Page 9 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Accounting for Companies – II

notes 1.2 accounting treatment

There are two bases for accounting treatment: in the books of the vendor and in the books of the
purchasing company.

1.2.1 accounting treatment: in the Books of vendor

When the business is sold to a public limited company by a sole trader or a partnership firm,
same accounting treatment will be adopted in the books of the vendor as one in the problems
relating to dissolution of partnership or sale of business.
The following entries are recorded in the books of vendor at the time of sale of business:
1. When assets are transferred to realisation account:

Realisation Account Dr.
To Relative Assets Account (with the amount of assets taken over)
(Being assets transferred to realisation account)
2. When liabilities are transferred to realisation A/c:
Various Liabilities Account Dr.
To Realisation Account

(Being transfer of liabilities taken by purchasing company)
3. When winding up expenses are paid:
Realisation Account Dr.
To Bank Account

(Being payment of expenses)
4. When purchase consideration is recorded:
Purchasing Company Dr.
To Realisation Account
(Being purchase price recorded)

5. When the profit on realisation (credit balance of realisation a/c) is transferred
to capital a/c:
Realisation Account Dr.

To Vendor’s Capital Account
(Being transfer of profit on realisation)
6. When general reserve is transferred to capital a/c:
General Reserve Account Dr.
To Vendor’s Capital Account

(Being transfer of general reserve)
7. When purchase consideration is received:
Shares in Purchasing Company Dr.

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