When a business is formed there are incorporation expenses which need to be paid. As the business has not yet been formed the expenses are usually paid by the owner and then reimbursed at a later date.
Subsequently when the business forms it must reflect the liability for these incorporation expenses. Consequently the double entry bookkeeping journal entry to show the incorporation expenses is as follows:
Incorporation Expenses Journal Entry
The accounting records will show the following bookkeeping transaction entries to record the incorporation fees.
| Account | Debit | Credit |
| Incorporation expenses | 750 | |
| Amount due to owner | 750 | |
| Total | 750 | 750 |
Incorporation Expenses Journal Entry Explained
Debit
Firstly the debit entry records the incorporation expenses which are the costs of setting up the business.
Credit
Secondly the owner pays the incorporation fees from personal funds, the business therefore owes this amount back to the owner. Consequently the credit entry sets up a liability, representing the amount due by the business to the owner. In this case the liability has been reflected in accounts payable although it could be maintained on a separate n account in the name of the owner.
Accounting Equation – Incorporation Fees
The accounting equation, Assets = Liabilities + Owners Equity means that the total assets of the business are always equal to the total liabilities plus the equity of the business This is true at any time and applies to each transaction. The following table shows the accounting equation for this particular transaction.
In this case a liability (accounts payable) increases representing money owed by the business to the owner. Subsequently this increase is balanced on the other side of the accounting equation by the debit entry. The debit to the income statement for the expenses reduces the profit. Consequently this reduces the retained earnings and therefore the owners equity in the business.
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About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.