Comprehensive One-Page Revision Notes for the chapter Profits or Loss Prior to Incorporation. Learn important definitions, accounting treatment, expense allocation, formulae, and exam-oriented concepts in a concise format.

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1. Important Definitions

Profit Prior to Incorporation

Profit Prior to Incorporation is the profit earned by a business from the date of acquisition to the date of incorporation of a company. Since the company did not legally exist during this period, such profit is treated as Capital Profit.

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Loss Prior to Incorporation

Loss Prior to Incorporation is the loss incurred between the date of acquisition and the date of incorporation. It is treated as a Capital Loss.

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Pre-Incorporation Period

The period between the date of purchase and the date of incorporation.

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Post-Incorporation Period

The period between the date of incorporation and the end of the accounting year.

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Capital Profit

Profit of a capital nature that is not earned through normal business operations and cannot be distributed as dividend.

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Revenue Profit

Profit earned after incorporation through normal business operations. It is available for dividend distribution, subject to legal provisions.

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2. Important Formulae

Time Ratio

Formula

Time Ratio = Pre-Incorporation Period : Post-Incorporation Period

Example

Pre-Incorporation = 3 Months

Post-Incorporation = 9 Months

Time Ratio = 3 : 9 = 1 : 3

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Sales Ratio

Formula

Sales Ratio = Pre-Incorporation Sales : Post-Incorporation Sales

Example

Pre Sales = ₹8,00,000

Post Sales = ₹24,00,000

Sales Ratio = 8 : 24 = 1 : 3

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3. Expense Allocation Table

Particulars	Basis of Allocation
Gross Profit	Sales Ratio
Sales Commission	Sales Ratio
Advertisement	Sales Ratio
Selling Expenses	Sales Ratio
Carriage Outward	Sales Ratio
Bad Debts	Sales Ratio
Discount Allowed	Sales Ratio
Rent	Time Ratio
Salaries	Time Ratio
Office Expenses	Time Ratio
Insurance	Time Ratio
Depreciation	Time Ratio
Telephone Expenses	Time Ratio
Electricity Charges	Time Ratio
General Expenses	Time Ratio
Audit Fees	Post-Incorporation Only
Directors’ Fees / Remuneration	Post-Incorporation Only
Preliminary Expenses	Post-Incorporation Only
Debenture Interest	Post-Incorporation Only
Company Formation Expenses	Post-Incorporation Only
Partners’ Salary	Pre-Incorporation Only
Partners’ Commission	Pre-Incorporation Only
Vendor’s Interest	Pre-Incorporation Only

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4. Accounting Treatment

Profit Prior to Incorporation

• Treated as Capital Profit.
• Transferred to Capital Reserve.
• Cannot be distributed as dividend.
• Shown under Reserves and Surplus in the Balance Sheet.

Journal Entry

Profit & Loss Account Dr.

To Capital Reserve Account

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Loss Prior to Incorporation

• Treated as Capital Loss.
• Debited to Goodwill, or
• Adjusted against Capital Reserve, where available.
• Goodwill is shown under Intangible Assets.

Journal Entry

Goodwill Account Dr.

To Profit & Loss Account

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5. Difference Between Pre and Post Incorporation Profit

Basis	Pre-Incorporation Profit	Post-Incorporation Profit
Nature	Capital Profit	Revenue Profit
Period	Before Incorporation	After Incorporation
Dividend	Not Allowed	Allowed
Reserve	Capital Reserve	Profit & Loss Appropriation
Legal Status	Company Not in Existence	Company Exists

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6. Preparation Sequence

Follow this order while solving practical problems:

1. Identify the Date of Purchase.
2. Identify the Date of Incorporation.
3. Calculate the Time Ratio.
4. Calculate the Sales Ratio.
5. Prepare the Trading Account.
6. Prepare the Profit & Loss Account.
7. Allocate each item using the correct basis.
8. Prepare the Statement Showing Allocation of Profit.
9. Determine Pre-Incorporation Profit.
10. Determine Post-Incorporation Profit.
11. Pass Journal Entries.
12. Present the items correctly in the Balance Sheet.

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7. Most Important Viva Questions

• What is Profit Prior to Incorporation?
• Why is it treated as Capital Profit?
• Why is it transferred to Capital Reserve?
• What is Capital Reserve?
• What is Goodwill?
• Explain Time Ratio.
• Explain Sales Ratio.
• Why is Gross Profit allocated on Sales Ratio?
• Explain the Accounting Treatment of Loss Prior to Incorporation.
• Why are Audit Fees charged only to the Post-Incorporation Period?

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8. Examination Tips

• ✔ Calculate the Time Ratio correctly before solving the problem.
• ✔ Use the Sales Ratio whenever separate sales figures are available.
• ✔ Allocate Gross Profit using the Sales Ratio.
• ✔ Allocate administrative expenses using the Time Ratio.
• ✔ Charge Audit Fees and Directors’ Remuneration entirely to the Post-Incorporation Period.
• ✔ Charge Partners’ Salary entirely to the Pre-Incorporation Period.
• ✔ Always prepare working notes for ratios and calculations.
• ✔ Mention the basis of allocation for every income and expense.
• ✔ Write journal entries with proper narration.
• ✔ Present Capital Reserve and Goodwill correctly in the Balance Sheet.
• ✔ Recheck all calculations before submitting your answer.

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9. Common Mistakes to Avoid

• ❌ Incorrect Time Ratio calculation.
• ❌ Using Time Ratio instead of Sales Ratio for Gross Profit.
• ❌ Wrong allocation of Advertisement and Selling Expenses.
• ❌ Apportioning Audit Fees between both periods.
• ❌ Apportioning Directors’ Remuneration between both periods.
• ❌ Allocating Partners’ Salary after incorporation.
• ❌ Transferring Capital Profit to General Reserve.
• ❌ Charging Capital Loss directly to Revenue Profit.
• ❌ Forgetting to prepare the Allocation Statement.
• ❌ Arithmetic mistakes in totals.

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10. Quick Memory Chart

Item	Remember
Gross Profit	Sales Ratio
Advertisement	Sales Ratio
Sales Commission	Sales Ratio
Rent	Time Ratio
Salaries	Time Ratio
Insurance	Time Ratio
Audit Fees	Post Only
Directors’ Fees	Post Only
Partners’ Salary	Pre Only
Profit Prior to Incorporation	Capital Reserve
Loss Prior to Incorporation	Goodwill
Dividend	Only from Revenue Profit

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Final Revision Checklist

✅ Learn all definitions.

✅ Memorize the Time Ratio and Sales Ratio formulae.

✅ Revise the Expense Allocation Table.

✅ Practice Journal Entries.

✅ Understand the Accounting Treatment.

✅ Learn the Balance Sheet presentation.

✅ Practice at least 10 numerical problems.

✅ Revise Viva Questions.

✅ Avoid common mistakes.

✅ Recheck calculations in the examination.

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Chapter Summary

The chapter Profits or Loss Prior to Incorporation focuses on determining the profit or loss earned before and after the incorporation of a company. Students must understand the concepts of Capital Profit, Capital Loss, Time Ratio, Sales Ratio, and the Basis of Apportionment of Expenses. Correct accounting treatment requires transferring Profit Prior to Incorporation to Capital Reserve, while Loss Prior to Incorporation is generally debited to Goodwill or adjusted against an existing Capital Reserve. Preparing the Statement Showing Allocation of Profit, using appropriate allocation bases, and presenting items correctly in the Balance Sheet are essential for accurate financial reporting and university examination success. This one-page revision guide serves as a quick reference for last-minute preparation and effective revision before examinations.