Profit Prior Incorporation

Profit Prior
To
Incorporation
 In many cases, a new company is formed exclusively to acquire an existing business
unit and take it over as a going concern, from a date prior to its own incorporation.
 In such cases, the business unit is purchased first, and the registration of the
acquiring company takes place later.
 For example, AB Pvt. Ltd. is incorporated on 1st April, 2011 to take over the
running business of Das Bros. from 1st January, 2011. The profit earned (or loss
suffered) during the pre incorporation period (in our example: 1st January to 1st
April, 2011) is called profit (loss) prior to incorporation.
 Profit earned before incorporation is a capital profit and profit earned after
incorporation is a revenue profit.
 It is a common practice that the date of incorporation should be taken as the basis
for calculation of pre-acquisition profit
Ascertainment of Profit Prior to Incorporation and
Profit after Incorporation
Three Ratios will be calculated :
Sales ratio
Time ratio
Vendor ratio
SALES RATIO: Sales ratio is calculated on the basis of sales made between date of
purchase to date of incorporation and date of incorporation to the date of balance sheet.
EXAMPLE
Sales from date of purchase to date of incorporation is Rs 120,000
Sales from date of incorporation to date of balance sheet is Rs. 480,000
Then sales ratio = sale in Pre incorporation period : ratio to post incorporation
= 120,000:480,000
= 1:4
TIME RATIO:
It is calculated by taking into consideration the time from the date
of purchase of business to the date of incorporation and from date
from incorporation to the date of balance sheet.
EXAMPLE:
Date of incorporation on 1st April,11 to take over the already
existing business from 1January,11. A ltd prepares its final accounts
on 31st December,11
Time ratio:- pre incorporation period: post incorporation period

1.1.11 to 1.4.11 : 1.4.11 to 31.12.11
3 months : 9 months
Ratio is 3:9 or 1:3
VENDOR RATIO:
It is calculated on the basis of date of purchase, date of incorporation and date of

settlement of claims.
EXAMPLE:
A co. incorporated on 1st Jan,11 purchased a business running from 1.10.10 claim are
settled on 1st April, 11
Vendor ratio= date of purchase to date of incorporation : date of incorporation of date

of settlement of claims.
3 months : 3 months
1:1
Ascertainment of Profit Prior to Incorporation and
Profit after Incorporation
Allocate gross profit /sales and expenses between pre- and post-incorporation period
on the basis of the following principles:
(i) Gross profit/sales is allocated in the ratio of sales of each period.
(ii) Fixed portion of an expenses is allocated on the basis of time.
(iii) Expenses related to sales, e.g., traveler's commission, discount allowed; on
the basis of sales.
(iv)Expenses related to time, e.g., rent, rates and taxes; insurance; depreciation,
salaries of general staff, to that period’s profit. Some example are:
(a)Preliminary expenses, director’s fees, debenture interest, etc. are to be charged

against post-incorporation profit.
(b)Partner’s salaries, interest on partners’ capital, etc are to be charged against the
profit of pre-incorporation period.
Net profit/loss of respective periods are calculated after deducting apportioned

expenses.
NOTE:
It should be noted that it is the “Date of

incorporation” not the date of commencement,
which is taken into consideration for the
calculation of profit or loss prior to
incorporation.
Apportionment Basis
Allocated on Basis of Time Allocated in Ratio of Sales

1.Rent, Rates and Taxes 1.Gross Profit
2.Depreciation 2.Bad Debts
3.Salaries of General Staff 3 .Discount Allowed
4.Carriage Outwards
4.Insurance 5.Selling Expenses
5.Interest on Purchase Consideration 6.Commission on Sales
6.Audit Fees 7.Advertisement Expenses
7.General Expenses 8.Delivery Expenses
9.Free Samples
8.Printing and Stationery 10.After-sales service cost
9.Office Expenses 11.Salaries to Salesmen
10.Fixed Expenses 12.Sales Promotion Expenses
13.Variable Distribution Expenses
11.Miscellaneous Expenses 14.General Travelling Expense
12.Fixed Distribution Expenses

13.Administrative Expenses
Statement showing Apportionment of Profit between Pre- and Post-incorporation Period
Particulars Basis Total Pre-incorporation Post-
Rs. incorporation
SALES (A)
Less:
(B)All direct and

indirect
Expenses
Net profit
Capital Profit Revenue Profit

Profit Prior To Incorporation And Profit Post Incorporation
Sr.No Profit Prior To Incorporation Profit Post Incorporation
1. Profit earned before incorporation is profit earned after incorporation is a

a capital profit. revenue profit.
2. It can be used for: It can be used for:
•Issue of Bonus shares •for distribution of dividend
•Writing off preliminary expenses
3. This profit is not available for Profit earned after incorporation is

distribution as dividend. available for distribution as dividend
TREATMENT OF LOSS PRIOR TO INCORPORATION:
Loss prior to incorporation being of capital nature shall be debited to

separate account called ‘loss prior to incorporation account’ and
shown under miscellaneous expenditure on the asset side of the
balance sheet to the extent not written off.
Loss prior to incorporation can be dealt in any of the following

manner:
write off against the profits of the company.
Treated as goodwill and debited to goodwill account
Such loss can be treated as deferred revenue expenditure and

written out of profits of the company over a period of years.

Profit Prior Incorporation

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Profit Prior

Time ratio:- pre incorporation period: post incorporation period

It is calculated on the basis of date of purchase, date of incorporation and date of

Vendor ratio= date of purchase to date of incorporation : date of incorporation of date

(a)Preliminary expenses, director’s fees, debenture interest, etc. are to be charged

Net profit/loss of respective periods are calculated after deducting apportioned

It should be noted that it is the “Date of

Allocated on Basis of Time Allocated in Ratio of Sales

12.Fixed Distribution Expenses

(B)All direct and

Capital Profit Revenue Profit

Sr.No Profit Prior To Incorporation Profit Post Incorporation

1. Profit earned before incorporation is profit earned after incorporation is a

3. This profit is not available for Profit earned after incorporation is

Loss prior to incorporation being of capital nature shall be debited to

Loss prior to incorporation can be dealt in any of the following

write off against the profits of the company.

Treated as goodwill and debited to goodwill account

Such loss can be treated as deferred revenue expenditure and

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