Partnership Firm Amalgamation Accounts -

Last Updated on: 5th July 2024, 01:47 pm

Partnership Firm Amalgamation Accounts

Amalgamation of Partnership Firms

Two or more firms may be amalgamated to take over the business of these firms. In this case amalgamated firms will dissolve and their accounts will be closed. New accounts will be opened in the books of new firm.

The following procedure will be adopted to close the books of amalgamated firms:

A Revaluation Account will be opened. The difference between book value and agreed value at which various assets and liabilities are being taken over by the new firm will be transferred to Revaluation account. Accounting entries will be made as under:
1. For increase in the value of the asset or decrease in liability:

Assets/Liabilities A/c Dr.

To Revaluation A/c

For decrease in value of assets or increase in value of liabilities:

Revaluation A/c Dr.

To Assets/ Liabilities A/c

If any assets are not taken over by the new firm, it may be taken over by a partner or may be sold. The difference between book value and taken over value (or sale value) will also be transferred to Revaluation Account. Balance of Revaluation account will be transferred to capital accounts of the partners in their profit sharing ratio.

Any balance of Profit and Loss Account or Reserve account appearing in the books of old firms will be transferred to the capital accounts of partners in their respective profit sharing ratio.
Each of the old firm will value its goodwill. Amount of goodwill will be credited to the capital accounts of the partner in their profit sharing ratio through following entry:

Goodwill Account Dr.

To Partners Capital Accounts

Liabilities not taken by the new firm will either be paid or taken over by a partner. If no mode of disposal is given, such assets or liability will be transferred to the capital accounts of all the partners either in profit sharing ratio or ratio of their final capital (which is the preferred way, as such takeover is considered as refund of capital).
Remaining assets, liabilities and partners capitals will be transferred to the new firm, to close all the accounts of the old firms. The entry will be:

For assets transferred:

New Firm’s A/c Dr.

To Assets A/c

For liabilities transferred:

Liabilities A/c Dr.

To New Firm’s A/c

For Capital transferred:

Capital A/c Dr.

To New Firm’s A/c

Accounting Entry in the books of Amalgamating Firm’s

(1)	*For closing the assets A/c*
	Realisation A/c	Dr.
	To Sundry Assets A/c (individually book value)
(2)	*For Closing various liabilities*
	Sundry liabilities A/c	Dr.	(individually book value)
	To Realisation A/c
(3)	*For Purchase consideration due from new firm*
	New Firm A/c	Dr.
	To Realisation A/c
(4)	*For assets taken over by partner*
	Partner Capital A/c	Dr.	(Agreed value)
	To Realisation A/c
(5)	*For sale of assets not taken over by the new firm*
	Bank A/c	Dr.
	To Realisation A/c
(6)	*For liabilities taken over by partner*
	Liabilities A/c	Dr.
	To Partner Capital A/c
(7)	*For payment of liabilities*
	Realisation A/c	Dr.
	To Bank A/c
(8)	*For payment of realiastion expenses*
	Realisation A/c	Dr.
	To Bank A/c
(9)	*For transferring balance of Realisation A/c*
	(a) *In case of Profit –*
	Realisation A/c	Dr.
	To Partners Capital A/c (Profit sharing ratio)
	(b) *In case of Loss –*
	Partners Capital A/c	Dr.	(Profit sharing ratio)
	To Realisation A/c
(10)	*For transferring undistributed profit/Reserves*
	Reserves A/c	Dr.
	P&L A/c	Dr.
	To Partners Capital A/c(Profit sharing ratio)
(11)	*For transferring accumulated losses (if any)*
	Partners Capital A/c	Dr.	(Profit sharing ratio)
	To Profit & Loss A/c
(12)	*Transfer the current accounts balance to partners capital A/c*
	(a) Partners Current A/c (Cr. Balance)	Dr.
	To Partners Capital A/c
	(b) Partners capital A/c	Dr.
	To Partners Current A/c (Dr. Balance)
(13)	*For settlement of purchase consideration by the new firm*
	Partners Capital in New Firm A/c To New Firm A/c	Dr.

Accounting Entries in the Books of New Firm

In the books of new firm various accounts for assets and liabilities taken over from old firms will be opened. For this purpose following entries will be made:

For assets and liabilities taken over:

Assets A/c Dr.

To Liabilities A/c

To Old Firm’s A/c

For capital transferred to new firm:

Old firm’s A/c Dr.

To Partners Capital A/cs

Above two entries will be made for the business of both firms separately.

After take over of the business, if goodwill account is to be written off, total goodwill of the two firms should be debited to the capital accounts of all the partners in their new profit sharing ratio.

