Financial Accounting · Amalgamation of Partnership Firms

Closing Books of Old Firms and Opening Entries in New Firm

Updated 10 October 2026 · Fact-checked

When firms amalgamate, each old firm revalues its assets and liabilities, transfers those taken over to a realisation account, and closes partners' capitals against the new firm. The new firm then records the same assets and liabilities at agreed values and credits each partner's capital. Both sets of books must agree.

Understand Closing Books of Old Firms and Opening Entries in New Firm

In an amalgamation, two or more partnership firms merge into one new firm. The old firms stop business. Their books must be closed, and the new firm must start its own books.

The old firms' books do two jobs. First, they bring assets and liabilities to the agreed values through a Revaluation Account. The profit or loss on revaluation goes to the old partners in their old profit-sharing ratio. Second, they transfer everything the new firm takes over. This is usually done through a Realisation Account (or a New Firm Account). After this, only the partners' capital accounts remain.

The amount the new firm owes the old firm is the net assets taken over at agreed values (assets taken over minus liabilities taken over). In a firm amalgamation this equals the partners' adjusted capitals, unless goodwill or cash adjustments are agreed. Each old firm's partners are credited this amount in the new firm as their capital.

The new firm's books are the mirror image. It debits each asset at the agreed value, credits each liability, and credits each partner's capital. If the old firms had common items such as inter-firm debts, these are cancelled. Read the question for what is taken over, what is left behind, and what the new capitals should be.

Key rules to remember

Adjusted capital of an old partner: Old capital ± share of revaluation profit or loss ± other adjustments (goodwill, reserves); Share the revaluation result in the old firm's old profit-sharing ratio.
Net assets taken over: Assets taken over at agreed values − Liabilities taken over at agreed values; This is the amount due from the new firm. It should equal the total of adjusted capitals.
Check of agreement: Σ Adjusted capitals of the old firm = Net assets taken over; If the two differ, you have missed a revaluation, reserve or an asset or liability left behind.
Closing entry in the old firm (transfer): Realisation A/c Dr, To Assets (at agreed values); Liabilities Dr, To Realisation A/c; New Firm A/c Dr, To Realisation A/c (net amount); Partners' Capital A/c Dr, To New Firm A/c; Asset accounts are first brought to agreed values through the Revaluation Account. The account balances then become nil. Use the exact entries your question format asks for.
Opening entry in the new firm: Assets Dr (agreed values); To Liabilities; To Partners' Capital A/cs; One compound entry per old firm is acceptable when assets and liabilities are few.
Balance sheet of new firm: Σ Capitals + Σ Liabilities = Σ Assets, each combined across the old firms; Add like items from both firms at the agreed values.

How to solve Closing Books of Old Firms and Opening Entries in New Firm questions

Use this order for any problem. It keeps each firm's work separate and ends with the new firm's balance sheet.

1Read the terms of amalgamation. Note which assets and liabilities are taken over, the agreed values, and any items left out (such as cash or bank loans).
2For each old firm, prepare a Revaluation Account. Debit decreases in assets and increases in liabilities. Credit increases in assets and decreases in liabilities. Share the profit or loss in the old ratio.
3Adjust the partners' capitals for revaluation, reserves and goodwill, if given. This gives the adjusted capital of each partner.
4Prepare the Realisation (or New Firm) Account for each old firm. Transfer assets at the agreed values, transfer liabilities, and find the amount due from the new firm.
5Close the partners' capital accounts by transferring the adjusted balances to the new firm. Confirm the old firm's accounts are all nil.
6Pass the opening entries in the new firm: debit assets, credit liabilities, credit each partner's capital. Add any capital changes agreed in the terms.
7Prepare the opening balance sheet of the new firm by adding the items from both firms. Check that both sides are equal.

Quickest way: Net-assets shortcut for the new firm's opening entry

When to use it: Use when the question asks for only the new firm's journal entry or balance sheet, with full revaluation figures given in the terms.

For each old firm, write the capital after revaluation (old capital plus or minus the partner's share of revaluation result).
Write the agreed value of every asset and liability taken over. Do not use old book values.
Check that total adjusted capitals equal assets minus liabilities at agreed values. Fix any gap before going further.
Write the new firm's entry: all assets Dr, all liabilities and each partner's capital Cr.
Add both firms' items line by line to get the balance sheet.

