Amalgamation & Sale of

Partnership firm
Ms. Meenakshi
Assistant Professor
Commerce Department
Kanya Mahavidyalaya Kharkhoda
Meaning of Amalgamation
Amalgamation means to merge or to combine two or
more business units carrying on same type of business
and form a new business unit.
Amalgamation of partnership firms means merger of
two or more partnership firms with one another and
form a new partnership firm.
Example: A & B firm + X & Y firm= A,B,X & Y firm
0r if A & B firm is taken over by X & Y firm then , after
amalgamation only X & Y firm will exist.
Forms of Amalgamation of partnership
firms
Amalgamation may be formed with any of the following
ways:
1. Merging of two or more existing sole proprietors into
each another and form a new partnership firm.
2. Merging one existing partnership firm with one existing
sole proprietor and form a new partnership firm.
3. Absorbing one existing partnership firm by another
existing partnership firm.
4. Merging two or more existing partnership firms with one
another and form a new partnership firm.
Objectives of amalgamation of partnership
firms:

To avoid cut-throat competition.

To minimize the common expenses of business.
To get advantage of large scale business.
To strengthen the capital position.
To get advantage of expertise of different people etc.
Accounting Treatment of amalgamation
of firms
Amalgamation of partnership firms includes

Closing the books of amalgamated Opening the books of

firms/old firms amalgamating firms/new firm
 Closing the books of old firms
Revaluation account is prepared.
Entry for raising goodwill is passed.
Assets and liabilities not taken over by the new firm are
transferred to the partners’ capital account.
New firm’s account is debited with the value of assets and
assets are credited.
New firm’s account is credited with the value of liabilities
and liabilities are debited.
or
• New firm’s account is debited with the difference
between the value of assets and liabilities.
Journal Entries in the books of old firms
(closing entries)
1. Revaluation of assets and liabilities:
 Assets A/c………. dr.
To Revaluation A/c
(for increase in value of assets )
 Revaluation A/c ………. dr.
To Assets A/c
(for decrease in value of assets)
 Revaluation A/c………. dr.
To liabilities A/c
(for increase in value of liabilities)
 Liabilities A/c………. dr.
To Revaluation A/c
(For decrease in value of liabilities)
Continue…

 Revaluation A/c ………. dr.

To partners’ capital A/c
( for distribution of profit on revaluation among partners)
or
 Partners’ capital A/c ……….dr.
To Revaluation A/c
( for distribution of loss on revaluation among partners)

2. Assets and Liabilities not taken over by the new firm

 Partner’s capital A/c ……….dr.
To Assets A/c
(Assets taken over by partners)
 Liabilities A/c ……….dr.
To Partner’s A/c
(Liabilities paid by /taken over by partners)
 Continue…
3. Division of accumulated profits /losses/Reserves.
 Profit & Loss A/c………dr.
Reserves A/c……………..dr.
To Partners’ capital A/c
(For distribution of accumulated profits and reserves)
 Partners’ capital A/c………dr.
To Profit & Loss A/c
( for distribution of loss among partners)
4. For raising/creating goodwill in the books of the firm
Goodwill A/c………dr.
To partners’ capital A/c
( goodwill is to be transferred in old profit sharing
ratio)
 Continue..
5. Transfer of Assets and liabilities to the new firm.
 New firm’s A/c………. dr.
To Sundry Assets A/c
( for transfer of assets to the new firm)
 Sundry Liabilities A/c……….dr.
To new firm ‘s A/c
(for transfer of liabilities to the new firm)
or
 Sundry Liabilities A/c……dr.
New firm’s A/c ……………..dr. ( with the balancing figure)
To Sundry Assets A/c
(Transfer of Assets and liabilities to the new firm.)
Continue…
6. Final closing of Capital Accounts
 Partners’ capital A/c………. dr.
To new firm’s A/c
(for closing of partners’ capital accounts)
Ledger Accounts to be maintained in the books of old
firms:
1. Revaluation A/c
2. Partners’ capital A/c
3. New firm’s A/c
4. Goodwill A/c
 Journal Entries in the books of new firm/ opening
entries
1. Assets, liabilities and capitals of the partners of the old
firm taken over by new firm
 Sundry Assets A/c……..dr. ( revised values)
To Sundry liabilities (revised values)
To partners’ capital A/c
( for assets, liabilities and capitals of the partners of the
old firm taken over by new firm)

