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

When a partnership firm sells its entire business to a company for a purchase consideration, which account is debited in the firm's books to record the amount due from the purchasing company?

The Purchasing Company's Account is debited. The firm becomes entitled to receive the purchase consideration from the company, so a receivable is created against the purchaser, with Realisation Account credited for the same amount.

  1. ARealisation Account
  2. BPurchasing Company's AccountCorrect
  3. CPartners' Capital Accounts
  4. DShare Capital Account

Explanation

On sale of the business, the firm records a receivable from the purchaser. The entry is Purchasing Company A/c Dr. to Realisation A/c for the purchase consideration. Realisation is credited, not debited, and the partners' capital accounts are affected only when the profit or loss on realisation is transferred.

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