1. Profit Prior to Incorporation "Profit prior to incorporation" is the profit earned or loss suffered during the period before incorporation. It is a Capital Profit and is not legally available for distribution as dividend because a company cannot earn a profit before it comes into existence. Profit earned after incorporation is revenue profit, which is available for dividend. Incorporation can be classified into Pre-incorporation and Post-incorporation.

2. Pre-Incorporation and Post-Incorporation Profit Private company starts its business soon after its incorporation whereas Public company commences its business only after obtaining certificate of commencement from the Registrar of the company. The profit earned before the incorporation period by the company is termed as Pre-Incorporation Profit/Profit Prior to Incorporation; the profit earned is considered as Capital Profits and is transferred to Capital Reserve A/c. In case if the company suffers loss prior to incorporation, it is treated as Capital loss and is transferred to Goodwill A/c. The Profit/Loss earned by the company after incorporation is called as Post-Incorporation Profit/Loss.

3. Pre-Incorporation and Post-Incorporation Period. The period before incorporation and the period after incorporation is called Pre-Incorporation and Post-Incorporation Period. Example: X Ltd. was formed on 1.4.2018 to take over the business of Y Ltd. from 1.1.2018. The year ended on 31.12.2018. Calculate Pre-Incorporation and Post-Incorporation Period. Solution: Business was taken over from 1.1.2018 and Incorporated on 1.4.2018 Pre-Incorporation Period = 1.1.2018 – 31.3.2018= 3 months Post-Incorporation Period = 1.4.2018 31.12.2018= 9 months Therefore Time Ratio = 1:3

4. Steps to determine Pre-Incorporation and Post- Incorporation Profit/Loss 1. Prepare a Trading A/c for the whole period. 2. Calculate Time Ratio and Sales Ratio:  Time Ratio can be calculated by taking pre-incorporation and post- incorporation time period. Example: Pre- Incorporation period is 3 months and Post-Incorporation period is 9 months. Therefore Time Ratio = 3:9 or 1:3  Sales Ratio can be calculated on the sales taken place during Pre-Incorporation and Post-Incorporation period. 3. Prepare a Net Profit/Loss statement to analyze Pre and Post Incorporation periods.

5. Cont… Example (Calculation of Sales Ratio) : M Ltd. was incorporated on 1.6.2018 and acquired a business w.e.f 1.4.2018. It closes its accounts on 31.3.2019. Total Sales from April, 2018 upto 31.3.2019 were Rs. 4,50,000. Sales for April and May were double the average sales. Sales from June to September were ¼ of the average monthly sales. Sales from October to February, 2019 were equal to average monthly sales and the sales in March, 2019 are double the average sales. Solution: Average monthly sales = 4,50,000/12 = 37500 (Total Sales/12)

6. Cont… Solution : Therefore: Pre-Incorporation Sales = 1,50,000 Post-Incorporation Sales = 3,00,000 There Sales Ratio= 1:2 PeriodRs. April - May, 2018 June - September, 2018 October - February, 2019 March, 2019 (37500 x 2) x 2 (37500 x ¼) x 4 (37500 x 1) x 5 (37500 x 2) x 1 150,000 37,500 187,500 75,000 Total Sales4,50,000

7. Basis of Allocation of expenses between Pre-incorporation and Post-incorporation period ParticularsBasis of Allocation 1. Gross Profit or Loss Sales Ratio 2. Expenses of variable nature (all type of expenses directly varying with sales) such as Carriage on sales, Packaging expenses, Advertisement, Discount allowed, Bad debts, Selling Expenses, etc. Sales Ratio 3. Expenses of fixed nature, such as, Salaries, Rent, Rates, Taxes, Insurance, Depreciation, Office Expenses, Printing & Stationery, Administrative Expenses, Postage, Audit fees, Repairs, etc. Time ratio 4. All Expenses relating to pre-incorporation period, such as, Partners salaries, Interest on partners capital. Pre-incorporation period 5. All Expenses that are solely incurred for the company on and after its incorporation, such as, Preliminary expenses, Directors’ fees, Interest on debentures etc. Post-incorporation period

8. Points to be noted while preparing Profit/Loss Statement 1. Some expenses exclusively belong to post incorporation period and they have to be charged to post-incorporation. Example: Managing Director’s Fees, Debenture Interest, Discount on issue of shares, Preliminary expenses written off, Underwriting commission written off etc. 2. Audit fees can be divided in time ratio or can also be charged exclusively in post incorporation period, assuming auditing is compulsory for the company. 3. Bad debts recovered can be charged to both the period depending on where it relates to. 4. Interest received can be charged for both the period based on period of investment.

9. Practice Questions Match the Columns: Column AColumn B 1.Pre-incorporation profit 2.Pre-incorporation loss 3.Company related expenses 4.Share transfer fees 5.Interest on debentures 6.Vendor related expenses 7.Gross margin 8.Audit fees a.Goodwill b.Capital Reserve c.Time ratio d.Pre-incorporation e.Post-incorporation f.Post-incorporation g.Post-incorporation h.Sales Ratio

10. Cont… Fill in the blanks: 1.The expenses pertaining to vendor should be allocated in _______ period 2.The loss prior to incorporation is transferred to _______ 3.The Profit/Loss during post incorporation period is transferred to _____________ 4.Interest paid to vendor should be allocated in ratio of ______ 5.For computation of pre-incorporation profit, salary to director is allocated in __________ Ratio. 6.For computation of pre-incorporation profit, fixed cost is _____ 7.For computation of pre-incorporation profit, discount on debentures is ___________ 8.Bad debts written off is allocated in _______ Ratio

11. State whether True or False: 1.The Profit/Loss during post incorporation period is transferred to Profit & Loss A/c 2.Directors fees are divided into pre and post incorporation period in time ratio 3.For computation of pre-incorporation profit fixed cost is allocated in sales ratio 4.For computation of pre-incorporation profit travelling expenses are allocated in time ratio 5.In profit prior to incorporation, preliminary expenses written-off should be allocated to pre-incorporation period. 6.Various items in balance sheet should be allocated in the ratio of time for pre and post incorporation period 7.Profit after incorporation are Revenue Profits. 8.Time Ratio is ratio of number of months before and after incorporation.