New Amalgamating firm Accounting Entries – Practical Example

If the net acquired assets is more than the purchase consideration

Sundry Assets A/c Dr.

To Sundry Liabilities A/c

To Partners Capital A/c

To Capital Reserve A/c

(2) If the net acquired assets is Less than the purchase consideration

Sundry Assets A/c Dr.

Goodwill A/c Dr.

To Sundry Liabilities A/c

To Partners Capital A/c

New Amalgamating firm Goodwill Accounting – Practical Example

Ex. J and K are partners of JK & Co. sharing profit and losses in the ratio of 3:1. K and N are partners of KN & Co. sharing profits and losses in the ratio of 2:1.

They decided to amalgamate and form a new firm M/s. JKN & Co. wherein J, K and N would be partners sharing profits and losses in the ratio of 3:2:1.

Their balance sheet on that date were as under:

The amalgamated firm took over the business on the following terms:

Goodwill of JK & Co. was worth Rs.60,000 and that of KN & Co. Rs.50,000. Goodwill account was not to been opened in the books of the new firm, the adjustments being recorded through capital accounts of the partners.
Building, machinery and cars were taken over at Rs.50,000, Rs.90,000 and Rs.1,00,000 respectively.
Provision for doubtful debts has to be carried forward at Rs.4,000 in respect of debtors of JK & Co. and Rs.5,000 in respect of debtors of KN & Co.

You are required to:

Compute the adjustments necessary for goodwill.
Pass the journal entries in the books of JKN & Co. assuming that excess/deficit capital (taking N’s Capital as base) with reference to share in profits are to be transferred to current accounts.

Solution:

Working Details:

Balance of Capital Accounts on transfer of business to M/s JKN & Co.

JK & Co.	Rs.	J’s Capital Rs.	K’s Capital Rs.
As per Balance sheet		1,20,000	80,000
Credit for Reserve [J = 25,000×3/4]		18,750	6,250
[K = 25,000×1/4]
Profit on Revaluation	40,000
Less: Provision for Doubtful debts	4,000	27,000	9,000
[J =36,000×3/4]
[K =36,000×1/4]
		1,65,750	95,250
KN & Co.	Rs.	K’s Capital Rs.	N’s Capital Rs.
As per Balance Sheet		1,00,000	50,000
Credit for Reserve [K = 50,000×2/3]		33,333	16,667
[N = 50,000×1/3]
Profit on Revaluation	20,000
Less: Provision for Doubtful Debts	5,000	10,000	5,000
[K = 15,000×2/3]
[N = 15,000×1/3]
		1,43,333	71,667

Capital in the new firm

	J Rs.	K Rs.	N Rs.
Balance as taken over	1,65,750	95,250	–
	–	1,43,333	71,667
	1,65,750	2,38,583	71,667
Adjustment for Goodwill	-10,000	+11,667	-1,667
	1,55,750	2,50,250	70,000
Total Capital, Rs.4,20,000* in the new ratio of 3:2:1 taking N’s Capital as the basis	2,10,000	1,40,000	70,000
	54,250	1,10250	–

N’s capital is Rs 70,000 and it is 1/6^th of total. Therefore, the total capital is Rs.4,20,000 .

Division of Goodwill

Division on Goodwill of JK and Co.

J = Rs.60,000 x ¾ = Rs.45,000

K = Rs.60,000 x ¼ = Rs.15,000

Division of Goodwill of KN and Co.

K = Rs.50,000 x 2/3 = Rs.33,333

N = Rs.50,000 x 1/3 = Rs.16,667

Goodwill written off in new Ratio:

J = Rs.1,10,000 x 3/6 = Rs.55,000

K = Rs.1,10,000 x 2/6 = Rs.36,666

N = Rs.1,10,000 x 1/6 = Rs.18,334.

Adjustment for raising & writing off of Goodwill:

Rs.60,000 Goodwill is divided into 3 : 1 ratio and Rs.50,000 Goodwill is divided in 2 : 1 ratio and Rs.1,10,000 is divided in 3 : 2: 1 ratio.

Books of JKN & Co.

Journal Entries

Partnership Firm Amalgamation Accounting – Practical Example

Ex. On 31^st March 2024, Kumar acquires on payment of Rs.80,000 the business of Messrs. Agarwal and Singhania taking over at book value the following assets and liabilities:

Debtors
Furniture
Stock
Creditors

Rs.
35,000
3,000
46,000
10,000

There was no change between 1^st January, 2024 and 31^st March, 2024 in the book value of the assets and liabilities not taken over.

