AMALGAMATION OF FIRMS

INTRODUCTION
Meaning
Amalgamation means combination or merger. In amalgamation of firms, two firms come together
to secure various advantage such as economies of large scale production, avoiding competition,
increasing efficiency, expansion and so on. Firms may combine in two ways: (a) amalgamation in
which a new firm is formed to take over the business of the old firms(s); or (b) absorption in which
an existing firm takes over the business of the old firms(s). For example, if the business of M/S ABC
& Co. is taken over by a new firm M/S XYZ & Co. , it is called amalgamation; if its business is taken
over by an existing firm M/S PQR & Co., it is called absorption. The old firm which is taken over (M/S
ABC & Co., in the above example) is known as the vendor firm , and the firm which takes over (M/S
XYZ & Co. or M/S PQR & Co. ) is known as the purchasing firm.

ACCOUNTING PROCEDURE REALISATION METHOD
VENDOR (OLD) FIRM
The vendor (old) firm is dissolved on amalgamation. Therefore it can follow the normal accounting
procedure for dissolution (opening a Realisation A/c etc.). The books of the old firm are closed and
the purchasing (new) firm starts with a fresh set of books. This is known as the Realisation method.
(We will be studying only the Realisation Method involving the dissolution of the vendor firms, as
prescribed under the syllabus. Another method, known as Revaluation method, is not prescribed for
study). The accounting procedure is summarised below:
1. Start with B/S on Date of Dissolution
The Balance Sheet of each of the old firm as on the date of the dissolution is the starting
point of the accounting process.
2. Open Ledger Accounts
The following accounts are opened in the books of each of the old firm to record the various
transactions on dissolution :
A) Realisation Account.
B) Partners Capital Accounts ( Columnar form).
C) Cash and Bank Account ( if not taken over by the purchasing firm).
D) Purchasing Firms Account.
3. Entries
The entries to be passed in the books of each of the Old Firm are explained in the Worksheet below.


PORFORMA OF JOURNAL ENTRIES IN THE BOOK OF OLD FIRM
No. Transaction / Entry Amount
(1) Assets transferred
Realisation A/c Dr.
To Various Asset A/c

[Total of assets]
[Balance as per B/S]
Notes:
1. Cash and bank balances are also transferred if they are taken are over by the new firm.
2. .If Goodwill A/c appears in the books, it too is transferred along with other assets.
3. Gross value of Debtors is transferred to the debit of the Realisation A/c . Reserve/
provision for bad/doubtful debts is transferred to the debit of the Realisation A/c.
4. Fictitious assets (accumulated losses) are transferred, not to the Realisation A/c, but to
the partners capitals (see 14 below).

(2) Liabilities transferred
Various Outside Liabilities A/c Dr.
To Realisation A/c

[Balance as per B/S]
[Total]
Note : Only outside liabilities (excluding loans from partners) are transferred.
(3) Purchase consideration due
Purchasing Firms A/c Dr.
To Realisation A/c

[Purchase Consideration]
Notes :
1. Meaning: Purchase Consideration (PC) is the amount payable by the purchasing firm to
the vendor firm for taking over its business.
2. Calculation : PC can be ascertained by any of the following methods:
2.1 Net Assets method under which PC is equal to the value of the assets of the old
firm taken over by the new firm (i.e. the Agreed value of assets taken over Less
Agreed value of liabilities taken over).
2.2 Net Payments method under which PC is equal to the total payment by the new
firm to the partners of the old firm. The amount of PC may be given as a lumpsum
or may have to be calculated by adding up all the amounts paid by the new firm in
various forms to the partners of the old firms (credit to partners capitals in
purchasing firm or cash or other asset).

(4) Take over by a partner of an asset
(recorded / unrecorded )
Partners Capital A/c Dr.
To Realisation A/c


[Agreed Value]
Note : If an asset is not taken over by the new firm, it is presumed to be taken over by all the
partners of the old firm in their profit sharing ratio. (However, some accounting authorities
recommend that such items should be presumed to be taken over by all the partners of the
old firm in the ratio of their capitals).

(5) Sale of an asset (recorded /
unrecorded)
Cash A/c Dr.
To Realisation A/c


[Sale Price]
(6) Takeover by partner of a liability
(recorded / unrecorded)
Realisation A/c Dr.
To Partners Capital A/c


[Agreed Value]
Note : If a liability is not taken over by the new firm, it is assumed to be taken over all the
partners of the old firms in their profit sharing ratio. (However, some accounting authorities
recommend that such items should be presumed to be taken over by all the partners of the
old firm in the ratio of their capitals).

(7) Payment of a liability (recorded /
unrecorded)
Realisation A/c Dr.
To Cash A/c


[Amount paid]
(8) Profit on realisation
Realisation A/c Dr.
To Partners Capital A/c

[Amount of Profit]
[In Profit Sharing Ratio]
(9) Loss on realisation
Partners Capital A/c Dr.
To Realisation A/c

[In Profit Sharing Ratio]
[Amount of Loss]
(10) Accumulated losses
Partners Capital A/c Dr.
To Profit & Loss A/c (Dr. Bal.)
To Deferred Revenue Exp. A/c

[In Profit Sharing Ratio]
[Balance as per B/S]
[Balance as per B/S]
(11) Accumulated profits / Reserves
Profit & Loss A/c (Cr.) Dr.
General reserves A/c Dr.
To Partners Capital A/c

{Balance as per B/S]
[Balance as per B/S]
[In Profit Sharing Ratio]
Note : Reserves appearing in the balance sheet of the old firm may be in the form of funds,
e.g. Investment Fluctuation Fund, Accident Compensation Fund etc. If there is any claim
against such fund, e.g. claim for compensation for accident by a worker, it should be first
deducted from the fund. The balance in the fund indicates the reserves to be transferred to
the partners capitals in the above entry.
In case the partners capital are kept under the Fixed Capitals Method, the balance in the
current account is transferred to the capital account of the concerned partner before his dues
are ascertained.
(12) Transfer credit balance in current
a/c
Partners Current A/c Dr.
To Partners Capital A/c


[Credit Balance]
(13) Transfer debit balance in current a/c
Partners Capital A/c Dr.
To Partners Current A/c

[Debit Balance]
(14) Settle partners loan
Partners Loan A/c Dr.
To Partners Capital/Cash A/c

[Amount Of Loan]

Note:
1. Any interest paid on such loans is debited to the Realisation A/c. Any rebate or
discount on repayment on such loans is credited to the Realisation A/c.
2. If the cash/bank balances are not taken over by the purchasing firm, the loan a/c can
be settled by payment in cash.
(15) Entry to settle capital balances
Partners Capital A/c Dr.
To New Firm A/c

[Cr. Balance in Capital]
[P.C.]



JOURNAL ENTRIES IN THE BOOK OF NEW FIRM

No. Transaction / Entry Amount
(1)
Incorporating assets/liabilities of old
firm
Various Assets A/c Dr.
To Various Liability A/c
To Partners Capital A/c


[Agreed Value]
{Agreed Value]
[Balance Taken Over]
(2)
Dissolution expenses paid & borne
by New Firm
Goodwill A/c Dr.
To. Cash A/c


[Amount of expenses]