Businesses require economic resources such as cash, capital and labor in order to setup, maintain and run their operations. In order to acquire such resources, businesses can either incur obligations to other economic entities or to their own owners who invest resources into their operations. Once set up, businesses can run their operations to produce revenues but must do so at the cost of incurring expenses. Start-up costs are the costs that businesses incur in opening a new operation and preparing it for usage. Most start-up costs are accounted for by being recorded as expenses, some are accounted for in other manners.
Record start-up costs as revenue expenditures, more often called expenses if they neither add to inventories nor contribute to the acquisition and preparation of long-term assets for use in operations. Most start-up costs are accounted for in this manner, including fees paid to acquire licenses and fees paid to accountants and lawyers to set up contracts. For example, if a business incurred $200 in expenses paid to acquire a license to run a food preparation business, it records that as a $200 expense in the time period in which it incurred it.
Record start-up costs as an addition to the business's inventory if the costs were spent to acquire products that the business intends for sale. Acquisition of products intended for sale can be done through either purchase or manufacture or a combination. Costs listed under inventory might include purchase costs, direct labor spent on manufacturing and/or raw materials used up in the manufacturing. For example, if a business incurred start-up costs of $10,000 in purchasing goods that it intends to sell, it records that $10,000 as a $10,000 deduction in cash and a corresponding increase in its inventory account.
Record start-up costs as a part of the base asset if they can be counted as being capital expenditures. In contrast to revenue expenditures, capital expenditures are expenditures that are expected to benefit the business across multiple time periods. Such expenditures are capitalized, meaning to record as part of an asset so that their expense can be spread out across multiple time periods. Such costs can include installation costs and/or costs spent to improve the function of existing assets. For example, if a business spent $2,000 to repair and setup a piece of equipment that cost it $10,000 to acquire, that $2,000 is rolled into the $10,000 so that the equipment is recorded as possessing $12,000 in value.
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