by When a company is formed during the course of a financial year, it often takes over a running business. The profits earned before the date of incorporation are termed pre-incorporation profits, and the profits earned after incorporation are known as post-incorporation profits.
Pre-incorporation profit is treated as a capital profit (not available for dividend).
To ascertain both, we use the vertical format of the Statement of Profit and Loss as per Schedule III of the Companies Act, 2013 and split items based on Time Ratio, Sales Ratio, or Weighted Ratio, depending on the nature of income or expense.
Format of Statement of Profit and Loss (Vertical Format)
As per Schedule III – Division I of the Companies Act, 2013, applicable to non-Ind AS companies.
ABC Ltd.
Statement of Profit and Loss for the year ended 31st March 2025
(Figures in ₹)
| Particulars | Total | Pre-incorporation | Post-incorporation |
|---|---|---|---|
| I. Revenue from operations | 10,00,000 | 2,50,000 | 7,50,000 |
| II. Other Income | 50,000 | 5,000 | 45,000 |
| III. Total Revenue (I + II) | 10,50,000 | 2,55,000 | 7,95,000 |
| – | – | – | – |
| IV. Expenses: | – | – | – |
| (a) Cost of materials consumed | 3,00,000 | 75,000 | 2,25,000 |
| (b) Purchase of stock-in-trade | 50,000 | 15,000 | 35,000 |
| (c) Changes in inventories of finished goods | 30,000 | 8,000 | 22,000 |
| (d) Employee benefit expenses | 1,00,000 | 20,000 | 80,000 |
| (e) Finance costs (Interest on debentures, etc.) | 40,000 | – | 40,000 |
| (f) Depreciation and amortisation expenses | 60,000 | – | 60,000 |
| (g) Other expenses (rent, admin, etc.) | 1,20,000 | 40,000 | 80,000 |
| Total Expenses (IV) | 7,00,000 | 1,58,000 | 5,42,000 |
| V. Profit before tax (III – IV) | 3,50,000 | 97,000 | 2,53,000 |
| Less: Income Tax (only on post-incorp. profit) | – | 65,000 | |
| VI. Profit for the year | 3,50,000 | 97,000 | 1,88,000 |
Treatment of Pre- and Post-incorporation Profit
| Particulars | Pre-incorporation | Post-incorporation |
|---|---|---|
| Classification | Capital profit | Revenue profit |
| Transfer to | Capital Reserve (in Balance Sheet) | Retained earnings / Dividend |
| Income Tax applicability | Not taxable | Taxable |
| Use | Cannot be distributed as dividend | Can be distributed |
Basis of Allocation:
| Item | Basis | Remarks |
|---|---|---|
| Sales | Sales Ratio | Based on turnover before and after incorporation |
| Cost of Goods Sold | Sales Ratio | Linked to volume of sales |
| Administrative Expenses | Time Ratio | Incurred uniformly |
| Salaries, Rent | Time Ratio | Fixed and recurring expenses |
| Selling and Distribution | Sales Ratio | Sales-based allocation |
| Depreciation | Post-incorporation | Applied only after incorporation |
| Interest on Capital/Debentures | Post-incorporation | Only after company is formed |
2 thoughts on “Ascertainment of Pre-incorporation and Post-incorporation Profits by Preparing Statement of Profit and Loss (Vertical Format) as per Schedule III of Companies Act, 2013”