Conversion of Partnership Firm into a Company and Sale of Partnership Firm to a Company: formula sheet

Key formulas

Purchase consideration (net assets method)

PC = Agreed value of assets taken over − Liabilities taken over

Include goodwill only if the agreement values it. Leave out assets and liabilities that the company does not take over.

Purchase consideration (payment method)

PC = Shares (number × issue price) + Debentures + Cash paid to the firm

Use the issue price, including any premium, not just the face value. The two methods should give the same PC.

Profit or loss on realisation

Profit = Credits − Debits, where Credits = PC + Liabilities transferred + Cash from assets not taken over, and Debits = Book value of assets transferred + Realisation expenses

PC here is the net amount the company pays. Liabilities taken over are credited only as the transfer of the liability, and the assets are debited at gross book value. A positive result is a profit and a negative result is a loss. Share it in the old profit sharing ratio. As a separate cross-check, use the net form: Profit = PC + Cash from assets not taken over − (Book value of assets transferred − Liabilities transferred) − Expenses. Use one form or the other to get the answer, never both added together.

Partners' final settlement

Opening capital ± Realisation profit/loss ± Other adjustments = Amount due to partner

The amount due is settled by shares, debentures and cash received. Total settlement must equal total amount due.

Company's goodwill or capital reserve

PC − Agreed value of net assets taken over = Goodwill (if positive) or Capital reserve (if negative)

Positive means the company paid more than the net assets are worth. Negative means it paid less.

Number of shares issued

Shares = Amount to be paid in shares ÷ Issue price per share

With shares issued at a premium, divide by the issue price. Share capital is the number × face value, and the premium goes to Securities Premium.

Net assets method

Purchase consideration = Agreed value of assets taken over − Liabilities taken over

Use the agreed (revalued) values, not book values, if the question gives them. Include goodwill if the company agrees to pay for it.

Payments method

Purchase consideration = Shares (number × issue price) + Debentures + Cash and other payments

Shares are counted at issue price including premium, and net of discount if issued at a discount.

Shares issued

Number of shares = Amount payable in shares ÷ Issue price per share

Divide by issue price, not face value, when the amount is fixed in rupees.

Cross-check

Net assets method figure = Payments method figure

A mismatch means an asset, liability or payment has been missed.

Profit or loss on realisation

Credits (purchase consideration + liabilities and assets taken by partners, if any) − Debits (assets transferred + realisation expenses)

Rearranged the same way as the account balance. A credit balance is profit, a debit balance is loss. Share it in the profit sharing ratio.

Transfer of assets

Realisation A/c Dr. (book value) To Assets taken over

Use book values. Exclude cash and bank if the company does not take them over. Show the assets not taken over separately.

Transfer of liabilities

Liabilities taken over Dr. To Realisation A/c

Credit the book value of the liabilities the company assumes.

Purchase consideration due

Purchaser Company A/c Dr. To Realisation A/c

Record the agreed consideration in total, whether in shares, debentures or cash.

Receipt of consideration

Shares in Company A/c / Debentures A/c / Bank A/c Dr. To Purchaser Company A/c

Debit each type of consideration at the value stated in the agreement.

Realisation expenses paid by the firm

Realisation A/c Dr. To Bank A/c

If a partner pays them, credit that partner's capital account. If the company bears them, make no entry.

Profit or loss transfer

Realisation A/c Dr. To Partners' Capital A/cs (profit) or the reverse (loss)

Share it in the profit sharing ratio.

Closing partners' capital accounts

Partners' Capital A/cs Dr. To Shares in Company / Debentures / Bank

Close each capital account fully using the consideration received.

Net assets taken over

Net assets = Agreed value of assets taken over − Liabilities taken over

Use agreed values in the agreement, not the firm's book values, if they differ. Exclude assets and liabilities not taken over.

Goodwill

Goodwill = Purchase consideration − Net assets taken over (when positive)

Debit Goodwill A/c in the entry for purchase.

Capital reserve

Capital reserve = Net assets taken over − Purchase consideration (when positive)

Credit Capital Reserve A/c. It appears under Reserves and Surplus.

Business purchase entry

Assets (each) Dr; Goodwill Dr (if any) → To Liabilities (each); To Vendor / Purchase Consideration Payable; To Capital Reserve (if any)

Total debits must equal total credits.

