Amalgamation of partnership

Amalgamation of partnership firms means merger of two or more partnership firms with one
another and formation of a new firms. The firm carrying on same type of business merge into
each another. There are different ways of amalgamation of partnership firms. The amalgamation
is made for the purpose to avoid cut-throat competition, to minimize common expenses, to get
advantage of large scale business, to strengthen the capital position etc.
Accounting for amalgamation of partnership firms includes closing entries in the books of old
firms and opening entries in the books of the new firm.
Amalgamation may be formed with any one of the following ways:
i) Merging of two or more existing sole proprietors into each another and form a new partnership
firm.
ii) Merging one existing partnership firm with one existing sole proprietor and form a new
partnership firm.
iii) Absorbing one existing partnership firm by another existing partnership firm.
iv) Merging two or more existing partnership firms with one another and form a new partnership
firm.
Objectives of Amalgamation of Partnership firms:
Amalgamation of partnership firm is done to achieve the following objectives:
i) To avoid the cut-throat competition.
ii) To minimize the common expenses of business.
iii) To get advantage of large scale business.
iv) To strengthen the capital position.
v) To get advantage of expertise of different people,
Accounting Procedure for Amalgamation of Partnership Firms using Revaluation Method
As per this method, for closing the books of accounts of old firms journal entries are to be passed
taking into consideration the following points:
i) Revaluation of Assets and liabilities.
ii) Creation of Goodwill.
iii) Close Reserves and other Profit Accounts.
iv) Close Loss Account.
v) Close Assets and Liabilities Accounts which are not taken over by the new firm.
vi) Transfer / close Assets and Liabilities Accounts which are taken over by the new firm.
vii) Close Capital Accounts of the partners.
To open the books of accounts of the New Firm the journal entries are to be passed taking into
consideration the following points:
i) Assets of the old firm taken over by the new firm.
ii) Liabilities of the old firm taken over by the new firm.
iii) Capitals of the partners of the old firm taken over by the new firm.
iv) Adjustment of Goodwill.
v) Adjustment of Capitals of the Partners
Journal Entries and Ledger Accounts for Amalgamation of Partnership Firms:
In the amalgamation of partnership firms closing entries and opening entries are to be passed.
The closing entries are to be passed to close the books of accounts of amalgamating /old firms
and the opening entries are to be passed to open the books of accounts of amalgamated/new firm.
Journal Entries in the Books of Old Firms (Closing Entries):
i) For Revaluation of Assets and Liabilities : Assets and Liabilities of the old firms may be
revalued at the time of amalgamation. There may be increase or decrease in the values of assets
and liabilities which shows profit or loss. To record this profit or loss a Profit & Loss
Adjustment A/c or Revaluation A/c is to be opened. The net profit or loss on this account is to
be transferred to Partner's Capital A/c in the old profit sharing ratio. For this purpose following
journal entries are to be passed.
a) For increase in the value of asset and decrease in the value of Liability, which shows
revaluation profit.
Particular Asset / Liability A/c ........... Dr.
To Profit & Loss Adjustment A/c / Revaluation A/c
b) For decrease in the value of asset and increase in the value of liability which shows
revaluation loss.
Profit & Loss Adjustment A/c / Revaluation A/c......... Dr.
Particular Asset / Liability A/c
c) For closing the Profit & Loss Adjustment A/c / Revaluation A/c and transferring profit.
Profit & Loss Adjustment A/c / Revaluation A/c......... Dr.
To Partner's Capital A/cs
(If there is a loss, a reverse entry will be passed)
ii) For Creation of Goodwill :If there is no goodwill account in the books of the old firm
and if it is to be created the following entry will be passed,
Goodwill A/c ...................... Dr.
To Partner's Capital A/cs
(Goodwill is to be transferred in the old profit sharing ratio)
iii) For closing Reserves and Profit Accounts : The balance on these accounts is to be transferred
to Partner's Capital A/cs in the old profit sharing ratio.
Reserves A/c ................. Dr.
Profit & Loss A/c (Cr. Balance) ............Dr.
To Partner's Capital A/cs
iv) For closing Loss Account : The Profit & Loss A/c showing Dr . balance is a loss account It
appears on the asset side of the Balance sheet. The balance on this account also transferred to
Partner's Capital A/cs in the old profit sharing ratio.
Partner's Capital A/cs ............Dr.
To Profit & Loss A/cs
v) For closing Assets and Liabilities A/cs which are not taken over by the New Firm : Those
assets and Liabilities which are not taken over by the new firm will be either so away paid off by
the old firm or transferred to Partner / Partner's Capital A/cs in the capital ratio. The profit or loss
on such transaction will be transferred to P & L Adjustment A/c or directly to Partner's Capital
A/cs in the old profit sharing ratio. For this purpose following journal entries are to be passed.
a) If an asset is sold away for cash
Cash / Bank A/c .................. Dr .
To Particular Asset A/c
b) If an asset is taken over by the partner / partners
Partner/s Capital A/c .................. Dr .
To Particular Asset A/c
c) If a liability is paid off
Particular Liability A/c .............. Dr.
To Cash / Bank A/c
d) If a liability is taken over by the partner/ partners
Particular Liability A/c .............. Dr.
To Partner/s Capital A/c
vi) For closing Assets and Liabilities which ar e taken over by the New Firm : The
accounts of assets and liabilities which are taken over by the new firm will be closed by
transferring them to the New Firm A/c at agreed values.
a) For closing Assets
New Firm A/c ................ Dr
To Assets A/c
b) For closing Liabilities
Liabilities A/c ................... Dr
To New Firm A/c
vii) For closing Partner's Caital A/cs : Partner's Capital A/cs of the old firm are to be
closed with the net balance by transferring them to the New Firm A/c
Partner's Capital A/c ................ Dr
To New Firm A/c
Ledger Accounts if the Books of the Old Firms :
Form the above journal entries the follwing important ledger accounts will be prepared in
the books of old firms.
i) Profit & Loss Adjustment A/c / Revaluation A/c
ii) Partner's Caital A/cs
iii) New Firm A/c
iv) Good willA/c
v) Partner's Current A/c, etc.
Journal Entries in the Books of the New Firm (Opening Entries) :
i) For Assets, Liabilities and Capitals of the Par tners of the old firm taken over
by the New Firm :
Assets A/c .............. Dr . (at agreed values)
To Labilities A/c (at agreed values)
To Partner's Capital A/cs (at transferred balance)
ii) For Adjustment of Goodwill :The good will transferred from the old firm to the new firm may
be maintained as it is or may be written off or may be reduced by the New Firm. If the goodwill
is written off or reduced the entry will be as follows:
All Partner's Capital A/cs .............. Dr.
To Goodwill A/c
(All partner's capital A/c are debited in the new profit sharing ratio)
iii) For Adjustment of Capitals : If the capitals of the partners in the nw firm are
changed as per the new profit sharing ratio or as per the agreement, there is a need to pass
journal entries for the adjustment of capitals. The adjustments of capital may be made in cash
or through current A/cs.
a) For cash brought in or through current A/c for adjustment of shortage of capital
Cash / Bank A/c .............. Dr.
Particular Partner Current A/c........... Dr.
To Particular Partner Capital A/c
b) For cash paid or through current a/c for adjustment of excess capital
Particular Partner Capital A/c........... Dr.
To Cash / Bank A/c
To Particular Partner Current A/c
Ledger Accounts in the Books of New Firm : From the above journal entries the
Opening Balance Sheet of the new firm is to be prepared. Also, the Partner's Capital A/s,
Cash/Bank A/c may be prepared.