Question

How are profit prior to incorporation ascertained? How are these profits dealt with?explain.

Answer 1

Explanation:

Example:

You are a small scale industrialist. You wish to convert your firm into a limited company from 1.6.19. But you got the certificate of incorporation on 1.9.19. Assume that accounts are closed on 31st December.

All the expenses are to be divided in any of the following ratios.

1. Time Ratio

2. Weighed Time Ratio

3. Sales Ratio

4. Weighed Sales Ratio

5. Allocation Expenses

6. Actual Expenses

1. Calculation Of Time Ratio:

you started your business as an limited company from 1.6.96. but got the certificate of incorporation on 1.9.19. So, these 3 months ( From June 1st to September 1st) are known as Pre incorporation period.

from 1.9.19 to 31.12.19 - 4 months are known as Post incorporation period.

So, Time Ratio is 3:4.

(the expenses which are related to time are to be divided in Time Ratio.) Example: Rent.

2. Calculation Of Weighted Time Ratio:

(should be calculated when any changes or adjustments made. )

2. Calculation of Weighted Time Ratio:

for example, 5 employees were there in a firm on pre incorporation period. the firm added 5 more employees after incorporation. You are asked to find the ratio in which salaries have to be divided.

Here, we need to calculate Time Ratio and then Weighted Time Ratio. Time Ratio = 3:4

Weighted Time Ratio =

Pre incorporation period time ratio × No. of employees in Pre Incorporation Period : Post Incorporation Period ratio × No. of employees in Post Incorporation Period.

Thus, 3×5: 4×10

= 15: 40 = 3:8 Weighted Time Ratio = 3:8

3. Calculation Of Sales Ratio:

( All the expenses related to sales are to be divided in Sales Ratio.)

Example: Commission, Carriage Outwards.

Sales Ratio =

Pre incorporation period Sales : Post Incorporation Period sales.

4. Weighed Sales Ratio is similar to Weighted Time Ratio.

5. Allocation Expenses:

Allocation Expenses are those which are fully allocated to post or pre incorporation period.

Example: Director's Fee, Preliminary to expenses.

6. Actual expenses are those whose expenditure is already divided or any information is given given in that problem.