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Profit Prior to Incorporation

 Pre-Incorporation Items:
1. Interest on Capital 2. Salary/ Commission paid to 3. Any transaction related to
partner partnership

 Post-Incorporation Items:
1. Debentures Interest
2. Interim Dividend
3. Directors Remuneration fees
4. Preliminary/ share issue/ underwriters commission/ discount on issue of shares/ Company
formation expenses

Note: If anyone of the items (4th point) is given in trail Balance then it cannot be directly transferred to profit &
Loss A/c Because such items given in trial Balance are treated as opening Balance, which first is required to be
transfer to Balance sheet as fictitious asset & only written off portion of these items should be transferred to profit
& loss A/c Debit side in post column.
If any one of these items are reflected in P/L A/c then it is treated as written off portion which can be
directly transferred to columnar profit & Loss Debit Side in post column.

 Fixed expenses/ Administrative expenses to be spread in Time Ratio:

1. Audit Fees 2. Telephone Bill 3. Printing & Stationery
4. Staff Salary 5. Electric Bill

 Variable expenses/ Selling & Distribution expenses to be distributed in sales Ratio:

1. Advertisement 2. Discount Allowed 3. Carriage Outward
4. Depreciation on Delivery Van 5. Salesman Salary/ Commission

 Important Points:
1. If any asset is sold in pre then profit/Loss on sale of asset should be transfer to only pre column &
vice versa.

2. If any Investment is done in pre period then Interest on Investment should be dividend between
pre & post in Time Ratio. But if Investment is done in Post period then Interest on Investment
should be transferred only in post column.
If date of purchase of Investment is not given than interest Received on Investment is
treated as 12 months Interest, Therefore is dividend is pre & Post in time Ratio.

3. Loan taken: Same as Investments – Loan taken I pre-Interest will be paid in pre & post – loan
taken in post Interest will be only charged in post – no date specified – assume last year loan
taken Interest will be charged in pre & Post.

4. Time Ratio:
For e.g.:
A M J J / A S O N D J F M
4 8
Therefore Time Ratio: 1:2

5. Sales Ratio:
For e.g.:
A M J J / A S O N D J F M
1 1 2 1 1 1 1 2 1 1 2 1
5 10
June, November & February sales are twice of other months.

Financial Accounting
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Therefore Sales Ratio: 1:2

6. Rent:
For E.g.: 2,000 pm till October & then increased by 20%
A M J J / A S O N D J F M
2000 2000 2000 2000 2000 2000 2000 2400 2400 2400 2400 2400
8000 pre 18000 post
E.g.: Rent Upto Oct. Rs.12,000 p.a.
Therefore Pm= 12000/12 = 1000 p.m.

November onwards it becomes Rs.18000 p.a.

Therefore pm = 18000/12 = 1500 p.m.

A M J J / A S O N D J F M
1000 1000 1000 1000 1000 1000 1000 1500 1500 1500 1500 1500
4000 pre 10500 post

7. Depreciation:
Machinery Rs. 2,00,000
New Machinery purchased on 1st Dec – Rs.60,000
Rate of Depreciation @ 10% p.a.

Dep – 2,00,000 X 10% Dep- 60,000 X 10% X 4/12

20,000 2,000

Pre 1 2 Post Pre Post

6667 13333 0 2000

8. Bad Debts: If information given related to Bad debts which pertain to sale incurred 1 year Back
or 2 years Back or such Bad debts are related to Debtors which are taken over from vendor, then
such bad debts should be transfer to pre-incorporation column & Balance Bad Debts should be
dividend between pre & Post in sales Ratio, But if it is clearly specified balance bad debts are
related to sales which is incurred in post Incorporation period then it is transferred to only post
column.

9. If salary is given only from June to October of Rs.8,000 then new ratio is generated i.e. Tailor
made Time Ratio.
For E.g.:
A M J J / A S O N D J F M

2 / 3
New Time Ratio:
2:3 8000

2 3

10. Where purchasing company makes the settlement of purchase consideration, after few months
Date of acquisition then they need to pay interest on such purchase consideration, it is divided
between pre & post on Tailor made time Ratio (Interest on PC/ Interest paid to vendor)

11. If in Trial Balance partners/proprietors capital given, total of that represents standard purchase
consideration It has to compare with actual purchase consideration. If there is excess payment is
treated as goodwill & less payment is treated as capital reserve.
12. Incomes mostly divided into Time Ratio. GP always sales Ratio
13. If commission Received – Time Ratio, Commission paid sales Ratio.

Financial Accounting
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Financial Accounting