CONVERSION INTO A COMPANY
The partners may convert their business and trade in form of a company. This may be due to some of the advantages a company has over a partnership. E.g. Limited liability of members and the number of members of a company can be more than twenty with an exception to professional firms.
The objective of accounting for conversions is to ensure that nay profit or loss on conversion is reported and shared between the partners and the opening position of the company is ascertained.
The procedure therefore involves closing off the books of the partnership and preparing the opening balance sheet of the company. A realization account thus used to facilitate the process and the balance on the realization account is the profit or loss on conversion which is closed off to the partners capital accounts.
The book values of the assets being taken over by the company will be posted to the debit side and the liabilities will be posted to the credit side. The purchase consideration paid by the company to the partners will be posted on the credit side of the realization account. If the expenses of formation are to be borne of the partners or the partnership, then this will be posted to the debit side of the realization account.