Accounting Procedure:The accounting treatment is divided into two parts namely1. Books of vendor company and 2. Books of purchasing companyBooks 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 accountb) 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 byDr. (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 accountii) Share capital should not be transferred to Realisation accountiii) 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 AccountDr.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 AccountDr.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 AccountDr.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 AccountDr.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 AccountDr.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 AccountDr.Realization AccountDr.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 AccountDr.To Asset AccountTo 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 AccountDr.To Bank Account(Being the liabilities not taken over by purchasing company paid)11. For Transfer of debentures to debentureholders:Debentures AccountDr.To Debentureholders Account(Being the transfer of debentures to debenture holders)12. For redemption of debentures:Debentureholders AccountDr.To Bank AccountTo Debentures in Purchasing Company Account13. If any premium is paid to debentureholders in discharging of debentures:Realization AccountDr.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 AccountDr.Profit and Loss Account (Cr balance)Dr.General Reserve AccountDr.Dividend Equalization Reserve AccountDr.Debenture Redemption fund AccountDr.Accident Compensation fund AccountDr.(to the extent not denote liability)Share Premium AccountDr.Workmen Compensation AccountDr.Investment fluctuation fund AccountDr.Any other Accumulated profit AccountDr.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 AccountDr.To Profit and Loss Account (Dr. Balance)To Preliminary expenses AccountTo Discount on issue of shares AccountTo 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 AccountDr.To Equity Shareholders Account(Being the profit on realization transferred to shareholders)(ii) If the realization account shows lossEquity shareholders AccountDr.To Realization Account(Being the loss on realization transferred to equity shareholders)17. For paying equity shareholders:Equity shareholders AccountDr.To Bank AccountTo Shares in purchasing company AccountTo Debentures in purchasing company Account(Being equity shareholders paid)Preference shares: Relating to preference shares, it is advised to note theFollowing:i) For transfer of preference share capital to preference shareholders Account:Preference share Capital AccountDr.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 AccountDr.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 capitalPreference shareholders AccountDr.To Realisation Account(Being the amount foregone by the shareholders transferred to relaisation account)iii) For payment of preference shareholders:Preference Shareholders AccountDr.To Bank AccountTo Shares in purchasing company Account(Being the preference shareholders paid)Books of Purchasing Company:-1. For purchase of business:Business Purchase AccountDr.To Liquidator of Vendor Company Account(Being the purchase of business)2. For recording assets and liabilities taken overVarious Assets AccountDr. (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 companyLiquidator of vendor company AccountDr.To Share Capital AccountTo Debentures AccountTo 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 AccountDr.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 AccountDr.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 accountDr.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).