The paper "Initial Capital and Operation Costs" is an outstanding example of a coursework on finance and accounting. Initial capital and operation costs ‘ The first important step in deciding whether a project should be accepted is the calculation of its initial cost. ’ Initial costs are the costs that occur for setting up the infrastructure to carry out the operational and other activities of the business. In accounting parlance, initial costs are called preliminary expenses. These costs can be divided into four categories, namely, incorporation and registration expenses, infrastructural expenses, pre- operational administration expenses, and fund raising expenses.
Incorporation and registration expenses: A business may be started by incorporating it as a company, or entering into a partnership, or entrepreneur starting as a sole proprietor. For incorporating a business the promoters have to deal with a department of company affairs established by the company for seeking the allotment of a name, preparation, and registration of memorandum and articles of association and filing these and other documents and registration fee with authorities. Normally all these activities are assigned to practitioners who are expert in company affairs.
So the cost of formulating memorandum and articles of association, registration and filing fee and the fee of the professional come under this category for establishing a body corporate. A partnership also requires a written partnership deed as its constitution and descriptions of terms between partners. So a few of the professional preparing the partnership deep, cost of stamp papers for partnership deed, and attestation and registration charges of the deed with authorities come under this category for formulating a partnership. A proprietorship does not require a written constitution like partnership deed, but it has to get registration under different legislation depending upon the nature of business of the proprietorship.
Then there are certain common expenses for all categories of businesses like VAT registration fee, various registrations with income tax authorities, and permit and licensing fee as per the nature of the business. These include the professional’ s fee helping for such registrations. Infrastructural expenses: Expenses under this category include purchase of long lived assets (fixed assets) before start of business like machinery and accessories in a factory, office property, office equipments like computers, furniture and fixtures, acquisition of intangibles like patents and trademarks, motor cars and other vehicles and other such purchases that occur before start of actual business.
Pre- operational administration expenses. These expenses include salaries and wages of staff helping in incorporation, setting the factory and office of the entity. Other expenses in this category are traveling and conveyance, boarding and lodging, printing and stationery, and others but all prior to starting of operations of the entity. Fund Raising Expenses: This is also called capital budgeting.
Business requires funds for long lived assets (fixed assets) and working capital for normal operations. Owned capital and debt capitals are used for financing the business. The owned capital of proprietor and partnership may not require any contributory expenses but companies have to raise owned capital by raising equities. So related expenses are issue registration fee, prospectus making charges, listing charges, advertisement expenses inviting investors to contribute, fund manager and another professional fee etc. All these expenses also relate to the raising of debt capital. The only difference is that debt capital raising involves lesser expenses as compared to owned capital.
From the accounting point of view, initial expenses are treated as preliminary expenses and are not charged to profit and loss in the very first year of operations. These are treated as deferred revenue expenditure and written off over a period of say five to ten years as per regulations under applicable GAAP.