The formation of a company is a much more costly step then the organisation of a partnership. The necessary costs include the payment of various fees to the state, the payment of fees to solicitors for their services in drawing up the memorandum and articles of association, payments to promoters, travel expenses and a variety of other outlays necessary to bring the company into existence.
The result of these expenditures is the existence of the corporate entity; consequently, the benefits derived from these expenditures may be regarded as extending over the entire life of the company. These expenditures are recorded by debiting an intangible asset account entitled Formation Costs or Organisation Costs or Preliminary Expenses. Once the company has begun operations, there should be no further charges to this account. In the balance sheet, formation costs appear under the group heading of Intangible Assets, along with each items as goodwill, patents and trademarks.
Since formation cots are applicable to the entire life span of the company and since this is indefinite, carrying the asset formation costs at its full amount until liquidation is in prospect is in accord with accounting theory. However, most companies do amortize formation costs. Accountants have been willing to condone this practice, despite the lack of theoretical support, on the grounds that such costs are relatively immaterial in relations to other assets. Unnecessary detail on the balance sheet is always to be avoided, and there seems to be little reason for carrying indefinitely organisation costs of modest amount.Главная Страница