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Financial Accounting · Amalgamation of Partnership Firms

Amalgamation of Partnership Firms: Meaning and Procedure

Updated 10 October 2026 · Fact-checked

Amalgamation of partnership firms is when two or more existing firms combine to form one new firm, and the old firms stop carrying on business. You solve it by following the agreement: revalue assets and liabilities, close the old books, pool the revalued balances, and open the new firm's books with adjusted partners' capitals.

Understand Amalgamation of Partnership Firms: Meaning and Procedure

Two or more firms often join because they are small, sell similar goods, or want to share resources and cut competition. When they join, the old firms end and one new firm starts. This is amalgamation of firms. The partners of the old firms usually become partners of the new firm.

There are two broad forms. In the first, two or more firms combine to form a new firm and all old firms are closed. In the second, one firm takes over another: the business of one firm is absorbed into a continuing firm. Exam questions mostly test the first form, but read each question carefully to see which one it is. The accounting changes if one firm continues.

The main objectives are larger capital, wider market, pooled skills, lower costs and less competition. None of these changes the accounting. What matters is the amalgamation agreement. It states which assets and liabilities are taken over, at what values, the new profit sharing ratio, and what capital each partner must hold.

Amalgamation is not the same as conversion. In conversion, a partnership firm is turned into a company, and a new legal entity with shareholders appears. In amalgamation, the result is still a partnership firm, with partners and capital accounts, not shares.

The usual procedure has four parts. First, each old firm revalues its assets and liabilities as the agreement says. Second, each old firm closes its books. Third, the new firm records the revalued assets and liabilities taken over. Fourth, partners' capitals are adjusted to the agreed amounts by bringing in or withdrawing cash.

Key rules to remember

Revaluation profit or loss
Revaluation result = Increase in assets + Decrease in liabilities − Decrease in assets − Increase in liabilities
A positive result is a profit. Share it among the old partners of that firm in their old ratio.
Capital of a partner after revaluation
Adjusted capital = Old capital ± Share of revaluation result ± Share of reserves and accumulated profits or losses
Reserves and accumulated profits belong to old partners in the old ratio. Accumulated losses reduce capital.
Net assets taken over
Net assets taken over = Revalued assets taken over − Liabilities taken over
This equals the total of partners' adjusted capitals of that firm, if all assets and liabilities are taken over.
Capital adjustment
Cash to bring in or withdraw = Agreed capital − Adjusted capital
A positive figure means the partner brings in cash. A negative figure means the partner withdraws cash.
Agreed capital in the new firm
Capital of a partner = Total agreed capital × Partner's share in new profit sharing ratio
Use this when the agreement fixes total capital and wants capitals in the profit sharing ratio.

How to solve Amalgamation of Partnership Firms: Meaning and Procedure questions

Use this order for any amalgamation question. Read the agreement terms first, because they decide every entry.

  1. 1Note which firms combine, which assets and liabilities are taken over, and which are left out.
  2. 2Note the agreed revaluation of each asset and liability, and any items to be adjusted, such as goodwill, reserves or unrecorded liabilities.
  3. 3Prepare the Revaluation Account in each old firm, and share its profit or loss in the old ratio.
  4. 4Transfer reserves and accumulated profits or losses to the old partners' capital accounts in the old ratio. Show the adjusted capitals.
  5. 5Close each old firm's books. The old firm's net assets taken over equal the total of its adjusted capitals.
  6. 6Pool the revalued assets and liabilities of all firms in the new firm's opening journal or Balance Sheet.
  7. 7Compare each partner's adjusted capital with the agreed capital, and record cash brought in or withdrawn.
  8. 8Prepare the new firm's opening Balance Sheet and check that assets equal capital plus liabilities.

Quickest way: Capital table method

When to use it: Use this when the question asks only for adjusted capitals, cash adjustment or the new Balance Sheet, and not for full journal entries.

  1. Draw a table with one column per partner, plus a total column.
  2. Write the old capital for each partner, and add or subtract reserves and revaluation results in the old ratio.
  3. Total each firm's adjusted capital and tick it against net assets taken over.
  4. Add the capital columns of all firms and compute the agreed capital for each partner.
  5. Take the difference to find cash brought in or withdrawn, and put these cash figures into the new Balance Sheet.
  6. Check that the Balance Sheet total agrees on both sides.

Common mistakes in Amalgamation of Partnership Firms: Meaning and Procedure

  • Mixing up amalgamation with conversion into a company.

    Both words describe firms combining or changing form, so students treat them as the same.

    Fix: Ask what the result is. If it is a partnership firm with capital accounts, it is amalgamation. If it is a company issuing shares, it is conversion.

  • Sharing revaluation profit or loss in the new ratio.

    Students focus on the new firm and forget the old firm's books are closing.

    Fix: Revalue in the old firm's books and share the result in that firm's old ratio. The new ratio applies only to future profits of the new firm.

  • Ignoring reserves and accumulated profits or losses when finding adjusted capital.

    Students look only at capital accounts and treat other balances as separate items.

    Fix: Add reserves and accumulated profits to old partners' capitals in the old ratio. Deduct accumulated losses. Do this before comparing with agreed capital.

  • Bringing taken-over items into the new firm at book value when the agreement gives revalued figures.

    Students copy values from the old Balance Sheet without reading the agreement.

    Fix: Underline every revalued figure in the question. The new firm records assets and liabilities at agreed values.

  • Including assets or liabilities that the agreement leaves out.

