Describe the methods of finding out profit prior and after incorporation.
Answers
Steps may be suggested for ascertaining profit or loss prior to incorporation:
Step I:
A Trading Account should be prepared at first for the whole period, i.e., between the date of purchase and the date of final accounts, in order to calculate the amount of gross profit.
Step II:
Calculate the following two ratios:
(i) Sales Ratio:
ADVERTISEMENTS:
Amount of sales should be calculated for the pre-incorporation and post-incorporation periods.
(ii) Time Ratio:
It is calculated after considering the time period, i.e., one is required to calculate the period falling between the date of purchase and the date of incorporation and the period between the date of incorporation and the date of presenting final accounts.
Step III:
A statement should be prepared for calculating the amount of net profit before and after incorporation separately on the following principle:
(i) Gross Profit should be allocated for the two periods on the basis of sales ratio which will present the gross profit for the two separate periods, viz. pre-incorporation and post- incorporation.
(ii) Fixed Expenses or expenses incurred on the basis of time, viz., Rent, Salary, Depreciation, Interest, etc. should be allocated for the two periods on the basis of time ratio.
(iii) Variable Expenses or expenses connected with sales should be allocated for the two periods on the basis of sales ratio.
(iv) Certain expenses, viz., partners’ salary, directors’ salary, preliminary expenses, interest on debentures, etc. are not apportioned since they relate to a particular period. For example, partners’ salary is to be charged against pre-acquisition profit whereas directors’ remuneration, debenture interest, etc. are to be charged against post-acquisition profit.
Explanation:
Method of Accounting of Profit/Loss Prior to Incorporation:
Steps may be suggested for ascertaining profit or loss prior to incorporation:
Step 1:
A Trading Account should be prepared at first for the whole period, i.e., between the date of purchase and the date of final accounts, in order to calculate the amount of gross profit.
Step II:
Calculate the following two ratios:
(i) Sales Ratio:
ADVERTISEMENTS:
Amount of sales should be calculated for the pre-incorporation and post-incorporation periods.
(ii) Time Ratio:
It is calculated after considering the time period, i.e., one is required to calculate the period falling between the date of purchase and the date of incorporation and the period between the date of incorporation and the date of presenting final accounts.
Step III:
A statement should be prepared for calculating the amount of net profit before and after incorporation separately on the following principle:
(i) Gross Profit should be allocated for the two periods on the basis of sales ratio which will present the gross profit for the two separate periods, viz. pre-incorporation and post- incorporation.
(ii) Fixed Expenses or expenses incurred on the basis of time, viz., Rent, Salary, Depreciation, Interest, etc. should be allocated for the two periods on the basis of time ratio.
(iii) Variable Expenses or expenses connected with sales should be
allocated for the two periods on the basis of sales ratio.
(iv) Certain expenses, viz., partners' salary, directors' salary, preliminary expenses, interest on debentures, etc. are not apportioned since they relate to a particular period. For example, partners' salary is to be charged against pre-acquisition profit whereas directors' remuneration, debenture interest, etc. are to be charged against post-acquisition profit.