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CMA Intermediate · Financial Accounting

Amalgamation of Partnership Firms for CMA Inter

Amalgamation of partnership firms is when two or more firms combine to form a new firm. To solve it, revalue the assets and liabilities of each old firm, close its books, record the assets and liabilities taken over in the new firm, and adjust partners' capitals to the agreed ratio.

What this chapter covers

This chapter deals with two or more existing partnership firms joining together to carry on business as one new firm. The old firms are dissolved as separate businesses. Their assets and liabilities are taken over by the new firm, usually at agreed or revalued figures. Each old firm's partners become partners in the new firm.

The work runs in a fixed sequence. First you read the agreement to see which assets and liabilities are taken over and at what values. Then you pass revaluation entries in each old firm's books. Then you close those books. Then you pass opening entries in the new firm's books. Finally, if the agreement fixes capitals in a given ratio, you adjust each partner's capital by cash or by current account.

The chapter builds directly on your earlier work in this paper: partnership admission, retirement and dissolution. It uses the same revaluation account, capital accounts and profit-sharing logic. If those are weak, this chapter will feel harder than it is. It also leads naturally into goodwill and balance sheet preparation. In the exam it usually appears as a numerical question with two old balance sheets and a new firm's balance sheet to prepare.

This chapter is a good use of effort because the method is mechanical once you learn it. A numerical question is long, but it splits into small steps, and each step earns marks even if a later step goes wrong. Errors usually come from missing a condition in the agreement, not from hard concepts. Students who practise the full sequence a few times can score well here, and the same skills (revaluation, capital accounts, balance sheets) support other chapters in the paper and can also help with MCQs.

Amalgamation of Partnership Firms: topics in the order to study them

  1. 1Amalgamation of Partnership Firms: Meaning and ProcedureStart here to learn what amalgamation means, the terms of an agreement, and the order of steps that the rest of the chapter follows.
  2. 2Revaluation of Assets and Liabilities on AmalgamationThe first accounting step in each old firm is revaluation, so you need it before closing any books.
  3. 3Closing Books of Old Firms and Opening Entries in New FirmOnce revaluation is done, you close the old books and record the takeover in the new firm.
  4. 4Purchase Consideration and Capital Adjustment of PartnersStudy this last because it uses the figures from all earlier steps to settle the final capitals of partners.

How to prepare Amalgamation of Partnership Firms

Prepare this chapter as one connected procedure, not four separate topics. Practise full questions early, because the steps depend on each other.

  1. Read the meaning and procedure once, then write the sequence of steps in your own words on one page.
  2. Revise revaluation from admission of a partner: the revaluation account, its profit or loss, and sharing in the old ratio.
  3. Solve a question on one old firm only: revalue, close its books and note what the new firm takes over.
  4. Solve a full question with two firms and prepare the new firm's opening entries and balance sheet. Check that both sides agree.
  5. Practise capital adjustment: work out each partner's required capital, then the shortfall or excess, and show the cash or current account treatment as the agreement states.
  6. Underline every condition in the question before you start, such as assets not taken over, agreed values and capital ratio.
  7. Attempt a few MCQs on meaning, treatment of items not taken over and balance sheet totals, then recheck your written answers against the steps.

Common mistakes in Amalgamation of Partnership Firms

  • Taking over every asset and liability of the old firms.

    Fix: Mark which items are taken over and which are excluded before passing any entry.

  • Sharing revaluation profit or loss in the new ratio.

    Fix: Revaluation belongs to the old firm's period, so use that firm's old ratio.

  • Using book values where agreed values are given.

    Fix: Read the agreed values first and use them in the new firm's opening entries.

  • Mixing up the old firms' books and the new firm's books.

    Fix: Label each working with the firm name and complete one firm's entries before the next.

  • Wrong capital adjustment, such as adding the shortfall instead of treating it as a balancing amount.

    Fix: Work out the required capital, compare it with actual capital, then treat the difference as the agreement states.

  • Leaving out working notes in written answers.

    Fix: Show each account and calculation separately so you earn step marks even if the final total is off.

Last-day revision: Amalgamation of Partnership Firms

  • Amalgamation of firms means two or more firms combine into a new firm under an agreement.
  • Revalue assets and liabilities in each old firm's books before closing them.
  • Revaluation profit or loss is shared by the old partners in their old profit-sharing ratio.
  • Items not taken over by the new firm stay with the old firm and are settled separately.
  • Old firm's books are closed by transferring balances to partners' capital accounts.
  • The new firm records assets and liabilities taken over at the agreed values.
  • Purchase consideration depends on the agreement, so read its terms before calculating.
  • Partners' capitals in the new firm may be fixed in an agreed ratio.
  • Compare required capital with actual capital to find the excess or shortfall.
  • Settle the difference by cash or current account, as the question states.
  • Check that the new firm's balance sheet balances.

Amalgamation of Partnership Firms practice questions

Amalgamation of Partnership Firms in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Amalgamation of Partnership Firms: frequently asked questions

Is amalgamation of partnership firms difficult for CMA Inter?

It is manageable if your revaluation and capital account basics are clear. The method follows the same order each time. Practise two or three full questions and the pattern becomes familiar.

Which topic should I study first in this chapter?

Start with the meaning and procedure, then revaluation, then closing of books and opening entries, and finish with purchase consideration and capital adjustment. This order matches the order in which you solve a question.

How is revaluation profit shared on amalgamation?

Each old firm's revaluation profit or loss is shared by its own partners in their old profit-sharing ratio. It is recorded in that firm's books before they are closed.

Can MCQs come from this chapter?

Yes. Section A has 15 standalone MCQs of 2 marks each, and they can test meaning, treatment of items not taken over or simple balances. There is no negative marking, so attempt every one.