Accounting Procedure:

The accounting treatment is divided into two parts namely

1. Books of vendor company and
2. Books of purchasing company
Books of vendor company: To close the books of the company going into
liquidation. Realization account should be opened. The following entries should
be passed in the books of vendor.
1. For transfer of assets taken over by the purchasing company:
Realization Account
Dr.
To Individual Asset Accounts
(at book values)
(being the assets taken over by the purchasing company transferred to
realization account)
Note:
a) The following assets appearing on the asset side should not be
transferred to
realization account
(i) Profit and Loss Account (Dr. balance); (ii) Preliminary expenses
(iii) Discount on issue of shares (iv) Discount on issue of debentures.
These should be directly transferred to shareholders account
b) If the some of the assets like cash in hand, cash at bank, stock, etc., are
not
taken over by the purchasing company, then they should not be
transferred
to realization account.
c) Goodwill even though, not taken over by the purchasing company should
be transferred to realization account.
2. For transfer of liabilities taken over by purchasing company:
Liabilities account by
Dr. (at book value)
To Realisation Account
(Being the liabilities taken over by purchasing company transferred to
Realization account)
Note:
i)
Accumulated profits should not be transferred to
Realisation account
ii)
Share capital should not be transferred to Realisation
account
iii)
Liabilities which are not taken over by the purchasing
company should not be transferred to realization
account.
iv)
Liabilities which the purchasing company agrees to pay
out should not be transferred to realization account.
v)
Debentures should not be transferred to realization
account company directly.
vi)
If asset like debtors is transferred to realization account,
its provision should not be transferred to realization
account (Debit provision for doubtful debts account
credit realization account).
3. For purchase consideration due from purchasing company:
Purchasing Company Account
Dr.
To Realization Account
(Being the purchase consideration payable by purchasing company)
4. For receiving the purchasing consideration from purchasing
company:
Bank or Cash Account
Dr.
Shares in Purchasing company Account
Dr.
Debentures in purchasing Company Account Dr.
To Purchase Company Account
(Being the purchase consideration received)
5. For liquidation expenses (When the vendor company bears):
Realization Account
Dr.

To Bank Account
(Being the liquidation expenses paid)
6. When liquidation expenses is to be borne by purchasing company
and included in purchasing consideration:
Realization Account
Dr.
To Bank Account
(Being the expenses paid)
7. When liquidation expenses are paid by purchasing company in
addition to purchase consideration (not included in purchase
consideration)
i) Purchasing company Account
Dr.
To Bank Account
(Being the expenses paid on behalf of purchasing company)
ii) When the money received from purchasing company relating to
liquidation expenses
Bank Account
Dr.
To Purchasing Company Account
(Being money received from purchasing company)
8. For assets sold not taken over by the purchasing company and any
loss sustained there on:
Bank Account
Dr.
Realization Account
Dr.
To Asset Account
(Being the asset not taken over by the purchasing company is sold)
9. For assets sold not taken over by purchasing company and profit
earned thereon:
Bank Account
Dr.
To Asset Account
To Realisation Account
(Being the asset sold not taken over by purchasing company and
profit earned thereon)
10.For payment of other liabilities not taken over by the purchasing
company:
Liabilities Account
Dr.
To Bank Account
(Being the liabilities not taken over by purchasing company paid)
11.For Transfer of debentures to debentureholders:
Debentures Account
Dr.
To Debentureholders Account
(Being the transfer of debentures to debenture holders)
12.For redemption of debentures:
Debentureholders Account
Dr.
To Bank Account
To Debentures in Purchasing Company Account
13.If any premium is paid to debentureholders in discharging of
debentures:
Realization Account
Dr.
To Debentureholders Account
(Being the premium paid on debentures transferred to realization
account)
14.For transfer of Equity share capital and accumulated profits to
shareholders:
Equity Share Capital Account
Dr.
Profit and Loss Account (Cr balance)
Dr.
General Reserve Account
Dr.
Dividend Equalization Reserve AccountDr.
Debenture Redemption fund Account Dr.
Accident Compensation fund Account Dr.
(to the extent not denote liability)
Share Premium Account
Dr.

