Organization Costs

The formation of a corporation is a much more costly step than the organization of a partnership. The necessary costs include the payment of an incorporation fee to the state, the payment of fees to attorneys- for their services in drawing up the articles of incorporation, payments to promoters, and a variety of other payments necessary to bring the corporation into existence. These costs are charged to an asset account called Organization Costs. In the balance sheet, organization costs appear under the 'other assets' caption.

The incurring of these organization costs leads to the existence of the corporate entity; consequently, the benefits derived from these costs may be regarded as extending over the entire life of the corporation. Since the life of a corporation may continue indefinitely, one might argue that organization costs are an asset with an unlimited life. However, income tax rules have permitted organization costs to be written off over a period of five years or more; consequently, most companies have elected to write off organization costs over a five-year period. Accountants have been willing to accept this practice, because organization costs are not material 'in dollar amount. The accounting principle of materiality permits: departure from theoretical concepts on the grounds of convenience if the practice in, question will not cause any material distortion of net income or financial position.