Preparation of Ledger Accounts in the Books of Vendor

When a partnership firm is converted into a limited company, the firm transfers its assets and liabilities to the purchasing company. The vendor, i.e., the partnership firm, prepares certain ledger accounts to record the closure of its books.

1. Realization Account: To record the sale of assets and liabilities.
2. Purchasing Company Account: To record the purchase consideration receivable from the purchasing company.
3. Partners’ Capital Account: To account for partners’ balances after transferring assets and liabilities.
4. Bank Account: To record cash received and payments made during the process.

Steps in Preparing Ledger Accounts:

• Realization Account

All assets except cash and fictitious assets (e.g., goodwill) are transferred to the realization account. Liabilities are also transferred here. The account is closed by transferring the net profit or loss to the partners’ capital accounts.

• Purchasing Company Account

This account records the purchase consideration due from the purchasing company and its subsequent receipt in cash, shares, or debentures.

• Partners’ Capital Account

The net profit or loss from the realization account is transferred here, along with any settlement made in cash or through shares and debentures.

• Bank Account

Any cash received as part of the purchase consideration or payments made for expenses is recorded here.

Journal Entries:

Explanation of Journal Entries:

• Transfer of Assets:

All assets (except cash) are transferred to the realization account at their book value.

• Transfer of Liabilities:

All external liabilities are transferred to the realization account.

• Purchase Consideration Receivable:

The purchase consideration receivable from the purchasing company is recorded by debiting the purchasing company account and crediting the realization account.

• Receipt of Cash:

When cash is received from the purchasing company, it is debited to the bank account, and the purchasing company account is credited.

• Receipt of Shares and Debentures:

If part of the purchase consideration is received in the form of shares and debentures, these accounts are debited, and the purchasing company account is credited.

• Realization Expenses:

Any realization expenses paid by the firm are recorded by debiting the realization account and crediting the bank account.

• Profit or Loss on Realization:

The profit or loss on realization is transferred to the partners’ capital accounts in their profit-sharing ratio.

• Settlement of Partners’ Accounts:

The partners’ capital accounts are settled by transferring the balance to the bank account, shares, or debentures, depending on the mode of settlement.