Workmen Compensation Account

Dr.
Investment fluctuation fund Account Dr.
Any other Accumulated profit Account Dr.
To Shareholders Account
(Being the share capital and accumulated profits and reserves
transferred to shareholders)
15.For transfer of accumulated losses and expenses not written off to
shareholders:
Equity shareholders Account
Dr.
To Profit and Loss Account (Dr. Balance)
To Preliminary expenses Account
To Discount on issue of shares Account
To Discount on issue of Debentures Account
(being accumulated losses and expenses transferred to equity
shareholders)
16.For Transfer of profit on realization to equity shareholders:
Realization Account
Dr.
To Equity Shareholders Account
(Being the profit on realization transferred to shareholders)
(ii) If the realization account shows loss
Equity shareholders Account
Dr.
To Realization Account
(Being the loss on realization transferred to equity shareholders)
17.For paying equity shareholders:
Equity shareholders Account
Dr.
To Bank Account
To Shares in purchasing company Account
To Debentures in purchasing company Account
(Being equity shareholders paid)
Preference shares: Relating to preference shares, it is advised to note
the
Following:
i)
For transfer of preference share capital to preference
shareholders Account:
Preference share Capital Account
Dr.
To Preference shareholders Account
(Being the preference share capital transferred to preference
share holders)
ii)
If arrears of dividend are to be paid to preference shareholders:
Realisation Account
Dr.
To Preference shareholders Account
(Being the arrears of dividend paid to preference
shareholders)
If preference shareholders have agreed to get less than the amount of
capital
Preference shareholders Account
Dr.
To Realisation Account
(Being the amount foregone by the shareholders transferred to
relaisation account)
iii)
For payment of preference shareholders:
Preference Shareholders Account
Dr.
To Bank Account
To Shares in purchasing company Account
(Being the preference shareholders paid)
Books of Purchasing Company:1. For purchase of business:
Business Purchase Account
Dr.
To Liquidator of Vendor Company Account
(Being the purchase of business)
2. For recording assets and liabilities taken over

Various Assets Account

Dr. (Individually with agreed

values)
To liabilities Account
(individually with agreed values)
To Business purchase Account (With purchase consideration)
(being the assets and liabilities taken over from vendor company
recorded)
Note 1: If credit is more than the debit, the difference is debited to
goodwill
account.
2: If Debit is more than the credit, the difference is credited to capital
reserve account.
3. For payment of purchase consideration to the liquidator of vendor
company
Liquidator of vendor company Account
Dr.
To Share Capital Account
To Debentures Account
To Bank Account
(Being purchase consideration paid)
4. For payment of liquidation expenses of vendor company:
i)
If it is included in purchase consideration no entry is required.
ii)
If it is not included in purchase consideration the following entry
is to be passed.
Good will Account
Dr.
To Bank Account
(Being the liquidation expenses of vendor company paid)
Formation Expenses: In the case of external reconstruction or amalgamation,
the formation of a new company, the purchasing company may have its own
formation expenses. On payment of such expenses the following entry is to be
passed.
Preliminary expenses Account
Dr.
To Bank Account
(Being the formation expenses paid)
Note:
1. Accident fund and workmen compensation fund: These are the funds
created with specific purpose i.e. to meet any liability in future. If there is
no possibility of arising any liability on these funds, they represent
accumulated profits and should be transferred to shareholders. However,
at the time of liquidation if there is some liability on these accounts, they
must be first be met out of these funds and the balance of only treated as
profits. If any liability arise on these accounts the following entries should
be passed.
Entry for recording liability:
Accident fund or workmen compensation fund account
Dr.
To Outstanding liability account
(Being the outstanding liability recorded)
Entry for discharging the liability:
Outstanding liability account
Dr.
To Bank Account
(Being the outstanding liability paid)
2. Reserve for doubtful doubts:
Provision for doubtful doubts must be treated as liability and be
transferred
to purchasing company along with the debtors taken over by it.
3. Accumulated profits/losses: All accumulated profits and losses must be
transferred to shareholders account.
4. When the purchasing company issues any shares as a part of purchase
consideration, these shares should be valued at an agreed value (paid up
value or market value).