Friday, 15 August 2014

Pre And Post Incorporation Profit

Pre Post Incorporation Profit

Pre Incorporation profit means profit earned for company before incorporation of Company. Those profits are considered to be capital reserve for company. If there is pre incorporation loss, it is called Capital Loss to be shown in balance sheet as Loss. If profit and Loss account is given for Pre and Post period combined, then following steps are applied for calculation of pre and post profit.

      Step 1)  Prepare trading account for whole period.
      Step2)   Prepare Profit and loss for pre and post period. All incomes and expenses should be split in pre post period using suitable RATIOS.

NOTE: Ratio for apportionment can be time ratio or sales ratio or any other ratio given in the question.

Following Items Should be split using Sales ratio:

  1.       Gross Profit
  2.       Selling Expenses
  3.       Commission
  4.       Discount
  5.       Freight Outwards
  6.       Bad Debts
Following items should be split using Time ratio:

  1. Salary
  2.  Rent
  3.  Interest
  4. Office Expenses
  5.  Printing and Stationary

NOTE:   Following items are always Considered as “Pre”.

  1. Partners Interest on capital
  2. Partners Salary

NOTE:   Following items are always Considered as “Post”.
  1.       Directors salary
  2.       Debenture Interest
  3.       Provision for tax
  4.       Proposed Dividend
  5.       Auditor’s Fee
  6.       Company Expenses/Preliminary Expenses

NOTE:   Sales ratio is Calculated on the basis of Sales in Pre-period and sales in post period.

Note: Presentation in Balance Sheet.

Capital Reserve
Profit and loss account
(post- profit)

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  1. Wow nice. Easy to understand you notes.

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  3. can you explain why directors salary debenture interest etc are considered as post

    1. Directors are appointed after the company gets incorporated. Hence post.


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