The same set of books has been continued after the acquisition and no entries of the acquisition have been passed except for the payment of Rs.80,000 made by Kumar.

From the following Balance Sheet and Trial Balance, prepare Business Purchase Account, Profit and Loss Account for the year ended 31^st December, 2024 and Balance Sheet at that date.

Balance Sheet as at December, 2023

Liabilities		Rs.	Assets	Rs.
Capital Accounts			Furniture	3,000
Sri Agarwal	30,000		Investment	5,000
Sri Sinhania	20,000	50,000	Insurance Policy	2,000
Bank Loan		18,000	Stock	40,000
Creditor		12,000	Debtors	30,000
		80,000		80,000

On 31^st December 2009 the Trial Balance is:

Closing Stock Rs.50,000.

Solution:

Working Details:

Calculation of purchase consideration:-

	Rs.
Value of assets taken over
Stock	46,000
Debtor	35,000
Furniture	3,000
	84,000
Less: Creditors	10,000
Net assets	74,000
Goodwill (Balancing figure)	6,000
Purchase Consideration	80,000

Increase in net assets upto 31^st March 2024:-

	As on 1^st January Rs.	As on 31^st March Rs.
Debtors	30,000	35,000
Stock	40,000	46,000
Furniture	3,000	3,000
	73,000	84,000
Less: Creditors	12,000	10,000
	61,000	74,000
Profit, equal to net increase	13,000	–
	74,000	74,000

Business Purchase Account

Profit & Loss Account of Kumar for the year ended 31^st December, 2024

Balance Sheet of Kumar as on 31^st December, 2024

Liabilities		Rs.	Assets	Rs.
Kumar’s Capital A/c	30,000		Goodwill (W.N.1)	6,000
Add: Profit (W.N.4)	65,000	95,000	Furniture	3,000
Sundry Creditors		15,000	Stock in trade	50,000
			Sundry Debtor	48,000
			Cash at Bank	3,000
		1,10,000		1,10,000

Partnership Firm Amalgamation Revaluation Accounts – Practical Example

Ex. The Balance Sheet of Messrs. A & B and Messrs. C & D as on 31^st December 2024 were as follows:

The two firms decided to amalgamate and form into A, B & Co., with effect from January 1, 2025 partners would share equally between themselves as they were doing prior to amalgamation and they agreed to the following revaluation of assets and liabilities:

	A & B (Rs.)	C & D (Rs.)
Land & Workshops Machineries & Tools Furniture & Fixture Sundry Debtors Stock Outstanding Expenses	10,000 7,000 2,500 5,500 8,000 2,000	10,000 8,000 2,500 7,000 8,000 3,500

In addition to the above it was decided:

That the new firm would not take over the loan of C & D.
That the Goodwill of A & B and C & D was valued at Rs.10,000 and Rs.5,000 respectively in the first instance but for the purpose of the Balance Sheet of the new firm, the combined goodwill would be valued at Rs.12,000.
That the reconstructed capital of Partners should be Rs.14,000 each, partners introducing cash if necessary.

You are required to show:

The Revaluation Account of Messrs A & B and Messrs, C & D and their reconstructed capital accounts prior to and after amalgamation.
The opening Balance Sheet of the new firm assuming that all arrangements have been duly carried out.

Solution:

Working Details:

Calculation of Cash and Bank Balance:

= Rs.(3,000+1,000)+ Rs. (250+250+750+750)

= Rs.(4,000+2,000) = Rs. 6,000

Goodwill value revalued:

= Rs. (10,000+5,000)-12,000

= Rs. 15,000-12,000 = Rs.3,000

A = Rs.3,000 X ¼ = Rs.750

B = Rs.3,000 X ¼ = Rs.750

C = Rs.3,000 X ¼ = Rs.750

D = Rs.3,000 X ¼ = Rs.750

Books of Messrs A and B

Revaluation Account (Prior to Amalgamation)

Capital Accounts

Books of Messrs C & D (Prior to Amalgamation)

Revaluation Account

Capital Accounts

Capital Accounts

( A, B & Co. – After Amalgamation)

8. Balance Sheet of M/s A, B & Co. as on 1^st Jan.2025

Partnership Firm Amalgamation – Partners Goodwill Account

Ex. Firm X & Co. consists of partners A and B sharing Profits and Losses in the ratio of 3: 2. The firm Y & Co. consists of partners B and C sharing Profits and losses in the ratio of 5: 3.

On 31^st March, 2024 it was decided to amalgamate both the firms and form a new firm XY & Co., wherein A, B and C would be partners sharing Profits and Losses in the ratio of 4: 5: 1.

