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Friday, September 17, 2010

Conversion of a Partnership into a Limited Company

Frequently a private business is converted into a limited company. The partners give up their partnership stakes in exchange for shares in the company. This conversion is usually seen as a necessary stage of development of the growth of the business. A larger stage may see the conversion of the private company into a public limited company.

Accounting entries

Such a transaction will necessitate the books of the firm being closed, and new books being opened for the company. The following will be the procedure for closing the firms’ books:
  1. Open the realization account, and transfer to the debit thereof the book value of the assets taken over by the purchasing company, crediting the various asset accounts.
  2. Transfer to the credit of the realization account the liabilities assumed by the company, debiting the respective liability accounts.
  3. Debit the purchasing company’s account, and credit realization account with the agreed purchase price of the net assets taken over by the company. (The term net assets mean the assets less the liabilities).
  4. The balance on the realization account, after debiting expenses, will represent the profit or loss on realization of the net assets, and will be transferred to the partners’ capital accounts in the proportions in which they share profits and losses.
  5. Debit the accounts of the assets received as purchase consideration, and credit the purchasing company’s account.
  6. Pay off any liabilities not taken over by the new company, crediting cash and debiting the liability accounts.
  7. Distribute between t6he partners the shares, debentures and so on received from the company in the proportions agreed between them, debiting their capital accounts and crediting the accounts of the shares, debentures and so on.
  8. Any balances remaining on capital accounts must now be cleared by the withdrawal or payment on of cash.

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