Profit prior to Incorporation

 (S R Patil)

Profit or loss prior to and after Incorporation

Profit prior to Incorporation

A company comes into existence from the date of the issue of the certificate of incorporation by the Register of Companies. Some time a company is formed to take over existing business of partnership firms or limited company before getting a certificate of incorporation. However as the company comes into existence from the date of issue certificate of incorporation, the profit / loss sustained by the existing business from the date of agreement to purchase to the date of incorporation belongs to the purchasing company. Thurs any profit /loss to the company is entitled or before its incorporation is termed as " Profit /loss prior to imcorporation " and it is a capital gains

The existing company to Purchase  business of partnership farm with effect from 1st April 2017 and it gets certificate  Of IncorporationOn 1st July  2017 the profit earned by the existing company from 1-4-2017 to 30-6-2017 is"profit prior to imcorporation " and the profit earned from 1-7-2017 to 31-3-2017 is "profit after incorporation ".

The total profit earned during the year is required to be split up into two periods " prior to imcorporation " and "after incorporation "

Basis of Apportionment

1. Gross profit is to be divided in the ratio of sales of the two periods.

2. Expenses of fixed nature and depending on period such as salaries, Deprecation, Rent, Rates, Taxes, General and office experience, Repairs, printing and stationery etc. are to be divided in the ratio of months falling in the two periods. Prior and After

3. Expenses of variable nature and relating to sales sach as discounts, advertisement, sales commission, carriage outward, traveling agents salaries, and commissions etc.  divided in the ratio of sales of two periods.

4. Expenses relating to specific period only are to be charged to that period only. Preliminary expenses, Debenture interest, Directors Fees, Audit Fees etc. are charged to After Incorporation period. Vendors salaries are charged to prior to imcorporation period

5. Interest on purchases price payable to vendors - Interest payable up to the date of lncorporation is charged to prior incorporation period and interest payable in respect of further period is charged to after incorporation period.

Ascertainment of Sales Ratio

When the sales for two periods - prior incorporation and after incorporation are not given directly  to calculate sales for the two periods on the basis of the ratio of sales of various month