Comprehensive Corporate Accounting notes on the Basis of Apportionment of Expenses. Explore the allocation of pre-incorporation and post-incorporation income and expenses using Time Ratio, Sales Ratio, and Specific Allocation for university examination preparation.

Learning Objectives

After studying this article, students will be able to:

• Understand the meaning of apportionment of expenses.
• Explain the necessity of apportioning expenses between pre-incorporation and post-incorporation periods.
• Identify the appropriate basis for allocating different incomes and expenses.
• Apply Time Ratio, Sales Ratio, and Specific Allocation correctly in practical problems.
• Solve university examination questions related to the apportionment of expenses with confidence.

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Introduction

When a company acquires an existing business before its incorporation, the Profit and Loss Account prepared at the end of the accounting year includes incomes and expenses relating to both the pre-incorporation period and the post-incorporation period. Since the company legally comes into existence only on the date of incorporation, it becomes necessary to divide the total profit or loss into two separate periods.

This process of distributing incomes and expenses between the pre-incorporation and post-incorporation periods is known as Apportionment of Expenses.

The allocation should be fair, logical, and based on the nature of each income or expense. Therefore, accountants use different bases such as Time Ratio, Sales Ratio, and Specific Allocation for apportioning various items.

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Meaning of Apportionment of Expenses

Apportionment of expenses refers to the systematic distribution of common incomes and expenses between the pre-incorporation period and the post-incorporation period on an appropriate basis.

The objective is to determine:

• Capital Profit or Capital Loss (Pre-Incorporation)
• Revenue Profit or Revenue Loss (Post-Incorporation)

Incorrect allocation may lead to incorrect profit determination and improper accounting treatment.

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Basis of Apportionment

Generally, incomes and expenses are allocated on one of the following bases:

1. Time Ratio

Used when the expense is incurred uniformly throughout the accounting period.

2. Sales Ratio

Used when the income or expense depends upon the volume of sales.

3. Specific Allocation

Used when an item clearly relates only to either the pre-incorporation period or the post-incorporation period.

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Detailed Table Showing Basis of Apportionment

Particulars	Basis of Apportionment	Reason
Gross Profit	Sales Ratio	Gross profit varies directly with sales.
Sales	Actual Sales	Sales are divided according to actual figures.
Sales Commission	Sales Ratio	Depends upon sales volume.
Commission on Sales	Sales Ratio	Related directly to sales.
Discount Allowed	Sales Ratio	Arises from credit sales.
Discount Received	Sales Ratio (where related to purchases/sales)	Linked with trading transactions.
Carriage Outward	Sales Ratio	Selling expense incurred on sales.
Freight Outward	Sales Ratio	Depends upon goods sold.
Advertisement Expenses	Sales Ratio	Incurred to increase sales.
Selling Expenses	Sales Ratio	Directly related to sales activity.
Bad Debts	Sales Ratio	Result from credit sales.
Salesmen’s Salary	Sales Ratio	Linked with sales performance.
Delivery Expenses	Sales Ratio	Depends upon goods delivered.
Packing Expenses (Sales)	Sales Ratio	Incurred for dispatch of goods sold.
Collection Charges	Sales Ratio	Connected with realization of sales.
Rent	Time Ratio	Accrues uniformly throughout the year.
Office Salaries	Time Ratio	Paid regularly over time.
Office Expenses	Time Ratio	Administrative expenses occur evenly.
Insurance	Time Ratio	Time-based expenditure.
Depreciation	Time Ratio	Charged according to usage over time.
Municipal Taxes	Time Ratio	Levied for a specific period.
Printing and Stationery	Time Ratio	Administrative expense.
Telephone Expenses	Time Ratio	Incurred continuously.
Electricity Charges	Time Ratio	Normally distributed over time.
Repairs and Maintenance	Time Ratio	Periodical administrative expense.
Office Maintenance Expenses	Time Ratio	Time-based expenditure.
Audit Fees	Post-Incorporation (Specific Allocation)	Audit relates to the company after incorporation.
Directors’ Fees	Post-Incorporation (Specific Allocation)	Directors are appointed after incorporation.
Managing Director’s Remuneration	Post-Incorporation (Specific Allocation)	Paid only after company formation.
Company Formation Expenses	Post-Incorporation (Specific Allocation)	Incurred after incorporation.
Preliminary Expenses	Post-Incorporation (Specific Allocation)	Company-related expenditure.
Debenture Interest	Post-Incorporation (Specific Allocation)	Debentures issued after incorporation.
Interest on Company’s Loan	Post-Incorporation (Specific Allocation)	Company borrows after incorporation.
Share Issue Expenses	Post-Incorporation (Specific Allocation)	Related to issue of shares.
Partners’ Salary	Pre-Incorporation (Specific Allocation)	Pertains to the business before company formation.
Partners’ Commission	Pre-Incorporation (Specific Allocation)	Paid before incorporation.
Interest on Purchase Consideration Payable to Vendor	Pre-Incorporation (Specific Allocation)	Relates to acquisition period before incorporation.
Vendor’s Compensation	Pre-Incorporation (Specific Allocation)	Pertains to business acquisition.
Income Tax	Post-Incorporation (Specific Allocation)	Company tax liability arises after incorporation.
Dividend Received (Investment Income)	Specific Allocation	Allocated according to the period in which it is earned.
Interest Received	Specific Allocation	Allocated to the period to which it belongs.
Rent Received	Specific Allocation	Allocated according to actual receipt period.