Common mistakes in Closing Books of Old Firms and Opening Entries in New Firm

Using old book values in the new firm's books instead of agreed values.
Students copy figures from the old balance sheet and forget the revaluation terms.
Fix: Always take the agreed values from the terms. The new firm records only these.
Sharing the revaluation profit in the new firm's ratio.
The new ratio is seen first in the question, so it feels like the right one.
Fix: Revaluation happens in the old firm's books, so use that firm's old ratio. The new ratio is only for the new firm's future profits.
Leaving partners' capitals open in the old firm after transferring the assets.
Students stop after the Realisation Account and forget the final transfer.
Fix: Transfer each partner's adjusted capital to the new firm. Check that every old account is nil.
Treating the balancing figure of the new firm as goodwill without any term for it.
The two sides do not agree, so a figure is created to balance them.
Fix: Recheck the revaluation and the items taken over. Record goodwill only if the terms mention it.
Including items that are not taken over, such as cash or a partner's loan, in the new firm.
Students take the whole balance sheet by habit.
Fix: Underline the items excluded in the terms. Exclude them from the new firm entry and settle them in the old firm's books.
Showing partners' capitals at old balances in the new firm's balance sheet.
Revaluation share is forgotten when the capital is carried over.
Fix: Carry over the adjusted capital, unless the terms fix different capitals for the new firm.

Worked examples

Example 1

Firm X (partners P and Q, sharing equally) has this balance sheet: Capital P ₹60,000, Capital Q ₹40,000, Creditors ₹20,000; Land ₹50,000, Stock ₹40,000, Debtors ₹30,000. It amalgamates with another firm into Z & Co. All assets and creditors are taken over at these agreed values: Land ₹60,000, Stock ₹35,000, Debtors ₹28,000. Prepare the Revaluation Account, pass the closing entries in X's books and the opening entry in Z & Co's books.

Show the solution

Revaluation: Land increases by ₹10,000 (gain). Stock decreases by ₹5,000 (loss). Debtors decrease by ₹2,000 (loss).
Net revaluation profit = 10,000 − 5,000 − 2,000 = ₹3,000. Share equally: ₹1,500 each to P and Q.
Adjusted capitals: P = 60,000 + 1,500 = ₹61,500. Q = 40,000 + 1,500 = ₹41,500. Total ₹1,03,000.
Net assets taken over = 60,000 + 35,000 + 28,000 − 20,000 = ₹1,03,000. This equals the adjusted capitals.
Closing entries in X's books, in this order. Entry 1 brings the asset accounts to agreed values: Revaluation A/c Dr ₹7,000, To Stock ₹5,000, To Debtors ₹2,000. Land A/c Dr ₹10,000, To Revaluation A/c ₹10,000. Entry 2 shares the profit: Revaluation A/c Dr ₹3,000, To P's Capital ₹1,500, To Q's Capital ₹1,500. After these entries, Land stands at ₹60,000, Stock at ₹35,000 and Debtors at ₹28,000, which are the agreed values.
Entry 3 transfers the assets at these agreed values: Realisation A/c Dr ₹1,23,000, To Land ₹60,000, To Stock ₹35,000, To Debtors ₹28,000.
Entry 4 transfers the liability and the amount due: Creditors A/c Dr ₹20,000, To Realisation A/c ₹20,000. New Firm (Z & Co) A/c Dr ₹1,03,000, To Realisation A/c ₹1,03,000. Realisation A/c now balances: debit ₹1,23,000, credits 20,000 + 1,03,000 = ₹1,23,000.
Entry 5 closes the capitals: P's Capital A/c Dr ₹61,500 and Q's Capital A/c Dr ₹41,500, To Z & Co A/c ₹1,03,000. All accounts of X now show nil.
Opening entry in Z & Co's books: Land A/c Dr ₹60,000, Stock A/c Dr ₹35,000, Debtors A/c Dr ₹28,000, To Creditors A/c ₹20,000, To P's Capital ₹61,500, To Q's Capital ₹41,500. Debits and credits are each ₹1,23,000.

