When a business is formed there are incorporation expenses which need to be paid. These are usually paid by the owner and then reimbursed at a later date.
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 expenses.
|Amount due to owner||750|
Incorporation Expenses Journal Entry Explained
The debit entry records the incorporation expenses which are the costs of setting up the business.
The incorporation expenses have been paid by the owner from personal funds, the business therefore owes this amount back to the owner. The credit entry sets up a liability, representing the amount due by the business to the owner.
Accounting Equation – Incorporation Expenses
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. For this transaction the accounting equation is shown in the following table.
|=||Accounts payable||+||Retained earnings|
In this case a liability (Accounts payable) increases representing money owed by the business to the owner, this increase is balanced by the reduction in owners equity. The debit to the income statement for the expenses, reduces the profit which 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 in 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 BSc from Loughborough University.