Financial Accounting · Conversion of Partnership Firm into a Company and Sale of Partnership Firm to a Company

Distribution of Shares and Closing of Partners' Accounts

Updated 10 October 2026 · Fact-checked

After a firm is sold to a company, the Realisation Account is closed and the shares, debentures and cash received are credited to the partners. Each partner's final capital balance is compared with the value of securities due to them. The difference is settled in cash, and the partners' accounts then close to nil.

Understand Distribution of Shares and Closing of Partners' Accounts

When a firm sells its business to a company, the company pays the purchase consideration in shares, debentures, cash or a mix. The firm does not keep these. It passes them to the partners and then closes its books.

The firm first records the sale in the Realisation Account. Assets taken over are debited and liabilities taken over are credited. The purchase consideration is credited to the Realisation A/c and debited to the Purchasers (Company) A/c. Expenses of realisation and any profit or loss are then dealt with. The profit or loss on realisation is shared by the partners in their profit sharing ratio and moved to their capital accounts.

Next, partners' capital accounts show what each partner is owed after adding the share of realisation profit, reserves, and so on, and after deducting losses, drawings and any loans due from them. This is each partner's final capital balance.

Now the consideration is handed over. The question usually says how: either in the profit sharing ratio or in the capital ratio (the ratio of final capital balances), or in a stated ratio. The securities received from the company are debited to Shares/Debentures in Company A/c and credited to Purchasers A/c. When they are handed over, each partner's capital account is debited and the Shares/Debentures in Company A/c is credited.

Often the securities due do not match the final capital balance. The partner then pays in cash or receives cash to settle the gap. Once every partner's capital account is nil, the firm's books are closed.

Key rules to remember

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.

How to solve Distribution of Shares and Closing of Partners' Accounts questions

Use this order for any question on distributing consideration and closing partners' accounts.

1Compute the purchase consideration and note its parts: shares, debentures and cash.
2Prepare the Realisation Account. Debit assets taken over, credit liabilities taken over, credit the purchase consideration, and record the realisation expenses. Find the profit or loss.
3Share the realisation profit or loss among partners in the profit sharing ratio. Transfer reserves and accumulated profits or losses to partners' capital accounts in the same ratio.
4Prepare the Purchasers (Company) Account. Debit it with the consideration. Credit it as shares, debentures and cash are received, with the matching debits going to Shares/Debentures in Company A/c and Bank A/c.
5Find each partner's final capital balance. Then work out each partner's share of shares and debentures in the ratio the question states, usually profit sharing or capital.
6Debit each partner's capital account with the securities received. Settle the difference by cash received or paid to make each capital account nil.
7Check that the Cash/Bank Account closes, and that all accounts of the firm are nil.

Quickest way: Capital-first cash settlement

When to use it: Use when the question gives opening balances and asks for the distribution of shares and the cash settlement.

List the opening capitals in one row per partner. Add reserves and realisation profit in the profit sharing ratio to reach final capital.
Split the shares and debentures in the ratio asked and put the values below the final capital.
Subtract securities from final capital to get cash due or payable.
Check the cash: opening bank + cash received from the company + cash brought in by partners − realisation expenses and liabilities paid must equal the cash paid to partners. If it fails, recheck the realisation profit.

Common mistakes in Distribution of Shares and Closing of Partners' Accounts

Distributing securities in the opening capital ratio instead of the final capital ratio
Students read 'capital ratio' and use the figures given in the balance sheet.
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
Students focus on the securities and skip the capital accounts.
Fix: Always credit reserves, profit and loss balances and realisation profit to partners in the profit sharing ratio first.
Valuing shares at face value when they are issued at a premium
The purchase consideration is in terms of issue price, but students use face value for distribution.
Fix: Distribute securities at the value in the purchase consideration, which is the issue price including any premium. The premium is part of the value credited to partners. The number of shares to each partner is that value divided by the issue price, not by the face value.
Treating the cash difference with the wrong sign
Students mix up whether a partner pays cash or receives it.
Fix: If capital balance exceeds securities, the firm pays the partner. If securities exceed capital balance, the partner brings in cash.
Leaving liabilities not taken over unpaid when closing the books
Students forget that the firm must pay liabilities the company did not take over.
Fix: Transfer the liability to the credit side of the Realisation Account, then pay it off by debiting the Realisation Account and crediting Bank. Any discount or excess on settlement goes to the Realisation Account. Do this before closing the accounts.

