Profit or Loss Pre and Post Incorporation Notes

Meaning of Profit or Loss Pre and Post Incorporation Notes

Here is the Profit or Loss Pre and Post Incorporation Notes. Profit or loss for the prior period of the business till the date the company came into existence is referred to as pre incorporation profits or losses. Generally there are two methods to calculate profit or loss prior to incorporation:

• One is to close the old books and open new books with the assets and liabilites as they existed at the date of incorporation. In this way, automatically the results to that date will be adjusted.
• The other is to split up the profit of the year of the transfer of the existing business to the company between pre and post incorporation periods. This is done either on the time basis or on the sales turnover basis or with a method which combines both the methods mentioned earlier.

Basis of apportioning the Profit or Loss Pre and Post Incorporation Notes –

Gross profit and gross loss should be apportioned:

1. On the basis of turnover in the respective periods.
2. On the basis of cost of the goods sold in the respective periods in the absence of any information regarding turnover.
3. On the basis of the time in the respective periods in the absence of any information regarding the sales turnover and cost of the goods sold.

Variable expenses linked with the sales turnover is to be apportioned on the basis of the sales turnover given in the pre and post incorporation periods.

Fixed common charges of the business is to be apportioned on the basis of the time taken in the pre and post incorporation periods.

Expenses exclusively relating to pre incorporation periods is to be charged to that period.

Thus, i hope these notes would be helpful for students.

Profit or Loss Pre and Post Incorporation Notes

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