Profit Prior to Incorporation

Before a company is incorporated, it may generate profits from its business activities. These profits are earned during the pre-incorporation period and are known as profit prior to incorporation (PPI). PPI represents the income earned by the company before it becomes a legal entity.

Utilization of Profit Prior to Incorporation

The profit prior to incorporation can be utilized in various ways. One common practice is to transfer these profits to different reserves. Reserves are created to set aside a portion of profits for specific purposes and to strengthen the financial position of the company. The three main types of reserves where profit prior to incorporation can be transferred are:

1. General Reserve:
General reserve is a type of reserve created out of profits to meet future contingencies or to strengthen the financial position of the company. It is a free reserve that can be utilized for any purpose deemed fit by the company. The profit prior to incorporation can be transferred to the general reserve to enhance the financial stability of the company and provide a cushion for future uncertainties.

2. Capital Reserve:
Capital reserve is created to record non-operating gains or losses that do not impact the company's day-to-day operations. The profit prior to incorporation can be transferred to the capital reserve if it is considered a non-operating gain. For example, if the company earned a profit from the sale of fixed assets during the pre-incorporation period, this profit can be transferred to the capital reserve.

3. Secret Reserve:
Secret reserve refers to the practice of under-stating profits or over-stating expenses in the financial statements. This is done intentionally to create an undisclosed reserve, which can be utilized in times of financial distress or to manipulate future profits. If the profit prior to incorporation is intentionally hidden or understated, it can be transferred to a secret reserve.

4. Revenue Reserve:
Revenue reserve is created out of revenue profits, which are generated from the normal operations of the company. It represents the retained earnings of the company that can be used for various purposes such as dividend payments, expansion, or research and development. If the profit prior to incorporation is considered a revenue profit, it can be transferred to the revenue reserve.

Conclusion

Profit prior to incorporation can be transferred to different reserves depending on its nature and the company's requirements. These reserves play a crucial role in strengthening the financial position of the company and ensuring its long-term sustainability. By transferring the profit prior to incorporation to reserves such as general reserve, capital reserve, secret reserve, or revenue reserve, the company can effectively manage its financial resources and meet future contingencies.

Capital reserve