Answer: Revaluation profit ₹3,000 (₹1,500 each). Adjusted capitals: P ₹61,500 and Q ₹41,500. Z & Co is debited ₹1,03,000 in X's books. In Z & Co, assets of ₹1,23,000 are debited against creditors of ₹20,000 and capitals of ₹1,03,000.

Example 2

Firm Y (partners R and S, sharing 3:2) has: Capital R ₹50,000, Capital S ₹30,000, Creditors ₹10,000; Building ₹45,000, Stock ₹30,000, Cash ₹15,000. It amalgamates with Firm X of Example 1 to form Z & Co. Y's assets and creditors are taken over: Building at ₹51,000, Stock at ₹27,000 and Cash at book value. Capitals of the new firm equal the adjusted old capitals. Prepare the opening balance sheet of Z & Co, including both firms.

Show the solution

Revaluation in Y: Building gains ₹6,000. Stock loses ₹3,000. Net profit = ₹3,000.
Share in 3:2: R gets 3,000 × 3/5 = ₹1,800. S gets 3,000 × 2/5 = ₹1,200.
Adjusted capitals: R = 50,000 + 1,800 = ₹51,800. S = 30,000 + 1,200 = ₹31,200. Total ₹83,000.
Check: 51,000 + 27,000 + 15,000 − 10,000 = ₹83,000. Agrees with adjusted capitals.
Opening entry in Z & Co for Y: Building Dr ₹51,000, Stock Dr ₹27,000, Cash Dr ₹15,000, To Creditors ₹10,000, To R's Capital ₹51,800, To S's Capital ₹31,200. Each side ₹93,000.
Combine with X (from Example 1). Land ₹60,000. Building ₹51,000. Stock = 35,000 + 27,000 = ₹62,000. Debtors ₹28,000. Cash ₹15,000. Total assets = 60,000 + 51,000 + 62,000 + 28,000 + 15,000 = ₹2,16,000.
Creditors = 20,000 + 10,000 = ₹30,000. Capitals: P ₹61,500, Q ₹41,500, R ₹51,800, S ₹31,200, total ₹1,86,000.
Check: 1,86,000 + 30,000 = ₹2,16,000, which equals total assets.

Answer: Z & Co's opening balance sheet: Capitals ₹1,86,000 (P ₹61,500, Q ₹41,500, R ₹51,800, S ₹31,200) and Creditors ₹30,000, total ₹2,16,000. Assets: Land ₹60,000, Building ₹51,000, Stock ₹62,000, Debtors ₹28,000, Cash ₹15,000, total ₹2,16,000.

Exam tips

Start every answer with the revaluation working. Step marks are given for each adjusted figure, even if a later entry goes wrong.
Show a one-line check that net assets taken over equal total adjusted capitals. It catches errors and shows the examiner you understand the link.
Write clear narrations. For old-firm closing entries, say what is being transferred and to whom.
For the MCQs, expect questions on which ratio shares the revaluation result, what the new firm records the assets at, and what the net assets taken over represent. The answers are old ratio, agreed values, and the amount credited to partners.
Keep each firm's working separate and label it. Combine only when you reach the new firm's balance sheet.

Practice questions from Amalgamation of Partnership Firms

Closing Books of Old Firms and Opening Entries in New Firm: frequently asked questions

Which profit-sharing ratio is used for revaluation profit in an amalgamation?

Use the old profit-sharing ratio of the firm whose assets are being revalued. The revaluation relates to the period before the amalgamation. The new ratio applies only to profits of the new firm.

At what value does the new firm record the assets and liabilities?

The new firm records them at the values agreed in the terms of amalgamation. These can differ from the old book values. The difference is already dealt with in the old firm's Revaluation Account.

Do I need a Realisation Account in the old firm's books?

It is the usual method for closing the books, and it shows what was transferred to the new firm. Some questions use a New Firm Account directly. Follow the format of the question and make sure all old accounts finish at nil.

How do I prepare the balance sheet of the new firm?

Take the agreed values of assets and liabilities from both firms and add like items. Show each partner's capital as per the terms. Then check that capitals plus liabilities equal total assets.