Welcome to Accounting Education

The Accounting University with 3400+ Accounting contents as study material which can watch, read and learn anyone, anywhere.

Start your studies


Journal Entries $type=three$count=6$author=hide$comment=hide$label=hide$date=hide$show=home$s=0

Balance Sheet $type=three$count=6$author=hide$comment=hide$label=hide$date=hide$show=home$s=0

Profit Prior Incorporation

Profit prior to incorporation is that profit which a company gets between the period of date of buying and date of incorporation. Suppose, A company buys XYZ company on 1st Jan. 2010 and it has to incorporate at 1st April 2010. Then profit between 1st Jan. 2010 and 1st April 2010 will be profit prior to incorporation. This profit can not be used for paying dividend to shareholders. Because current shareholder’s capital is not involved for this profit, so this will be capitalized profit and it will be transferred to capital reserve account. If company gets loss prior to incorporation, it will be transferred to goodwill account.

Ascertainment of Profit or Loss Prior to Incorporation

Following steps are taken for calculating the profit or loss prior to Incorporation :

1st Step : Make Trading Account of Whole Period

First of all, we have to make trading account for calculating gross profit of whole period. We will not make different trading account for prior and after incorporation because after calculating gross profit of a year, we can divide it prior incorporation on the basis of time.

2nd Step : Calculate Time Ratio and Sale Ratio

Time and sale ratios are two very important ratio which can be used for allocation of gross profit and other items of profit and loss account into prior and after to incorporation. Suppose, if After buying company, if it was incorporate after 4 months from 1st Jan. 2010, then time ratio will be 4 months : 8 months or 1:2
If before incorporation sale is Rs. 1,00,000 and after incorporation sale is Rs. 3,00,000, then sale ratio is 1:3

3rd Step : Make Profit and loss account prior and after incorporation in different Columns

a) Gross profit will divide on the basis of sale ratio

b) All expenses which are relating to sale will be divide on the basis of sale ratio

c) All fixed charges like salaries, rent, audit fees, insurance, depreciation, administrative expenses will divide on the basis of time ratio. All expenses which done after incorporation will be charged totally to after


Subhash ltd. was incorporated on 1st march, 2010 and received its certificate of commencement of business on 1st April, 2010. The company bought the business of M/S small and co. with effect from 1st Nov. 2009. From the following figures relating to the year ending 31st oct. 2010, find out the profits available for dividends.

a) Sales for the year were Rs. 6,00,000 out of which sales up to 1st march , were Rs. 2,50,000
b) Gross profit for the year was Rs. 1,80,000
c) The expenses debited to the profit and loss account were :

rent 9000
salaries 15000
director's fees 4800
interest on debentures 5000
discount on sales 3600
depreciation 24000
general expenses 48000
advertising 18000
stationery expenses 3600
commission on sales 6000
bad debts 500 relate to debts created prior to incorporation 1500
interest to vendor on purchase consideration up to 1st may 2010


Working Notes :

a) Sales ratio is 250000 : 350000 or 5:7

b) time ratio except for interest to vendor 4 months : 8 months or 1:2

c) time ratio for interest to vendor 4 months : 2 months or 2:1

d) Director fees and interest on debentures relate to post - incorporation period.


: 5
  1. thnxxx.....I've my exam 2morrw
    got too much help frm thius

  2. yaar itne acche se toh meri class teacher bhi nahi samjhati ......wow Perfect job........

  3. How would this adj. be treated
    Bad debt recovered amt to rs.50000 for a sale made prior to incorporation, whc has been deducted from bad debts
    Bad debts= rs.100,000 (p&like a/c)

  4. Does gross profit is always distributed in sales ratio????
    Can it be ever distributed in time ratio?
    Please guide me....

  5. Audit fees shall be basis on 5:7

In comment, you can give your feedback, reviews, ideas for improving content or ask question relating to written content.