Settlement by shares at par or premium

Number of shares = Amount to be settled in shares ÷ Issue price per share

Credit Share Capital at face value and Securities Premium for the excess. Shares cannot be issued at a discount (Section 53, Companies Act, 2013). Only debentures may be issued at a discount, debited to Discount on Issue of Debentures.

Settlement by shares or debentures

Vendor Dr → To Share Capital; To Securities Premium; To Bank / Debentures

Debit vendor with the full consideration payable.

Final capital balance

Opening capital + Reserves share + Realisation profit share (or − loss share) − Drawings ± other adjustments

Compute this for each partner before distributing securities.

Distribution in profit sharing ratio

Partner's securities = Total shares (or debentures) × Partner's profit share

Use only when the question says distribute in profit sharing ratio.

Distribution in capital ratio

Partner's securities = Total shares (or debentures) × Partner's final capital ÷ Total final capital

Use the final capital after realisation profit, not the opening capital, unless the question states otherwise.

Cash settlement per partner

Cash = Final capital balance − Value of securities received

Positive means the firm pays the partner; negative means the partner pays the firm.

Closing check

Opening bank + Cash received from the company + Cash brought in by partners − Realisation expenses and liabilities paid = Cash paid to partners

After all payments the Bank A/c must close to nil. If it does not, recheck the realisation profit, the payment of liabilities not taken over, and the cash settlements.

Quick revision

• Purchase consideration is what the company agrees to pay the firm for the business taken over.
• Net payment method: add up shares, debentures, cash and other payments to the firm.
• Net assets method: agreed value of assets taken over minus liabilities taken over.
• Shares are valued at issue price, so premium or discount affects the consideration.
• In the firm's books, assets and liabilities taken over go to Realisation Account.
• The firm debits the Purchasing Company Account with the consideration and credits Realisation Account.
• Assets not taken over are dealt with by the firm separately, not through the company.
• Realisation profit or loss is shared by partners in their profit sharing ratio.
• In the company's books, consideration above net assets is goodwill; below is capital reserve.
• Credit share capital with face value and securities premium with any premium, and debit discount where shares are issued at a discount.
• Partners' capital accounts must close to nil after shares and cash are given.
• The company's Balance Sheet follows Schedule III and must balance.

Common mistakes

• Using agreed values instead of book values on the debit side of the Realisation Account. Fix: In the firm's books, debit assets at book value and credit the PC. The company's books use agreed values.
• Including cash or bank in the PC when the company does not take it over. Fix: Read the takeover clause. If cash is excluded, leave it out of both the PC and the Realisation Account.
• Using book values when the agreement gives revalued values. Fix: Read the notes first and mark each asset with its agreed value before adding.
• Including cash or bank that the company did not take over. Fix: Check the wording for the assets taken. If cash is not mentioned as taken, leave it out.
• Transferring cash and bank, or assets not taken over, to the Realisation Account. Fix: Read the agreement first. Only items the company takes over go to Realisation. Others stay on the books or pass to partners.
• Treating the purchase consideration as a debit to Realisation. Fix: In the firm's books the consideration is what the firm receives, so it is a credit to Realisation and a debit to the Purchaser Company Account.
• Using the firm's book values instead of the agreed values. Fix: Always check the agreement for revalued figures and use those for the company's entries.
• Including assets or liabilities not taken over, such as the firm's cash or partners' loans. Fix: Tick only the items stated as taken over. Anything excluded stays with the firm and has no entry in the company books.
• Distributing securities in the opening capital ratio instead of the final capital ratio Fix: Unless the question says opening capital, work out final capitals after reserves and realisation profit, then use that ratio.
• Forgetting to share reserves and the realisation profit among partners before computing final capital Fix: Always credit reserves, profit and loss balances and realisation profit to partners in the profit sharing ratio first.

Exam tips

• Write the PC calculation as a separate working note. Step marks are given for it even if a later figure is wrong.
• Label the firm's books and the company's books clearly. Mixing them is a frequent way to lose marks.
• In MCQs, check for hidden exclusions such as cash or a particular liability not taken over, and for shares issued at a premium.
• For theory, give reasons for conversion and the difference from amalgamation in short points. A two-column comparison is easy to mark.
• Close with a quick proof: capital balances after realisation equal the shares and cash received.
• Underline every phrase such as "not taken over" or "agreed at" before you start. Each one changes the figure.
• Show both the asset list and the liability list, even if the answer is short. Step marks come from the working.
• For MCQs, test the trap options: book value instead of agreed value, or liabilities not deducted.