AL-Principles of Accounts
Pre-incorporation Profit
A. Introduction
Sole proprietorship and partnership can convert their business into a limited company for the
purpose of ______________________ and to enjoy the benefit of ______________________.
However, it needs times to complete the necessary procedures before limited company comes
into existence, i.e. ______________________. The business will go on trading as usual during
this period. Therefore, the date of the limited company incorporated may be in the middle of or
at any time during the financial year. The period falls before the date of incorporation of the
limited company is called ______________________ and the period after the date of
incorporation is called ______________________.
B. Date of Incorporation
Example:
A and B trading as a partnership for several years, they decide to convert their business into a
limited company in 20X2 and the company was incorporated on 1 July 20X2. The accounting
year end is 31 December of each year for the partnership and the new incorporated company.
When the accounts for the full financial year are prepared, they will consist the transactions of
both the partnership and the limited company. It is important to ensure that cost and revenue
must be allocated to the suitable periods.
1 Jan
1 July
31 Dec
C. Allocation of cost and revenue
Item
Suggested basis of allocation
Cost of sales
Rent and rates
Wages and salaries
General expenses
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Six-12-notes-WSM
AL-Principles of Accounts
Depreciation
Interest
Advertising
Delivery costs
Postage and packing and
telephone
Formation expenses/ Preliminary
expenses
Directors remuneration
Sole trader or partners
remuneration and share of profits
D. Treatment of Pre-incorporation Profit or Loss
A company cannot earn profits before it comes into existence.
Therefore, any
pre-incorporation profit or loss does NOT belong to the limited company and cannot be
distributed as dividends. It can be treated in the following ways:
For pre-incorporation profit:
1. transferred to ________________________;
2. offset against ________________________ if any;
For pre-incorporation loss,
1. carry forward the loss and write off against the ________________________ profit;
2. treat the loss as ________________________ on acquisition of business.
Where there is a time lapse between the company’s acquisition of the partnership and its actual
incorporation the profit and loss should be divided into three parts:
a. The period prior to acquisition – Profits arising in this period belong to the partners.
b. The period after acquisition and prior to incorporation – Treat as pre-incorporation profit or
loss.
c. The period after incorporation – Profits arising in this period are allocated to the retained
profits of the company and are available for a dividend.
Classwork:
Homework: supplementary ex.
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Six-12-notes-WSM