Profit Prior to Incorporation (PPI) Process
Learn about Profit Prior to Incorporation (PPI) when a business transitions from a sole trading concern or partnership firm to a Joint Stock Company. Explore the pre-incorporation and post-incorporation periods and how to prepare relevant financial statements efficiently.
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Presentation Transcript
Chapter-Profit Prior to Incorporation (PPI)
Profit Prior to Incorporation (PPI) When sole trading concern or partnership firm sold their business to Joint Stock Company, in consideration amount paid by company to sole trading concern or partnership firm is called as Purchase consideration. Due to certain procedural difficulties there is time gap between takeover of business of sole trading concern or partnership firm and Joint Stock Company. Period from date of taken over to date of incorporation is known as PRE INCORPORATION PERIOD whereas period from date of incorporation to year end is called as POST INCORPORATION PERIOD.
Profit Prior to Incorporation (PPI) NOTES Prepare Trading Account for the entire period to find out GROSS PROFIT. IF GROSS PROFIT is already given in question no need to prepare Trading Account. Directly prepare Profit and Loss Account in Columnar form. GROSS PROFIT is allocated in Sales Ratio. When Closing Stock as on date of incorporation as well as date of year end is given in question, then prepare Trading Account in columnar form showing pre incorporation and post incorporation and find out GP separately. While preparing P/L Account in columnar form, it includes Particular, Basis of Allocation, Pre incorporation period and Post incorporation period columns. All the expenses or incomes are allocated on basis of Time Ratio, Sales Ratio, Purchase Ratio and Specific Ratio.
Profit Prior to Incorporation (PPI) Time Ratio:- Salary and Wages, Rent Rates and Taxes, Telephone Charges, Printing and stationary, Audit Fees, Sundry Expenses, Insurance Premium, All Fixed Expenses, Administrative Expenses, Electricity Charges, Depreciation, Legal Charges, Lighting and Heating Expenses etc. Sales Ratio:- Selling and distribution Expenses, Carriage Outward, Commission on sale, Showroom Expenses, Bad Debts, Sales Promotion Expenses, Gross Profit, All Variable Expenses, Salesman Salary or Commission, Travelling Expenses, Trade fair and Exhibition Expenses, Discount Allowed. Free Sample or Advertisement Expenses etc. Purchase Ratio:- Only Discount Received and Carriage Inward is allocated in Purchase Ratio.
Profit Prior to Incorporation (PPI) Specific Ratio:- All those expenses or incomes related to Sole Trading Concern or Partnership Firm are directly shown in Pre incorporation period column only. Example:- Interest to Vendor, Salary to Partner, Interest on Drawing etc. All those expenses or incomes related to Joint Stock Company are directly shown in Post incorporation period column only. Example:- Goodwill written off, Preliminary Expenses written off, Share issue expenses written off, Discount on issue of shares or debentures, Fees to Director , Salary to Director, Debenture Interest and Share Transfer Fees received etc.
Thank You!! Thank You!! Assistant Prof. Pradeep H. Tawade DEPARTMENT OF ACCOUNTANCY, NSS College of Commerce & Eco. Tardeo, Mumbai-34 Email ID pradeeptawade26@yahoo.com Mobile No. 9619491859
