Incorporation Entries in the Books of Purchasing Company

When a purchasing company acquires the assets and liabilities of a partnership firm or another company, incorporation entries are made in the books of the purchasing company. These entries serve to record the assets and liabilities taken over from the vendor (the selling company or firm) and to reflect the purchase consideration (which may be paid in cash, shares, debentures, or a combination thereof).

Steps Involved in Incorporation Entries:

  • Recording the Assets and Liabilities Taken Over:

The purchasing company needs to record all the assets (such as property, plant, equipment, inventory, receivables) and liabilities (like loans, payables, provisions) that it has taken over. These are recorded at their respective agreed values, which may be based on the purchase agreement or a valuation report.

  • Recording Purchase Consideration:

The purchase consideration, which is the total amount payable to the selling company (or its partners), is recorded as a liability in the purchasing company’s books. This consideration may be paid in cash, shares, debentures, or a combination of these.

  • Settling the Purchase Consideration:

Once the purchase consideration is settled (whether in cash, shares, or debentures), appropriate journal entries are passed.

Incorporation Entries – Journal Entries

The journal entries made by the purchasing company during the incorporation process can be summarized in the table below:

Date Particulars Debit (₹) Credit (₹) Narration
1 Assets A/c Dr. ₹XX
To Vendor’s Realization A/c ₹XX (Being assets taken over from the vendor at agreed values)
2 Vendor’s Realization A/c Dr. ₹XX
To Liabilities A/c ₹XX (Being liabilities of the vendor taken over)
3 Purchase Consideration A/c Dr. ₹XX
To Vendor’s Realization A/c ₹XX (Being purchase consideration payable to the vendor)
4 Purchase Consideration A/c Dr. ₹XX
To Cash/Bank A/c ₹XX (Being part of purchase consideration paid in cash)
5 Purchase Consideration A/c Dr. ₹XX
To Shares in Purchasing Company A/c ₹XX (Being purchase consideration settled through shares issued)
6 Purchase Consideration A/c Dr. ₹XX
To Debentures in Purchasing Company A/c ₹XX (Being purchase consideration settled through debentures issued)
7 Vendor’s Realization A/c Dr. ₹XX
To Capital A/c ₹XX (Being final settlement of purchase consideration with the vendor)

Explanation of Journal Entries:

  • Recording Assets Taken Over:

When assets are transferred from the vendor to the purchasing company, the assets are recorded in the purchasing company’s books at their agreed values. This is done by debiting the respective asset accounts and crediting the vendor’s realization account.

  • Recording Liabilities Taken Over:

Similarly, liabilities of the vendor (such as loans, creditors, provisions) are transferred to the purchasing company. These are debited to the vendor’s realization account and credited to the respective liability accounts.

  • Purchase Consideration Payable:

The total amount of purchase consideration payable to the vendor is recorded in the purchasing company’s books as a liability. This is done by debiting the purchase consideration account and crediting the vendor’s realization account.

  • Payment of Purchase Consideration in Cash:

When part of the purchase consideration is paid in cash, the bank account is debited and the purchase consideration account is credited.

  • Payment of Purchase Consideration through Shares:

If part of the purchase consideration is settled through the issuance of shares, the respective share capital account is credited.

  • Payment of Purchase Consideration through Debentures:

Similarly, if debentures are issued to settle the purchase consideration, the debenture account is credited.

  • Final Settlement with Vendor:

After all assets and liabilities are transferred, the purchase consideration is fully paid. The vendor’s realization account is closed by transferring the balance to the capital account.

Leave a Reply

error: Content is protected !!