Incorporation is the first step toward the creation of a company. The founders should prepare a number of preliminary documents before registering an organization. Upon filing an application with the Registrar of Companies (ROC), a registration certificate is issued. It is then considered that the company has been formed. When a company has been incorporated, it can begin earning profits. During the pre-incorporation period, the founders of a company may have earned profits, that is, profits earned before the company received its certificate of incorporation.
A company’s profits before being formed should be treated as capital profits. A company’s profit earned after it acquired a business is called post-incorporation profit or post-acquisition profit. A company’s profit prior to incorporation is known as a pre-incorporation profit. The balance sheet shows “Miscellaneous Expenditures”, which includes “Loss before incorporation.”.
Prior to Incorporation, a Company’s Profit
Post-incorporation period refers to a company’s period after incorporation, while the pre incorporation profit refers to its period before incorporation.
It is possible for private companies to commence business immediately after incorporation; however, public companies must wait until they receive the certificate of commencement of business to begin operations. The profits generated before the incorporation of a private company or before the commencement of operations of a public company are known as pre-incorporation profits.
Prior to Incorporation, Profit Allocation
In order to properly identify pre-incorporation profits from divisible profits, a separate profit and loss account must be prepared for pre- and post-incorporation periods.
To distinguish profits earned from losses incurred, profit and loss accounts are prepared separately for pre- and post-incorporation periods.
Incorporation Is Preceded by a Profit or Loss Assessment
The following steps are followed to calculate profit or loss before incorporation:
- Compile the entire trading account
Creating a trading account before incorporation is necessary to calculate the gross profit for the entire period. Since we can divide the gross profit over a year based on time, we don’t need to create separate trading accounts before and after incorporation.
- Calculation of time ratios and sales ratios
In the profit and loss account, gross profit and other items can be allocated according to the sales and time ratios before and after sales. incorporation. The time ratio would be Four months: Eight months or two months if the company was incorporated after four months from January 1.
Using the example of a sale of $100,000 before incorporation and $300,000 after incorporation, the ratio of sales is 1:1.
- Preparation of a net profit statement before and after incorporation is recommended
- The gross profit allocation for the pre- and post-incorporation periods should be based on the sales ratios
- Expenses like rent, copying, office supplies, mailing, phone calls, amortisation, etc., must be allocated across both periods on time
- Marketing, transportation, insurance, fees, bad debts, and other variable expenses will need to be allocated between the two periods
- The pre-incorporation expenses include interest on the purchase price, partner salaries, and vendor financing
- There are a number of expenses that must be deducted after incorporation, such as board fees, salary of the managing director, interest on debentures, issue discount, issuance discount, etc.
- Before and after incorporation, auditing fees can be allocated based on the duration ratio.