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Explanation of the Three Bases

1. Time Ratio

Time Ratio is used when an expense is incurred evenly throughout the accounting period without any relation to the volume of business.

Examples include:

• Office Rent
• Salaries
• Insurance
• Depreciation
• Telephone Charges
• Electricity Expenses
• Office Expenses

These expenses are distributed according to the duration of each accounting period.

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2. Sales Ratio

Sales Ratio is applied to incomes and expenses that fluctuate according to the level of sales.

Examples include:

• Gross Profit
• Sales Commission
• Advertisement
• Carriage Outward
• Discount Allowed
• Selling Expenses
• Bad Debts

These items increase or decrease in proportion to sales.

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3. Specific Allocation

Certain expenses belong exclusively to either the pre-incorporation period or the post-incorporation period.

For example:

Pre-Incorporation Only

• Partners’ Salary
• Partners’ Commission
• Interest payable to Vendor

Post-Incorporation Only

• Directors’ Fees
• Audit Fees
• Preliminary Expenses
• Share Issue Expenses
• Debenture Interest

These expenses are not apportioned. They are charged wholly to the relevant period.

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Practical Illustration

Suppose:

• Rent = ₹1,20,000
• Gross Profit = ₹12,00,000
• Audit Fees = ₹30,000
• Partners’ Salary = ₹60,000

The basis of allocation will be:

Item	Basis
Rent	Time Ratio
Gross Profit	Sales Ratio
Audit Fees	Post-Incorporation
Partners’ Salary	Pre-Incorporation

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Importance of Correct Apportionment

Correct apportionment is essential because it:

• Determines Capital Profit accurately.
• Determines Revenue Profit correctly.
• Ensures proper accounting treatment.
• Prevents incorrect declaration of dividends.
• Facilitates preparation of reliable financial statements.
• Helps auditors verify financial records.
• Ensures compliance with accounting principles and company law.

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Common Mistakes Made by Students

Students frequently make the following mistakes:

• Allocating Gross Profit on Time Ratio instead of Sales Ratio.
• Allocating Rent on Sales Ratio.
• Charging Directors’ Fees to both periods.
• Forgetting that Partners’ Salary belongs only to the pre-incorporation period.
• Apportioning Preliminary Expenses instead of charging them entirely to the post-incorporation period.
• Ignoring specific allocation items.

Understanding the nature of each expense helps avoid these errors.

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Examination Tips

• First identify whether an item is related to time, sales, or a specific period.
• Prepare the Time Ratio and Sales Ratio before allocating expenses.
• Learn the commonly asked items and their basis of apportionment.
• Remember that Gross Profit is almost always apportioned on Sales Ratio.
• Audit Fees, Directors’ Fees, and Preliminary Expenses generally belong to the Post-Incorporation Period.
• Partners’ Salary and Partners’ Commission belong to the Pre-Incorporation Period.

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Key Points to Remember

• Expenses are apportioned using Time Ratio, Sales Ratio, or Specific Allocation.
• Administrative expenses generally follow Time Ratio.
• Selling and trading-related expenses generally follow Sales Ratio.
• Company-related expenses after incorporation are charged wholly to the Post-Incorporation Period.
• Partners’ remuneration belongs entirely to the Pre-Incorporation Period.
• Correct apportionment ensures accurate determination of Capital Profit and Revenue Profit.

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Examination-Oriented Questions

Very Short Answer Questions

1. What is meant by apportionment of expenses?
2. Name the three bases of apportionment.
3. On what basis is Gross Profit apportioned?
4. Why are Directors’ Fees not apportioned?
5. Which expenses are allocated on Time Ratio?

Short Answer Questions

1. Explain the basis of apportionment of expenses.
2. Distinguish between Time Ratio, Sales Ratio, and Specific Allocation.
3. Explain the treatment of Partners’ Salary and Audit Fees.

Long Answer Question

Explain the basis of apportionment of expenses between pre-incorporation and post-incorporation periods. Discuss the allocation of various incomes and expenses with suitable examples.

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Summary

The Basis of Apportionment of Expenses is a fundamental concept in Corporate Accounting that ensures the fair distribution of income and expenses between the pre-incorporation and post-incorporation periods. Depending on their nature, items are allocated using Time Ratio, Sales Ratio, or Specific Allocation. Administrative expenses such as rent and salaries are generally apportioned on a Time Ratio, while trading and selling-related items such as Gross Profit and Advertisement Expenses are allocated on a Sales Ratio. Certain expenses, including Directors’ Fees, Audit Fees, Preliminary Expenses, and Partners’ Salary, are charged exclusively to one period through Specific Allocation. A clear understanding of these principles enables students to prepare accurate financial statements and solve university examination problems effectively.