operations ready and going in the initial phases. The above does not constitute an exhaustive list of what these costs are.

What is the accounting for Startup Costs?

Accounting for startup costs involves a nuanced approach based on the nature of the expenses and applicable accounting standards. In general, many startup costs are expensed as incurred, appearing as operating expenses on the income statement. These immediate expenses include items such as legal fees, initial marketing, and office supplies.

However, certain startup costs that result in identifiable future benefits can be capitalized and amortized over time. It means they are recorded as assets on the balance sheet and gradually expensed over their useful life, such as specific legal and registration fees or market research expenses with finite value. Additionally, when startup costs contribute to creating intangible assets like patents or trademarks, these assets may be recorded and amortized.

What is the journal entry for Startup Costs?

As mentioned above, companies may either expense out or capitalize startup costs based on accounting standards. In the former case, these costs go directly to the income statement. The journal entry for these startup costs is as follows.

Dr Startup costs (expense)
Cr Bank or cash or accounts payable

If the startup costs are capital in nature, companies must capitalize the cost on the balance sheet. The journal entry is similar but involves recording an asset instead of an expense. Typically, this entry looks as follows.

Dr Startup costs (asset)
Cr Bank or cash or accounts payable

If companies capitalize the startup cost, it also entails monitoring the value of that asset. Depending on the asset type, companies may also record depreciation and amortization in later stages of operations. On top of that, capitalizing the cost also requires companies to monitor the asset’s value for impairment over time.

Conclusion

Startup costs are expenses companies incur during the initial phase of their business. These may include items, such as legal, research, leases, and additions to fixed assets. Depending on the type of expense, the accounting treatment for startup costs may vary. On top of that, it may also require further steps if a company capitalizes on the asset.

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