Regarding maintaining books

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

20 March 2016 A company,( business is to purchase cloth and prepare garments and then online sale) is started its purchase and offline sale ( as the site is under process) but has not regd as co. And it is under process. So can they show sale n pur made before registration in company books after registration

KAVIRAJA ADDANGADI

KAVIRAJA ADDANGADI (Expert)
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20 March 2016 Company take legal birth only after incorporation, before incorporation transaction pertain to purchase and sales is not considered as valid transaction, same can not be considered for booking prior incorporating purchase and sales transactions, moreover purchase and sales need to take vat Registration the transactions valid only from the date of application of vat, For applying vat require COI .

KAVIRAJA ADDANGADI

KAVIRAJA ADDANGADI (Expert)
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Querist : Anonymous

Querist : Anonymous (Querist)

22 March 2016 so how to show profit made before incorporation

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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20 July 2025 This is a common situation for startups and businesses in the pre-incorporation phase. Let's break it down clearly:

✅ Key Concept:
A company legally exists only after incorporation, and it cannot have any income or expenses before its date of incorporation. However, there is a way to account for business activity done before incorporation.

📘 How to Handle Profit (or Transactions) Before Incorporation:
1. Treat all pre-incorporation transactions as conducted by the promoters (founders) in their personal capacity.

Any:

Purchases
Sales
Expenses
Agreements
done before incorporation are considered done on behalf of the future company by promoters.
2. After incorporation: company can adopt or take over those pre-incorporation transactions.

This is done via a board resolution stating that:

The company accepts the pre-incorporation contracts and transactions done by the promoters on its behalf.
📑 Accounting Treatment:
On incorporation, pass entries such as:

a) For pre-incorporation purchases:

Purchases A/c Dr.
To Promoter’s Capital A/c
b) For pre-incorporation sales:

Debtors/Cash/Bank A/c Dr.
To Sales A/c
c) For expenses:

Expense A/c Dr.
To Promoter’s Capital A/c
You can aggregate all profit made and transfer to Promoter’s Capital/Loan Account (based on company policy).

🔄 Alternative: Record it as Pre-incorporation Profit:
Show it under Reserves & Surplus → Pre-incorporation Profit in the first year's financials.
Make proper disclosures in notes to accounts.
🚫 Caveats:
You cannot file tax returns for the company showing profit before the incorporation date.
VAT or GST compliance cannot apply before legal registration.
Any contractual obligation before incorporation must be ratified by the company post-incorporation.
✅ Summary:
Pre-incorporation profits can be shown in books via promoter contributions or adoption of prior activity.
Proper board resolution and accounting disclosures are a must.
Tax filing and compliance start only from incorporation.

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