Amalgamating Sole Proprietorships Into A Partnership
Peter Marshall Bsc (Econ) BA MBIM is a Fellow of the Society of Business Teachers, and an experienced educator in business subjects. He is also a prolific author and his books have been translated and sold worldwide. He lives in London, UK.
Consolidation
Now we come to a new accounting technique, consolidation. The idea is to consolidate or amalgamate the accounts of two separate businesses into those of a single partnership. The method is very simple:
- we just add each of the individual balance sheet items together, after making adjustments in each for any changes in asset values agreed by the parties.
Making the adjustments
Such adjustments may arise for example because A thinks his ‘provision for bad debts’ of 5% is reasonable, while B feels it should be 7 ½%; or B might feel that one of A’s machines is not worth what A’s balance sheet says it is; and so on. If the amalgamation is to go ahead, the parties will have to settle all such disagreements first.
When we make such adjustments, it is bound to affect the capital figure. So we also need to make the adjustment to the capital accounts, before consolidating the balance sheets by adding all their components together. Indeed, if we didn’t adjust the capital accounts, the individual balance sheets would cease to balance, and then the consolidated one would not balance either.
The ‘goodwill’ value of each business
The parties may agree that different values of goodwill existed in their businesses before amalgamation. Perhaps one business was long-established, while the other one was rather new and had not yet built such a good reputation. In such a case, each business would write an agreed figure for goodwill into its balance sheet before amalgamation. It would post the other side of the dual posting to the credit of its capital account. On amalgamation we then add the two goodwill amounts together, just like all the other assets.
Writing off goodwill after amalgamation
If it is decided later on to write it off, the one aggregated goodwill figure in the post-amalgamation accounts will be credited to goodwill account; the debit entry to complete the dual posting will be posted to the partners’ current accounts, in proportion to their profit-sharing arrangements (unless a different agreement exists between them).
