All subjects · Accounting · WAC12 Corporate and Management Accounting

Purchase of a business: Realisation and Sundry Shareholders accounts

Edexcel IAL Accounting · WAC12 Corporate and Management Accounting

When one company buys the business of another, the selling (vendor) company closes its books. The Realisation account works out the profit or loss on the sale; the Sundry Shareholders account shows what the vendor's shareholders finally receive.

Practise this in the app: instant marking and a fix for every mistake. Free, no email needed to start.

Practise this lesson

The situation

A purchasing company takes over the assets (and usually the liabilities) of a vendor company in exchange for a purchase consideration: shares in the purchaser, cash, or both. The vendor's shareholders receive the consideration and the vendor company is wound up.

In a merger, two companies combine, often by forming a new company that issues shares to the shareholders of both.

Realisation account

1. Transfer the assets taken over at book value: Dr Realisation, Cr each asset account.

2. Transfer the liabilities taken over: Dr each liability account, Cr Realisation.

3. Record the purchase consideration: Dr Purchaser's account, Cr Realisation.

4. Balance the account: if credits exceed debits there is a profit on realisation: Dr Realisation, Cr Sundry shareholders. A loss goes the other way.

Examiners report that the purchase consideration is often posted to the wrong side, losing marks in both accounts, and that the profit on realisation (and its matching Sundry Shareholders entry) is often left out.

Sundry Shareholders account

This account collects everything owed to the vendor's shareholders:

Cr Share capital and Cr every reserve (transferred from those accounts)
Cr Profit on realisation (or Dr a loss)
Dr Shares in the purchaser and Dr Cash, as the consideration is passed to them.

It closes with no balance. The purchaser's account is cleared when the consideration is received: Dr Shares in purchaser / Bank, Cr Purchaser.

Worked Realisation account

Tamar Ltd sells its business to Exe plc. Exe plc takes over all assets and liabilities and gives 500,000 £1 ordinary shares valued at £1.40 plus £50,000 cash.

Dr	£	Cr	£
Property, plant and equipment	600,000	Trade payables	80,000
Inventory	150,000	Bank loan	200,000
Trade receivables	90,000	Purchaser (purchase consideration)	750,000
Cash	40,000
Sundry shareholders: profit on realisation	150,000
Total	1,030,000	Total	1,030,000

Realisation account (Tamar Ltd)

Worked example

Prepare the Sundry Shareholders account for Tamar Ltd (share capital £400,000, retained earnings £200,000).

Credits: share capital 400,000 + retained earnings 200,000 + profit on realisation 150,000 = £750,000
Debits: shares in Exe plc 500,000 x £1.40 = 700,000; cash 50,000
Total debits = £750,000 = total credits, so the account closes

Answer: Sundry shareholders receive consideration of £750,000: shares £700,000 and cash £50,000

Key idea: Realisation account: Dr assets at book value, Cr liabilities taken over, Cr purchase consideration; the balance is the profit or loss on realisation, transferred to Sundry Shareholders, who are credited with capital and reserves and debited with the consideration.

Check yourself

A purchaser gives 300,000 of its £1 shares, valued at £2.20 each, and £120,000 cash for a business. Calculate the purchase consideration.
Show answer
£780000. 300,000 x 2.20 + 120,000 = £780,000.
A vendor company's net assets have a book value of £540,000. The purchase consideration is £610,000. Calculate the profit on realisation.
Show answer
£70000. 610,000 - 540,000 = £70,000 profit.
A vendor's assets at book value total £900,000 and the purchaser takes over liabilities of £260,000. The purchase consideration is £600,000. Calculate the loss on realisation.
Show answer
£40000. Net assets = 640,000; 640,000 - 600,000 = £40,000 loss.
A vendor has share capital £500,000, share premium £100,000 and retained earnings £240,000. The profit on realisation is £90,000. What do the sundry shareholders receive in total?
Show answer
£930000. 500,000 + 100,000 + 240,000 + 90,000 = £930,000.
In the vendor's Realisation account, on which side is the purchase consideration recorded?
- Debit
- Credit
- It is not recorded in the Realisation account
- Either side, depending on whether it is shares or cash
Show answer
Credit. Dr Purchaser, Cr Realisation: it is what the vendor receives for its net assets.
At what value are the vendor's assets transferred to the Realisation account?
- Fair value agreed with the purchaser
- Original cost
- Replacement cost
- Book value
Show answer
Book value. Assets leave the vendor's books at their carrying (book) value; the difference with the consideration is the profit or loss.
Where is a profit on realisation transferred?
- Debit of the Sundry Shareholders account
- Credit of the Sundry Shareholders account
- Credit of the purchaser's account
- Share premium account of the purchaser
Show answer
Credit of the Sundry Shareholders account. The profit belongs to the vendor's shareholders.
From the companies' point of view, give one reason why a purchaser might pay the vendor's shareholders in shares rather than cash.
Show answer
The purchaser keeps its cash for running and growing the business, so its liquidity is protected and it does not need to borrow; the vendor's shareholders become shareholders of the combined company.. Examiners wanted reasons from the companies' viewpoint: paying in shares conserves cash and avoids borrowing.

Practise with instant feedback

Sources

Last updated 8 November 2026. Spotted a mistake? Tell us.