This is the original discussion question!
“Business Expenditures and Deductions”
- Avery has always wanted to own his own business. Last year, he took the leap and opened a pet store in a nearby city. He incurred start-up costs and large inventory costs for buying food in bulk. He even hired five people: a groomer, two clerks, a stock person, and a bookkeeper. Unfortunately, his bookkeeper has accounting experience, but no tax experience. Now, he is lost. How does he handle the start-up costs? What kinds of assets can he depreciate? What kinds of records should he keep?
This is the students POST!
The assets that can depreciate are personal property comprises tangible assets such as automobiles, equipment, and machinery. The real property comprises buildings and land (although the land is non-depreciable). These are assets that depreciate that are in this question. Start-up costs are costs businesses incur to start up a business. These costs include costs associated with investigating the possibilities of and actually creating or acquiring a trade or business. The rules for immediately expensing and amortizing start-up costs are the same as those for immediately expensing and amortizing organizational expenditures. Consequently, businesses incurring at least $55,000 of start-up costs are not allowed to immediately expense any of the costs. Thus, a business could a business could immediately expense $5,000 of organizational expenditures and for start-up costs. Thus, a business could immediately expense $5,000 of organizational expenditures and $5,00 of start-up costs in its first year of business in addition to the 15-year amortization amount. For taxes an intangible asset can be placed into one of the following 4 categories: 1) purchased intangibles, 2) start-up expenditures and organizational costs, 3) research and experimentation costs, 4) patents and copyrights. Businesses amortize all intangible assets in these categories using the straight-line method for both financial accounting and tax purposes. For taxes they take the total organizational expenditure, subtract the amount immediately expensed, then it gives you the expenditures subject to amortization, then they take the recovery in months and divide the total amount of expenditures, then multiply by how many months the business was active during the year, then add the amount immediately expensed to total the year 1 cost recovery expense for organizational expenditures.
This is my discussion POST!!
Hello Class and Professor,
The cost of starting a new business, called a startup cost, includes costs for a building, licenses, inventory, salary, and technology. Businesses often neglect the meticulous process of cost planning and rely only on customers to keep the business afloat. In Avery’s case, if the cost planning is implemented effectively, then handling the startup costs and identification of the assets to be depreciated will be efficient. Further, the record keeping tool can help him comply with various laws and control the business.
To handle the startup costs, the costs should be treated similarly with the accounting techniques. The startup expenses should be cluster into a single category. For example, if Avery incurs $25,000 startup costs, which include various expenses, then the account should be debited for $25,000 under ‘startup expenses’ instead of listing each expense separately, whereas asset account should be credited. The taxation for the startup cost is complex; therefore, it is convenient to divide startup expense into various segments (Berry, 2014). Efficient handling of the startup costs provides precise control over the business and helps in filing tax return timely.
For the pet shop, the cost associated with the building and equipment can be depreciated. If the pet shop requires the license, then it should be amortized over its duration. Depreciation is the reduction in the cost of tangible assets throughout its lifetime (Kieso, Weygandt, & Warfield, 2016). Depreciating assets can provide substantial tax saving to the businesses; therefore, it has significant value and recovers the cost of tangible assets.
A scope and size of the business decide the type and volume of the records. Since the business is a startup, Avery’s pet shop requires transactional records associated with the shop, information of sales and expenses, the record of inventory, ledgers, balance sheets, statement of income and cash flow. Keeping the bank records would be beneficial for Avery’s pet shop since it is a startup. Record-keeping helps to provide more control over the business and helps to comply with various laws.
Effective cost planning helps startups handle expenses incurred before starting the business, which is similar to the accounting, but the entire cost of expense is clubbed together as one. Avery should pay focus on depreciation and record-keeping, as a significant parts of cost accounting, which help him controll the business process. If the business fails to follow the cost accounting process and planning, then it suffers unexpected financial loss or even loss of control over the business.
Berry, K. (2014, September 29). How to handle start-up costs. AccountingWEB. Retrieved from https://www.accountingweb.com/aa/law-and-enforcement/how-to-handle-start-up-costs
Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2016). Intermediate accounting (16th ed.). Hoboken, NJ: Wiley.
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