 Point to be noted:
• Above mentioned entry is passed separately for each firm
• Different assets and liabilities taken over by the new firm are recorded
separately by their names.
Continue….
2. For Adjustment of Goodwill : The goodwill
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 goodwill written off or
reduced , the entry will be as follows:
 All partners’ capital A/c……….. dr. (new ratio)
To Goodwill A/c
( for goodwill written off )
Ledger Accounts to be maintained by new firm
Assets A/c
Liabilities A/c
Partners’ capital A/c
Balance sheet
Sale of Partnership firm to a company
Sometimes, a partnership firm sells its business to an
existing company or converts itself into a company .
The main reason for conversion is that in case of
partnership, the liability of partners is unlimited
whereas in case of companies the liability is limited.
Sale price of the firm is fixed by mutual
understanding.
The firm being sold is dissolved and the partners
receive the shares of the company to whom the firm is
being sold and thus they become the shareholders of
the company.
Accounting records in the books of the firm
Realisation A/c
1 Transfer all recorded assets and liabilities(whether or not taken over by the purchasing
 
company) to the Realization account, except cash and bank balance if not taken over by the
purchasing company.


Realization A/C………. Dr.
To sundry assets
(For transferring recorded assets)


Sundry liabilities A/C……….. Dr.
To Realization A/C
(For transferring recorded liabilities)


Purchasing company A/C………. Dr.
To Realization A/C
(For purchase price due)
Continue…
 2. If, there remain any assets(whether or not recorded) not
taken over by the purchasing company, it may be sold, or
may be taken by one of the partners or may be shared
among the partners.
I. On sale of assets
 Bank A/C………. Dr.
To realization A/c
(sale of assets not taken over by the purchasing company)
II. On division of assets among partners
 Partners' capital A/C(capital ratio)………… Dr.
To realization A/C
( for sharing assets among the partners)
continue
3.The liabilities (whether or not recorded) by the
purchasing company may be discharged or may be
assumed by any one of the partners, or must be
shared by the partners in their capital ratio.
I. If liability is paid by purchasing company
 Realization A/C .............Dr.
To Bank A/C
(For discharging liability by purchasing company)
II. If such liability has to be assumed by all partners
 Realization A/C................Dr.
To Partners' capital A/C
(For distribution of liabilities among partners)
Continue….
4.When the realization expenses is paid, Realization account is
debited.
 Realization A/C.............Dr.
To Bank
(For payment of realization expenses)
5. Close the realization account by transferring the balance (profit
or loss) to the capital of the partners in profit sharing ratio.
 Realization A/C..............Dr.
To Partners' capital A/C
(For profit on realization account)
or
 Partners' capital A/C............Dr.
To realization A/C
(For loss on realization account)
Continue…
6. On the receipt of purchase consideration (price),
cash/bank account, equity shares in purchasing company
or preference shares in purchasing company at their issue
prices are debited and purchasing company's account is
credited.
 Cash/bank A/C....................................Dr.
Equity share in purchasing Co...........Dr.
Preference share in purchasing Co....Dr.
Debentures share in purchasing Co...Dr.
To purchasing Co.
(For the receipt of purchase price)
 …
Continue
7.Transfer all accumulated reserves/profits/losses to the capital accounts of
partners in profit sharing ratio.
 Reserve A/C.................Dr.
Profit and loss A/C.......Dr.
To partners' capital A/C
(For accumulated reserves, profits) or
 Partners' capital A/C.............Dr.
To profit and loss A/C
(For accumulated losses)
8.Transfer the current account, if any, to the capital accounts of the partners.
 Partners' current Account................Dr.
To partners' capital Account
(For transferring current account to the capital account)
 9.Pay off the partner's loan if any.
 Partner's loan A/C ..............Dr.
To bank A/C
(For the payment of partner's loan )
Continue…
10. Make final settlement by paying off balances in capital
accounts. In the absence of an agreement as to the division
of shares (from purchasing company) among partners,
such shares are distributed in the ratio of their final claims
(i.e. in the ratio of capitals after all the adjustments).
 Vendor’s/Partners' capital A/C ...........Dr.
To equity shares in purchasing Co.
To preference shares in purchasing Co.
To bank A/C
(For final settlement)
 
 
Continue…
Entries in the books of purchasing company
 Assets Account...........................Dr.
Goodwill Account........................Dr. (balancing figure)
To liabilities
To share capital
To share premium
(Being assets and liabilities taken over)
Note: In case debit higher than credit, capital
reserve is credited with the difference.
Thanks