Question

Sale of partnership firm to company accounting problems

Answer 1

Often, a partnership firm converts itself into a joint stock limited company or sells its business to an existing one.  Realisation Account will be opened and assets transferred to it, so also liabilities (but not if liabilities are not assumed by the company).

Whatever the company pays as consideration will be credited to the Realisation Account. If expenses are incurred by the firm, the amount will be debited to the Realisation Account. If the creditors are taken over by the company, no further treatment is necessary beyond transferring them to the credit of Realisation Account; but if creditors are to be paid by the firm, the actual amount paid to them will be debited to liability account concerned; the difference between the book figure and the amount actually paid will be transferred to Realisation Account. The profit or’ loss on realisation will be transferred to the capital accounts in the profit-sharing ratio.

When a firm admits a new partner with a view to secure additional capital or better business skill, it is known as admission of partner in an existing firm. In the same manner, two or more independent firms, engaged in identical business activities, may combine their activities into a New Firm and this combination or consolidation is known as Amalgamation of Firms. Thus, two or more firms are said to amalgamate when they join together, pool their resources and run the business into a composite form, as a new firm – as a single integrated unit.