Page 262 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Manpreet Kaur, Lovely Professional University Unit 11: Profit and Loss Prior to Incorporation

Unit 11: Profit and Loss Prior to Incorporation Notes

CONTENTS
Objectives
Introduction

11.1 Meaning of profit or loss prior to incorporation (pre- incorporation profit or loss)
11.2 Nature & Use of Profit or Loss
11.3 Method of Ascertainment of Profit or Loss Prior to Incorporation

11.4 Statutory Report
11.5 Summary
11.6 Keywords
11.7 Review Questions
11.8 Further Readings

Objectives

After studying this unit, you should be able to:
 Explain the meaning of profit and loss prior to incorporation

 Understand the nature and use of profit and loss account
 Learn method of Ascertainment of Profit or Loss Prior to Incorporation
 Describe statutory Report

Introduction

When a running business is taken over by the promoters of a company, from a date before the
company which is to manage and own is registered, the amount of profit or loss of such a
business for the period prior to the date the company came into existence is referred to as pre
incorporation profits or losses. Such profits or losses, though belonging to the company or
payable by it, are of capital nature; it is necessary to disclose them separately from trading
profits or losses.
The general practices in this concern are as follows:
1. If there is a loss.
(a) It is either written off by debit to the Profit and Loss Account or to a special account
described as Loss Prior to Incorporation and show as an asset in the Balance Sheet.
(b) In the alternative, it is debited to the Goodwill Account.
2. On the other hand, if a profit has been earned by business prior to the same being taken
over and the same is not fully absorbed by any interest payable for the period, it is
credited to Capital Reserve Account or to the Goodwill Account, if any goodwill has been
adjusted as an asset. The profit will not be available for distribution as a dividend among
the members of the company.

LOVELY PROFESSIONAL UNIVERSITY 255