    Students assume all items are taken over.

    Fix: Check whether items such as cash, bank or particular creditors stay with the old firm. Items not taken over, such as cash, are retained or realised by the old partners, so their capitals are settled or withdrawn to that extent. The new firm's opening capital is then the net assets actually taken over.

  • Forgetting the cash adjustment after fixing the new capitals.

    Students stop once adjusted capitals are ready.

    Fix: Always compare adjusted and agreed capital, and show cash brought in or taken out. Then bring this into the bank balance of the new firm.

Worked examples

Example 1

Firm A is to amalgamate with another firm. A's partners are Ravi and Sunil, sharing profits equally. Their capitals are ₹2,00,000 and ₹1,50,000. A's assets are Stock ₹1,00,000, Debtors ₹2,00,000 and Cash ₹50,000, and there are no liabilities. Total assets ₹3,50,000 equal total capital ₹3,50,000. The agreement values stock at ₹90,000 and debtors at ₹1,90,000, and all assets are taken over. Prepare the Revaluation Account and find the adjusted capitals of A's partners.

Show the solution
  1. Decrease in stock = ₹1,00,000 − ₹90,000 = ₹10,000.
  2. Decrease in debtors = ₹2,00,000 − ₹1,90,000 = ₹10,000.
  3. Revaluation Account: debit side, Stock ₹10,000 and Debtors ₹10,000, total ₹20,000. There is nothing on the credit side, so the balance is a loss of ₹20,000.
  4. Transfer the loss equally: Ravi's Capital A/c Dr ₹10,000 and Sunil's Capital A/c Dr ₹10,000.
  5. Ravi's adjusted capital = ₹2,00,000 − ₹10,000 = ₹1,90,000.
  6. Sunil's adjusted capital = ₹1,50,000 − ₹10,000 = ₹1,40,000.
  7. Check: total adjusted capital = ₹3,30,000. Revalued assets = ₹90,000 + ₹1,90,000 + ₹50,000 = ₹3,30,000. They agree.

Answer: Revaluation loss is ₹20,000. Adjusted capitals are Ravi ₹1,90,000 and Sunil ₹1,40,000, totalling ₹3,30,000.

Example 2

Firm P has partners Asha and Bina sharing profits 3:2, and their adjusted capitals are ₹3,00,000 and ₹2,00,000. Firm Q has partners Chitra and Dev sharing equally, with adjusted capitals ₹1,50,000 and ₹1,50,000. They form a new firm, PQ & Co., with total capital ₹10,00,000, and partners share profits Asha 4, Bina 3, Chitra 2 and Dev 1. Capitals are to be in the profit sharing ratio. Find the cash to be brought in or withdrawn by each partner.

Show the solution
  1. Total of ratio = 4 + 3 + 2 + 1 = 10.
  2. Agreed capitals: Asha = ₹10,00,000 × 4/10 = ₹4,00,000. Bina = ₹3,00,000. Chitra = ₹2,00,000. Dev = ₹1,00,000.
  3. Asha: ₹4,00,000 − ₹3,00,000 = ₹1,00,000 to bring in.
  4. Bina: ₹3,00,000 − ₹2,00,000 = ₹1,00,000 to bring in.
  5. Chitra: ₹2,00,000 − ₹1,50,000 = ₹50,000 to bring in.
  6. Dev: ₹1,00,000 − ₹1,50,000 = −₹50,000, so ₹50,000 to withdraw.
  7. Check: total brought in = ₹2,50,000. Total withdrawn = ₹50,000. Net cash added = ₹2,00,000. Old capital total = ₹8,00,000. Adding ₹2,00,000 gives ₹10,00,000, which matches the agreed capital.

Answer: Asha brings in ₹1,00,000, Bina brings in ₹1,00,000, Chitra brings in ₹50,000, and Dev withdraws ₹50,000. Net cash added to the firm is ₹2,00,000.

Exam tips

  • Read the amalgamation agreement twice and mark the valuation, ratio and capital terms before writing anything.
  • In MCQs, check whether the question describes a partnership firm result or a company with shares, since this separates amalgamation from conversion.
  • For written answers, show the Revaluation Account, capital table and opening Balance Sheet separately, because step marks are given for each part.
  • Always prove your answer by checking that net assets equal total capital and that the Balance Sheet tallies.
  • Write the old ratio next to every revaluation or reserve split. It shows the examiner you used the right ratio.

Practice questions from Amalgamation of Partnership Firms

Amalgamation of Partnership Firms: Meaning and Procedure 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: Meaning and Procedure: frequently asked questions

What is amalgamation of partnership firms?

It is the combining of two or more existing partnership firms into a new firm. The old firms stop their business and the partners usually continue in the new firm. The terms are set out in an amalgamation agreement.

What is the difference between amalgamation and conversion of a partnership firm?

In amalgamation, the result is still a partnership firm with partners' capital accounts. In conversion, the firm becomes a company, and the partners receive shares or other consideration. The accounting entries and the legal form are therefore different.

Which ratio is used to share revaluation profit or loss in amalgamation?

Each old firm shares its own revaluation profit or loss in its old profit sharing ratio. The new ratio is used only for the new firm's future profits and, if the agreement says so, for setting the agreed capitals.

Do all assets and liabilities have to be taken over by the new firm?

No. The agreement decides which items are taken over. Some items, such as cash or certain creditors, may be left with the old firm. Read the question carefully and take over only the items it names.