Accounting Treatment Amalgamation of Firm - Summary

Amalgamation of Firms
Introduction
When two or more firms doing similar business come together and conduct
business under the name and style of a new firm is called ‘Amalgamation of Firms’.
The old firms are called as ‘Amalgamating Firms’ (Selling firm) and the new firms is
called as ‘Amalgamated Firm’ (Purchasing firm).
Steps to solve the problem in the Books of Old Firm:

Step - 1 : Transfer of Balance Sheet items to Realisation A/c
Step – 2 : Purchase Consideration due
Step – 3 : Treatment of assets and liabilities not taken over by New Firm
Step – 4 : Realisation Expenses
Step – 5 : Closing of Realisation A/c
Step – 6 : Transfer of Partner’s Capital balance to New Firm
Accounting Entries in the Books of Old Firms

Step - 1 : Transfer of Balance Sheet items to Realisation A/c
1. Transfer of Assets to Realisation A/c at Book Value:

Realisation A/c ___________________________Dr
To Sundry Assets A/c
(Being Assets transferred to Realisation a/c)
Note:- If Cash or Bank balance is taken over by the new firm, then it is transferred to
Realisation A/c. If it is not taken over by new firm then separate Cash or Bank A/c
is opened.
2. Transfer of Accumulated losses (if any) or fictitious assets to Partner’s

Capital A/c
Partner’s Capital A/c ______________________Dr
To Profit & Loss A/c (Dr Balance)
To Fictitious Assets A/c
(Being losses transferred to Partner’s capital A/c in PSR)
3. Transfer of Accumulated Profits/Reserves to Partner’s Capital A/c

Reserves A/c ___________________________Dr
To Partner’s Capital A/c
(Being reserves and profits transferred)
4. Transfer of different liabilities to Realisation A/c

Sundry Liabilities A/c ____________________Dr
To Realisation A/c
(Being liabilities transferred to Realisation A/c)
Step - 2 : Purchase Consideration due

New Firm’s A/c ___________________________Dr
To Realisation A/c
(Being Purchase Consideration due)
Step - 3 : Treatment of assets and liabilities not taken over by new firm
a) If Asset is taken over by the partners

To Realisation A/c
(Being assets taken over by the partners)
b) If asset is sold by the firm

Bank A/c _______________________________Dr (Actual amount received)
To Realisation A/c
(Being asset sold)
c) If the liability taken over by the partners

Realisation A/c ________________________Dr
(Being Liability taken over by the partners)
d) Payment of the liability (not taken over by the new firm)

Realisation A/c _________________________Dr
To Bank A/c
(Being liability paid)
Step - 4 : Realisation expenses (if any)

Realisation A/c _________________________Dr
To Bank A/c
(Being realization expenses paid)
Step - 5 : Closing of Realisation A/c

a) If there is Profit
Realisation A/c ___________________________Dr
(Being profit on realization transferred to Partner’s Capital A/c)
b) If there is Loss
To Realisation A/c
(Being loss on realization transferred to Partner’s Capital A/c)
Step - 6 : Transfer of Partner’s Capital balance to New firm’s A/c

Partner’s Capital A/c _______________________Dr
To New Firm’s A/c
(Being Final adjustment made)
Steps to solve the problem in the Books of New Firm:

Step – 1 : Recording of Business Purchased
Step – 2 : Write off Goodwill
Step – 3 : Capital Adjustment
Accounting Treatment in the Books of New Firm

Step – 1 : Recording of Business Purchased
Assets A/c ___________________Dr
To Liabilities A/c
(Being assets and liabilities taken over by the new firm)
Step – 2 : Write off Goodwill

All Partner’s Capital A/c ____________Dr
To Goodwill A/c
(Being Goodwill written off)
Step – 3 : Capital Adjustment

Adjust capital accounts of all the partners as per the policy of the new firms
(adjustment given in the question). The adjustment may be made either through
Current Account or Loan A/c or Cash A/c.
a) Adjustment of Surplus Capital

Partner’s Capital A/c __________________Dr
To Cash A/c
OR
To Partner’s Current A/c
OR
To Partner’s Loan A/c
(Being adjustment of surplus capital is made)
b) Adjustment of Deficit
Cash A/c ____________________________Dr
OR
Partner’s Current A/c __________________Dr
OR
Partner’s Loan A/c ____________________Dr
(Being final adjustment made)
Method of Calculation of Purchase Consideration

It is the amount agreed to be paid by the purchasing firm to the vendor firm.
Purchase Consideration may be decided as follows-
a) Net Asset Method

Under this method, the new firm agree to take over the various assets and
liabilities of old firms and the value of the net assets i.e. Assets taken over at
agreed values ( – ) Liabilities taken over at agreed values is the purchase
consideration.
It is calculated as follows:-
Particulars Rs. Rs.
A) Assets Taken Over at Agreed Value (Revised Value)
Land & Building XX
Goodwill XX
Machinery XX
Stock XX
Debtors XX
Cash and Bank Balance XX
A) XXX
Less: B) Liabilities Taken over at Agreed Value
Creditors XX
Bills Payable XX
B) XXX
Purchase Consideration (A-B) XXX
b) Lumpsum Method
Under this method, there is no need to calculate purchase consideration
because the amount of purchase consideration is given in lumpsum.
For e.g. M/s A & B takes over the business of M/s C & D at the agreed price
of Rs. 5,00,000. Therefore here the Purchase Consideration is Rs. 5,00,000/-.
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Amalgamation of Firms

Steps to solve the problem in the Books of Old Firm:

Accounting Entries in the Books of Old Firms

1. Transfer of Assets to Realisation A/c at Book Value:

2. Transfer of Accumulated losses (if any) or fictitious assets to Partner’s

3. Transfer of Accumulated Profits/Reserves to Partner’s Capital A/c

4. Transfer of different liabilities to Realisation A/c

Step - 2 : Purchase Consideration due

a) If Asset is taken over by the partners

b) If asset is sold by the firm

c) If the liability taken over by the partners

d) Payment of the liability (not taken over by the new firm)

Step - 4 : Realisation expenses (if any)

Step - 5 : Closing of Realisation A/c

Step - 6 : Transfer of Partner’s Capital balance to New firm’s A/c

Steps to solve the problem in the Books of New Firm:

Accounting Treatment in the Books of New Firm

Step – 2 : Write off Goodwill

Step – 3 : Capital Adjustment

a) Adjustment of Surplus Capital

Method of Calculation of Purchase Consideration

a) Net Asset Method

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