In many cases, a new company is formed by acquiring an existing business unit. The existing business will be assumed as going concern. In such cases, the business unit is purchased first and the registration of the acquiring company takes place later. The duration of purchasing and incorporation of the company, the profit (or loss) earned is known as Profit or Loss prior to incorporation. For example, Shivam Pvt Ltd is incorporated on 1st April, 1995 by acquiring running business ABC Pvt Ltd on 1st Jan, 1995. From 1st Jan, 1995 to 1st April, 1995 whatever profit or loss incurred is known as Profit or loss prior to incorporation.
NOTE: The profit earned prior to incorporation will not be distributed as dividend and kept as Capital profit.
The accounting treatment of profit or loss earned prior to incorporation is totally different from after incorporation.
Method of Computing Profit or Loss prior to incorporation:
To calculate profit or loss prior to incorporation, the following steps may be taken:
1. Prepare the trading account for the whole period i.e. from the date of purchase of business to the last date of accounts closing in order to calculate the gross profit. Date of incorporation will not affect the calculation of gross profit.
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