Operative expenses

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yash gupta (Querist)
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06 August 2013 If a company is incorporated for the business of marketing of products and before its operation company purchase and sale land than is its profit is preoperative ?? and how to deal it.??

yash gupta

yash gupta (Querist)
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07 August 2013 kindly give the explanation.

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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09 August 2024 In the context of a company incorporated for marketing products but which engages in buying and selling land before its operational activities commence, the treatment of profits and expenses needs careful consideration. Here's how to handle such scenarios:

### **Understanding Preoperative Expenses**

Preoperative expenses, also known as pre-incorporation expenses, refer to costs incurred before the commencement of business operations. They typically include expenses such as:

- Legal fees for company registration
- Consultancy fees
- Administrative costs
- Initial marketing expenses

### **Handling Profits from Sale of Land**

If a company that is intended to engage in marketing activities buys and sells land before starting its actual business operations, the profits from such transactions should be treated carefully:

1. **Nature of Transactions:**
- **Primary Business vs. Investment:** Determine whether the land transactions were incidental to the company's intended business activities. If the company is not primarily engaged in real estate but the transactions are for investment purposes, the profits from the sale of land should be classified as capital gains rather than operational income.
- **Business Income:** If the buying and selling of land was part of the company’s intended business activities, then the profits should be treated as business income.

2. **Accounting Treatment:**
- **Profit or Loss on Sale of Land:** Record the profit or loss from the sale of land in the financial statements. If the transactions were not part of the company's primary business, they should be classified as "Other Income" or "Investment Income."
- **Preoperative Expenses:** Ensure that any expenses related to setting up the company (preoperative expenses) are distinctly separated from profits or losses from land transactions.

3. **Reporting in Financial Statements:**
- **Profit and Loss Account:** The profit from the sale of land should be included in the Profit and Loss Account under the appropriate category (business income or other income).
- **Balance Sheet:** Any remaining unsold land should be shown under assets in the Balance Sheet.

4. **Tax Treatment:**
- **Capital Gains Tax:** If the land transactions are treated as capital gains, appropriate capital gains tax provisions should be applied.
- **Business Income Tax:** If the transactions are considered part of the business, then they should be included in the taxable income of the company, and standard business tax rules will apply.

### **Regulatory Considerations**

1. **Disclosure Requirements:**
- Ensure that the nature of land transactions is clearly disclosed in the financial statements, especially if they are not aligned with the company's primary business activity.

2. **Company Law and Accounting Standards:**
- Comply with relevant company law and accounting standards applicable to the reporting and treatment of preoperative expenses and profits from land transactions.

3. **Audit and Compliance:**
- Consult with an auditor or financial advisor to ensure that the accounting treatment and tax implications are correctly handled according to applicable laws and standards.

### **Summary**

- **Profit from Land Sales:** Treat as capital gains if incidental or as business income if part of primary activities.
- **Preoperative Expenses:** Should be separately accounted for and not mixed with land transaction profits.
- **Financial Reporting:** Clearly classify and report in financial statements.
- **Tax Treatment:** Apply appropriate tax rules based on the nature of income.

Properly distinguishing between preoperative expenses and business income ensures accurate financial reporting and compliance with accounting standards and tax regulations.

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