Balance Sheet as at 31.3.2024

Liabilities	X & Co.	Y & Co.	Assets	X & Co.	Y & Co.
	Rs.	Rs.		Rs.	Rs.
Capital:			Cash in hand/Bank	40,000	30,000
A	1,50,000	—–	Debtors	60,000	80,000
B	1,00,000	75,000	Stock	50,000	20,000
C	—–	50,000	Vehicles	—-	90,000
Reserve	50,000	40,000	Machinery	1,20,000	–
Creditors	1,20,000	55,000	Building	1,50,000	–
	4,20,000	2,20,000		4,20,000	2,20,000

The following were the terms of amalgamation:

Goodwill of X & Co., was valued at Rs.75,000. Goodwill of Y & Co. was valued at Rs.40,000. Goodwill Account not to be opened in the books of the new firm but adjusted through the Capital Accounts of the partners.
Building, Machinery and Vehicles are to be taken over at Rs.2,00,000, Rs.1,00,000 and Rs.74,000 respectively.
Provision for doubtful debts at Rs.5,000 in respect of X & Co. and Rs.4,000 in respect of Y & Co. are to be provided.

You are required to:

Show, how the Goodwill value is adjusted amongst the partners.
Prepare the Balance Sheet of XY & Co. as at 31.3.2024 by keeping partners capital in their profit sharing ratio by taking capital of ‘B’ as the basis. The excess or deficiency to be kept in the respective Partners’ Current Account.

Solution:

Working Details:

Balance of Capital Accounts at the time of amalgamation of firms

Particulars	A’s Capital	B’s Capital
	Rs.	Rs.
X & Co. (Profit and Loss sharing ratio 3:2)
Balance as per Balance Sheet	1,50,000	1,00,000
Add: Reserves	30,000	20,000
Revaluation profit (Building)	30,000	20,000
Less: Revaluation loss (Machinery)	(12,000)	(8,000)
Provision for doubtful debt.	(3,000)	(2,000)
	1,95,000	1,30,000
	B’s Capital	C’s Capital
	Rs.	Rs.
Y & Co. (Profit and loss sharing ratio 5:3)
Balance as per Balance Sheet	75,000	50,000
Add: Reserves	25,000	15,000
Less: Revaluation loss (vehicle)	(10,000)	(6,000)
Provision for doubtful debts	(2,500)	(1,500)
	87,500	57,500

Balance of Capital Accounts in the Balance Sheet of the new firm as on 31.3.2024

Particulars	A	B	C
	Rs.	Rs.	Rs.
Balance b/d:
X & Co.	1,95,000	1,30,000	—
Y & Co.	—	87,500	57,500
	1,95,000	2,17,500	57,500
Adjustment for goodwill	(1,000)	(2,500)	3,500
	1,94,000	2,15,000	61,000
Total capital Rs.4,30,000 (B’s capital i.e.
Rs.2,15,000 x 2) to be contributed in 4:5:1 ratio	1,72,000	2,15,000	43,000
Transfer to Current Account	22,000	—	18,000

Adjustment for raising and writing off of Goodwill

	Raised in old profit sharing ratio (1)		Total (2)	Written off in new ratio (3)	Difference (4) = (2) – (3)
	X & Co.	Y & Co.
	3: 2	5: 3
	Rs.	Rs.	Rs.	Rs.	Rs.
A	45,000	—	45,000 Cr.	46,000 Dr.	1,000 Dr.
B	30,000	25,000	55.000 Cr.	57.500 Dr.	2,500 Dr.
C	—	15,000	15,000 Cr.	11,500 Dr.	3,500 Cr.
	75,000	40,000	1,15,000	1,15,000	Nil

Rs.1,15,000 written off in the new ratio of 4:5:1.

Balance Sheet of XY & Co.(New firm) as on 31.3.2024

Liabilities	Rs.	Assets	Rs.
Capital Account:		Vehicle	74,000
A	1,72,000	Machinery	1,00,000
B	2,15,000	Building	2,00,000
C	43,000	Stock	70,000
Current Account:		Debtors	1,31,000
A	22,000	Cash & Bank	70,000
B	18,000
Creditors	1,75,000
	6,45,000		6,45,000

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Partnership Firm Amalgamation Accounts

Amalgamation of Partnership Firms

Accounting Entries in the Books of New Firm

New Amalgamating firm Accounting Entries – Practical Example

New Amalgamating firm Goodwill Accounting – Practical Example

Partnership Firm Amalgamation Accounting – Practical Example

Partnership Firm Amalgamation Revaluation Accounts – Practical Example

Partnership Firm Amalgamation – Partners Goodwill Account

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