access,2,account,86,accountant,95,Accounting,683,accounting definitions,99,accounting ebook,3,Accounting education,85,Accounting Education Ads Help,1,accounting procedure,2,accounting process outsourcing,2,Accounting Software,52,advance,3,advertising,6,africa,7,Amalgamation,6,amendments,16,Amortization,1,announcements,62,Annuity,2,assets,53,audit,47,auditing,41,Australia,2,B.Com.,22,balance sheet,87,bank,111,Bank reconciliation,12,banking,33,basic accounting,110,BBA,1,benefits,13,best,50,bill,12,black money,3,blog,12,bloggers,7,book keeping,4,bookkeeping,3,Branch Accounting - full tutorial,8,budget,35,Budget variance,13,business,65,businessman,9,CA,30,calculator,4,canada,3,capital,72,capital budgeting,27,career,21,cash,40,cash book,8,cash flow statement,11,Chiense,1,children,13,china,6,class,3,coaching,2,coins,2,college,6,commerce,10,commerce students,7,company,36,computer,9,computer accounting,1,conference,4,Contact vinod kumar,1,Control Your Spending,27,corporate accounting,69,cost,160,cost accounting,195,cost center,8,cost centre,1,CPA,2,credit,18,credit card,11,cs,10,currency,35,data,11,Debit and credit,17,debit cards,1,debt,62,debtor,21,degree,6,depletion,2,depreciation,38,Diwali Messages,12,documents,4,dollar,5,domain,3,Downloads,3,Dubai,1,e-accounting,17,earning,17,education,246,Education Loans,6,email,15,employee,4,EPF,2,ERP,7,euromoney,1,examination,7,excel,17,excise duty,6,expenses,65,facebook,7,factor of loan,1,fans,2,feature,32,fifo,5,FII,4,fiji,1,finacle,1,finance,823,Finance Journal Entries,6,Financial,134,financial accounting,147,Financial Statements,4,fire insurance,3,flickr,2,flow,4,forensic,4,forex,21,formula,8,france,1,fraud,6,free,2,fun,34,function,1,fund,48,GAAP,36,GDP,1,gdr,5,germany,1,gold,7,goodwill,4,goodwill accounting,3,google,34,google apps,3,google apps,1,google base,1,google buzz,1,google calendar,1,Google docs,38,google finance,3,google fusion tables,1,google talk,5,govt.,5,GST,33,guide,85,health,6,Hindi,2,Hindi Language,3,history,3,holding company,3,How to treat FBT in Tally 9,1,HRA,3,ICAI,11,ICAWI,3,ICICI Bank,1,IFRS,11,income,17,income statement,19,Income Tax,7,India,57,indian railway,1,Indonesia,1,inflation,4,inflation accounting,3,infographics,8,information,7,inspiration,176,insurance,14,insurance accounting,2,Intangible,3,interest,26,international,7,Internet,40,Introduction of Tally 9,1,inventory,41,investment,135,investment in Shares,6,invoice,3,IT,1,Japan,1,Job costing,4,journal entries,143,Journal Entries eBook Help,4,Kalculate,1,keyboard,3,kuwait,2,laptop,2,law,4,LBT,1,learning,36,lease,5,lecture,11,ledger,17,leducation,1,Leverage Analysis,7,liabilities,16,lifo,3,linkedin,1,loan,74,logical point,1,loss,5,loss of profit,1,M.Com.,5,m.phil,2,malaysia,3,management accounting,129,manual accounting,4,manufacturing account,1,market,11,marketing,3,mastercard,2,material,13,MBA,14,MCA,1,media,4,migration,2,mobile,9,money,61,ms word,3,ms. excel,14,multi currency in tally 9,1,Multicurrency Accounting,3,mutual fund,30,national security,1,new and sacrifice ratio,1,new york times,1,new zealand,1,news,1,NGO,5,nonprofit-accounting,6,North Georgia Mountains,1,Notification,1,NPV,17,NSE,1,odbc,2,office,10,oman,1,online application,2,online accounting,11,Online Accounting Course,5,otcei,1,pakistan,3,parents,3,Partnership,1,pay pal,3,pdf,4,Personal Finance,6,pie chart,1,pie chart of income,2,pnb,5,podcast,1,ppf,1,presentation,10,price,7,privacy policy,2,prof. vinod kumar,13,profit,24,profit and loss account,12,project management,11,provision,14,purchase,9,puzzles,2,quickbooks,2,Quote,22,quotes,42,quotes of svtuition,1,rating agency,2,ratio analysis,34,RBI,7,readers,13,real estate,13,rectification of errors,11,remote control,2,reports,10,reserves,8,responsibility accounting,4,retirement,2,revenue,3,Revenue reserves,2,review,7,risk,11,rupees,9,salary,5,sale,12,SAP,3,saudi arabia,1,saving,19,sbi,9,scholarship,2,school,1,SEBI,13,security,30,service tax,23,share,20,share trading,15,Shares,16,shri lanka,3,singapore,2,sms,6,social accounting,7,society,5,solution,219,South Africa,1,stock,24,stock exchange,22,structure,6,student,39,students,70,study,21,subsidiary company,2,svtuition,14,swiss bank,2,tally,100,tally 9,8,Tally 7.2,8,Tally 9,42,Tally.ERP 9,59,TallyPrime,1,tanzania,2,tax,94,Tax Accounting,30,TDS,15,teacher,62,teaching,112,technology,33,test,40,testimonial,15,testimonials,15,thailand,1,tips,60,trading,5,trading on equity,2,transaction,7,trend,12,trial balance,14,truthfulness,1,tuition,3,twitter,10,UAE,5,UGC - NET Commerce,13,UK,11,United Arab Emirates,1,university,9,usa,25,valuation,9,VAT,22,Video,36,Voucher and vouching,4,Wealth,8,wikipedia,25,working capital,29,youtube,14,
Accounting Education: Profit Prior Incorporation
Profit Prior Incorporation
Accounting Education
Loaded All Posts Not found any posts VIEW ALL Reply Cancel reply Delete By Home PAGES Contents View All RELATED CONTENTS FOR YOUR LEARNING Topic ARCHIVE SEARCH ALL POSTS Not found any post match with your request Back Home Sunday Monday Tuesday Wednesday Thursday Friday Saturday Sun Mon Tue Wed Thu Fri Sat January February March April May June July August September October November December Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec just now 1 minute ago $$1$$ minutes ago 1 hour ago $$1$$ hours ago Yesterday $$1$$ days ago $$1$$ weeks ago more than 5 weeks ago Followers Follow THIS PREMIUM CONTENT IS LOCKED STEP 1: Share to a social network STEP 2: Click the link on your social network Copy All Code Select All Code All codes were copied to your clipboard Can not copy the codes / texts, please press [CTRL]+[C] (or CMD+C with Mac) to copy