Worked examples

Example 1

A and B share profits 3:2. Their firm's final capitals before distribution are A ₹4,20,000 and B ₹2,80,000 (after all adjustments and realisation profit). The company's purchase consideration of ₹7,00,000 was settled by 50,000 equity shares of ₹10 each at par (₹5,00,000) and ₹2,00,000 in cash. The shares are to be distributed in the capital ratio. Show the distribution and close the partners' capital accounts.

Show the solution

Final capital ratio = 4,20,000 : 2,80,000 = 3 : 2.
Shares to A = 5,00,000 × 3/5 = ₹3,00,000 (30,000 shares). Shares to B = 5,00,000 × 2/5 = ₹2,00,000 (20,000 shares).
Cash due to A = 4,20,000 − 3,00,000 = ₹1,20,000.
Cash due to B = 2,80,000 − 2,00,000 = ₹80,000.
Total cash paid = 1,20,000 + 80,000 = ₹2,00,000, which equals the cash received from the company.
Journal: Partners' Capital A/c Dr (A ₹4,20,000; B ₹2,80,000) to Equity Shares in the Company A/c ₹5,00,000 and to Bank A/c ₹2,00,000. After this, both capital accounts are nil.

Answer: A gets 30,000 shares and ₹1,20,000 cash. B gets 20,000 shares and ₹80,000 cash. Both capital accounts close to nil.

Example 2

X and Y are partners sharing profits 2:1. Their final capitals, derived after the realisation profit and all other adjustments, are X ₹3,50,000 and Y ₹1,90,000. The firm has no other cash and no liabilities left to pay. The company pays a purchase consideration of ₹4,50,000 in shares of ₹10 each at par, and ₹90,000 in cash. The shares are to be distributed in the profit sharing ratio. Show the settlement.

Show the solution

The final capitals already include the realisation profit and all adjustments. The firm has no other cash and no liabilities to pay, so the only cash available to pay partners is the ₹90,000 received from the company.
Here the securities and cash received from the company total 4,50,000 + 90,000 = ₹5,40,000, and the capitals total 3,50,000 + 1,90,000 = ₹5,40,000. They match only because the firm has no other cash or liabilities in this question. This is not a rule that must hold in every problem.
Shares to X = 4,50,000 × 2/3 = ₹3,00,000 (30,000 shares). Shares to Y = 4,50,000 × 1/3 = ₹1,50,000 (15,000 shares).
Cash due to X = 3,50,000 − 3,00,000 = ₹50,000.
Cash due to Y = 1,90,000 − 1,50,000 = ₹40,000.
Total cash paid = 50,000 + 40,000 = ₹90,000, which equals the cash received from the company, so the Bank A/c closes to nil.
Journal: Partners' Capital A/c Dr ₹5,40,000 to Shares in the Company A/c ₹4,50,000 and to Bank A/c ₹90,000. All accounts close.

Answer: X gets 30,000 shares and ₹50,000 cash. Y gets 15,000 shares and ₹40,000 cash. The total cash paid ₹90,000 matches the cash received.

Exam tips

Read the distribution basis in the question first: profit sharing ratio, capital ratio, or a stated ratio. It decides the whole table.
Show a neat partners' capital account with all columns. Step marks are given for each adjustment.
Check that the cash paid to partners equals the cash available. A mismatch shows an earlier error.
Write the journal entry for the distribution and for the cash settlement. Most written answers need both.
In MCQs, spot the trap: use final capital, not opening capital, and include premium in the value of shares. The number of shares is that value divided by the issue price, not the face value.

Practice questions from Conversion of Partnership Firm into a Company and Sale of Partnership Firm to a Company

Distribution of Shares and Closing of Partners' Accounts: frequently asked questions

How are shares distributed among partners after a firm is sold to a company?

The shares are distributed in the ratio the question states, usually the profit sharing ratio or the final capital ratio. Each partner's capital account is debited with the value received. Any difference is settled in cash.

What is the capital ratio in these problems?

It is the ratio of the partners' final capital balances after adjusting reserves, realisation profit or loss and drawings. Use opening capitals only if the question clearly says so.

How do I settle the difference between securities and capital balance?

Subtract the value of securities from the final capital balance. If the result is positive, the firm pays cash to the partner. If it is negative, the partner brings in cash.

When is a partner's capital account closed?

It is closed when it is debited with the securities and cash paid to the partner, with the credits going to the Shares in Company A/c and the Bank A/c. This leaves a nil balance. The Purchasers A/c is closed separately by the receipt of the consideration from the company. Then the firm's books are closed.