Page 281 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Accounting for Companies-I

Notes 11.5 Summary

 Profit or loss of a business for the period to the date company came into existence is
referred to as Pre-Incorporation Profits or Losses.

 Generally, there are two methods of computing Profit & Loss prior to incorporation.
 One is to close off old books and open new books with the assets and liabilities as they
existed all the date of incorporation. In this way, automatically the result to that date will
be adjusted.
 Other is to split up the profit of the year of the transfer of the business to the company
between pre- and post-incorporation periods. This is done either on the time basis or on
the turnover basis or by a method which combines the two.

 A company taking over a running business may also agree to collect its debts as an agent
for the vendor and may further undertake to pay the creditor on behalf of the vendors. In
such a case, the debtors and creditors of the vendors will be included in the accounts for the
company by debit or credit to separate total accounts in the General Ledger to distinguish
them from the debtors and creditors of the business and contra entries will be made in
corresponding Suspense Accounts. Also details of debtors and creditors balance will be
kept in separate ledger.

 The vendor is treated as a creditors for the cash received by the purchasing company in
respect of the debts due to the vendor, just as if he has himself collected cash from his
debtors and remitted the proceeds to the purchasing company.
 The vendor is considered a debtor in respect of cash paid to his creditors by the purchasing
company. The balance of the cash collected, less paid, will represent the amount due to or
by the vendor, arising from debtors and creditors balances which have been taken over,
subject to any collection expenses.

 The balance in the suspense accounts will be always equal to the amount of debtors and
creditors taken over remaining unadjusted at any time.

11.6 Keywords

Balance Sheet: A balance sheet is often described as a “snapshot of a company’s financial
condition”. Of the four basic financial statements, the balance sheet is the only statement which
applies to a single point in time of a business calendar year.
Capital Reserve: A type of account on a municipality’s or company’s balance sheet that is reserved
for long-term capital investment projects or any other large and anticipated expense(s) that
will be incurred in the future.
Loss: The harm or suffering caused by losing or being lost.
Pre Incorporation Profits or Losses: 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.
Profit: Profit is the difference between the purchase price and the component costs of delivered
goods and/or services and any operating or other expenses.

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