Financial Accounting · Amalgamation of Partnership Firms

Purchase Consideration and Capital Adjustment in Firm Amalgamation

Updated 10 October 2026 · Fact-checked

Purchase consideration is the amount the taking-over firm agrees to pay for the net assets of the other firm. Compute it as the agreed value of assets taken over minus liabilities taken over, after cancelling inter-firm debts. Then adjust each partner's capital to the agreed profit-sharing ratio, settling differences through cash or current accounts.

Understand Purchase Consideration and Capital Adjustment of Partners

When one firm takes over another, or two firms merge into a new firm, the firm that takes over pays for what it gets. That price is the purchase consideration. It is usually settled by crediting the capital accounts of the partners of the firm taken over, though it can also be paid in cash.

The most common way to compute it is the net assets method. Take the assets the buyer has agreed to take over at their agreed values, not book values. Deduct the liabilities the buyer has agreed to take over. The result is the purchase consideration. Assets or liabilities left out of the deal are ignored.

The two firms may have dealings with each other. One firm may owe money to the other, or one may hold the other's bills. These are inter-firm debts. Once the firms combine, a firm cannot owe money to itself. So such balances are cancelled. A debtor balance of one firm that is owed by the other firm, and the matching creditor balance, simply disappear from the new books.

After the deal, partners often agree to hold capital in the new profit-sharing ratio. Their actual capitals, after revaluation and goodwill, rarely match this. A partner with too much capital withdraws the excess in cash or has it moved to a current account. A partner with too little brings in cash or has the shortfall debited to a current account. The total capital of the firm is fixed first, and each partner's required capital is that total multiplied by their share.

Your answer should show the purchase consideration working, the cancellation of inter-firm balances, and a clear capital adjustment table.

Key rules to remember

Purchase consideration (net assets method): Purchase consideration = Agreed value of assets taken over − Liabilities taken over; Use agreed values. Include only the assets and liabilities the buyer actually takes over.
Inter-firm debts: Amount owed by one firm to the other is deducted from the debtors (or bills receivable) of one firm and from the creditors (or bills payable) of the other firm; The combined firm then shows neither balance. In the purchase consideration, an amount due from the buyer is not an asset taken over, and an amount the firm sold owes to the buyer is not taken over as a liability. The buyer's own books cancel the matching balance. Never leave a firm owing itself.
Required capital of a partner: Required capital = Agreed total capital of new firm × Partner's share in new profit-sharing ratio; If total capital is not given, it is often fixed on the basis of one partner's capital and that partner's share.
Capital adjustment: Excess or shortfall = Actual capital after adjustments − Required capital; Excess: withdraw cash or credit current account. Shortfall: bring cash or debit current account.
Revaluation effect on capital: Adjusted capital = Old capital ± Share of revaluation profit or loss ± Share of goodwill and reserves; Share revaluation results in the old profit-sharing ratio of each firm.

How to solve Purchase Consideration and Capital Adjustment of Partners questions

Use this order for any question on purchase consideration and capital adjustment. It keeps your working clear and earns step marks.

1Read which assets and liabilities the buyer takes over. Note any excluded items, such as cash or bank loans.
2List each item at its agreed value. Where only a revaluation is given, convert book values to agreed values.
3Spot inter-firm debts. Deduct the amount from the debtors of one firm and from the creditors of the other, so no firm owes itself.
4Compute purchase consideration = agreed assets − agreed liabilities. Show it as a neat statement.
5Settle the consideration as stated: credit partners' capitals in their profit-sharing ratio, or pay cash, or both.
6Work out each partner's adjusted capital, including their share of revaluation, goodwill and reserves in old ratios.
7Compute required capital in the new ratio and compare it with actual capital. Note excess or shortfall for each partner.
8Pass the adjusting entries through cash or current accounts, and check that total capital matches the figure agreed.

Quickest way: Net assets in one pass

When to use it: Use this when the question gives book values plus a list of agreed values and some mutual debts. It saves time in the 14-mark descriptive questions.

Write two columns: assets taken over at agreed value, liabilities taken over.
Deal with any inter-firm balance first: take it off the debtors (or creditors) of the firm sold, and cancel the matching balance in the other firm's books.
Total each column and subtract. This is the purchase consideration.
For capital adjustment, write actual capital, required capital and difference in one three-line table per partner.
Check that total excess equals total shortfall, or that the net difference equals cash brought in or taken out.

Common mistakes in Purchase Consideration and Capital Adjustment of Partners

Using book values instead of agreed values for assets and liabilities.
The balance sheet is in front of you, so its figures feel final.
Fix: Read the agreement. Where a different value is given, use it. Book values apply only when no other value is stated.
Leaving inter-firm debts in the net assets.
Students see the debtor and creditor as ordinary balances and forget they belong to the combining firms.
Fix: Scan both balance sheets for amounts due to or from the other firm. Deduct the amount from the debtors of one firm and from the creditors of the other, so the combined firm shows neither.
Including assets or liabilities that are not taken over.
Students total the entire balance sheet by habit.
Fix: Underline what is excluded, such as cash, bank balance or personal loans, and leave these out of the purchase consideration.
Sharing revaluation profit or goodwill in the new ratio.
The new ratio is the focus of the question, so it gets used everywhere.
Fix: Use the old ratio of each firm for adjustments before the merger. The new ratio is only for the required capital and later profits.
Treating capital adjustment as a loss or gain.
Students confuse a shortfall with an expense.
Fix: A shortfall or excess is only a transfer between the partner and the firm. Pass it through cash or the current account, not the profit and loss account.
Not checking that total capital equals the agreed amount.
Students stop once each partner is adjusted.
Fix: Add the final capitals. If they differ from the agreed total, recheck your revaluation and required capital figures.

Worked examples

Example 1

X & Co. takes over Y & Co. The assets and liabilities of Y & Co. are: Land (book value ₹4,00,000, agreed at ₹5,00,000); Stock (book value ₹2,00,000, agreed at ₹1,80,000); Debtors (agreed at ₹1,40,000, including ₹30,000 due from X & Co.); Cash ₹50,000; Creditors ₹1,00,000, all due to outside parties. X & Co. takes over all assets except cash, and all the creditors. The ₹30,000 due from X & Co. is an inter-firm debt and is cancelled. Find the purchase consideration.

Show the solution

Land at agreed value: ₹5,00,000.
Stock at agreed value: ₹1,80,000.
Debtors at agreed value: ₹1,40,000. Less the ₹30,000 due from X & Co., which is an inter-firm debt and is cancelled. Debtors taken over = ₹1,10,000.
Cash is not taken over, so it is left out.
Total assets taken over = 5,00,000 + 1,80,000 + 1,10,000 = ₹7,90,000.
Creditors taken over (all outside parties, nothing to cancel): ₹1,00,000.
Purchase consideration = 7,90,000 − 1,00,000 = ₹6,90,000.
The debtor balance due from X & Co. is not an asset taken over, so the consideration is ₹30,000 lower than the ₹7,20,000 it would be if debtors were taken at the full ₹1,40,000. In X & Co.'s own books, the ₹30,000 it owes to Y & Co. is cancelled against the matching creditor, because a firm cannot owe money to itself.

Answer: Purchase consideration is ₹6,90,000, normally settled by crediting the capital accounts of Y & Co.'s partners in X & Co.'s books in their profit-sharing ratio. The ₹30,000 inter-firm debt is excluded from the debtors taken over, which lowers the consideration by ₹30,000, and X & Co.'s matching liability is cancelled in its own books.

Example 2

Rekha and Sunil are partners in one firm and have been sharing profits equally. On reconstitution they agree to share profits in the ratio 3:2, with total capital fixed at ₹10,00,000. Before the change, Rekha's capital is ₹5,80,000 and Sunil's ₹3,50,000. On revaluation of the firm's assets, a profit of ₹70,000 arises, which is shared between them in their old ratio (equal). Show the capital adjustment.

Show the solution

Revaluation profit is shared in the old ratio, 1:1. Rekha's share = 70,000 × 1/2 = ₹35,000. Sunil's share = ₹35,000.
Rekha's adjusted capital = 5,80,000 + 35,000 = ₹6,15,000.
Sunil's adjusted capital = 3,50,000 + 35,000 = ₹3,85,000. Total adjusted capital = ₹10,00,000, which equals the agreed total capital. So the excess and the shortfall must net to zero.
Required capital in the new ratio 3:2: Rekha = 10,00,000 × 3/5 = ₹6,00,000. Sunil = 10,00,000 × 2/5 = ₹4,00,000.
Rekha: 6,15,000 − 6,00,000 = ₹15,000 excess. Sunil: 3,85,000 − 4,00,000 = ₹15,000 shortfall. Excess ₹15,000 equals shortfall ₹15,000, so the net difference is nil.
Rekha's excess is withdrawn in cash or credited to her current account. Sunil brings ₹15,000 in cash or his current account is debited by ₹15,000.

Answer: Rekha's capital is reduced to ₹6,00,000 with ₹15,000 excess settled in cash or current account. Sunil's capital is raised to ₹4,00,000 with ₹15,000 brought in or debited to his current account. Total capital stays at the agreed ₹10,00,000.

Exam tips

In MCQs, check first whether inter-firm debts and excluded items change the net assets. Many options differ only by these.
Show the purchase consideration as a small statement with agreed values. Marks are given for each correct item.
Write the old ratio and the new ratio clearly at the top. Label which one you use for each step.
If the question says capitals should be in profit-sharing ratio but gives no total, find the total from the partner whose capital is not to be changed, then compute others.
Finish with a short capital account or balance sheet extract so the examiner can see your totals agree.

Practice questions from Amalgamation of Partnership Firms

Purchase Consideration and Capital Adjustment of Partners in other exams

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

Purchase Consideration and Capital Adjustment of Partners: frequently asked questions

What is purchase consideration in amalgamation of partnership firms?

It is the price the taking-over firm agrees to pay for the net assets of the other firm. It is usually computed as agreed value of assets taken over less liabilities taken over. It is often settled by crediting the partners' capital accounts.

How do you treat inter-firm debts in amalgamation?

An amount owed by one combining firm to the other is deducted from the debtors of one firm and from the creditors of the other. The combined firm then shows neither balance, so no firm shows a balance owed to itself.

How do partners adjust capital in the new profit-sharing ratio?

Compute each partner's required capital by multiplying total agreed capital by the new ratio share. Compare it with the actual capital. Settle any excess or shortfall through cash or current accounts.

Should I use the old or new ratio for revaluation profit?

Use the old ratio of the firm in which the profit or loss arises, because it relates to the period before the merger. The new ratio applies to required capitals and future profits.