Presentation
On
Admission of a Partner
PREPARED BY:
NAVDEEP KAUR
PGT COMMERCE
KV 2, PATHANKOT
ADMISSION OF A PARTNER
Admission of a partner means reconstitution of the firm
because with admission of a partner, the existing
agreement comes to an end and a new agreement among
all the partners (including incoming or new partner) comes
into effect. The capital contribution by the new partner, his
share of profits and other conditions are agreed upon. The
new partner on joining becomes liable for the liabilities of
the firm and entitled to assets and profits of the firm.
Section 31 of the Indian Partnership Act, 1932 provides
that a new partner shall not be inducted into a firm without
the consent of all the existing partners, unless it is a
agreed otherwise by the partners in the Partnership Deed.
Thus, a new partner can be admitted into a partnership
firm with the consent of all the partners.
Effects of Admission of a Partner
The effects of admission of a new partner are:
1. The old partnership comes to an end and new
partnership comes into existence.
2. New or Incoming partner becomes entitled to share
future profits of the firm and the combined share of the
old partners gets reduced.
3. New or Incoming partner contributes an agreed
amount of capital to the firm.
Adjustments made on the Admission of a Partner
1. Change in the profit-sharing ratio.
2. Goodwill.
3. Adjustment of accumulated profits, reserves and
losses.
4. Adjustments of capital (if agreed).
CHANGE IN PROFIT-SHARING RATIO
The new or incoming partner is entitled to a share in the
future profits of the firm. In effect, there will be a change in
the old profit-sharing ratio. Since, the new or incoming
partner acquires his share from the old partners,
therefore, it becomes necessary to determine the new
profit-sharing ratio and also the sacrificing ratio.
New Profit-Sharing Ratio
The new profit-sharing ratio is the ratio in which all the
partners, including the new or incoming partner, share the
future profits and losses o the firm.
1. In their old profit-sharing ratio; or
2. In a particular ratio or the surrendered ratio; or
3. In a particular fraction from some of the partners.
Let us now discuss each of the above cases in detail.
Case 1: When a new or incoming partner acquires his
share from the old or existing partners in their old profitsharing ratio.
In such a situation, the share of the new partner is given
and it is assumed that the new partner has acquired his
share from the old partners in their old profit-sharing ratio.
The old partners, therefore, continue t share the balance
profits or losses in their old profit-sharing ratio. In other
words, unless otherwise agreed, the profit-sharing ratio
among the existing partners remains unchanged. The new
profit-sharing ratio among all the partners is determined
by deducting the new or incoming partner’s share from 1
and then dividing the balance in old profit-sharing ratio of
the old partners.
Illustration 1 A and B are partners sharing profits in the
ratio of 5 : 3. C is admitted for 1/4th share in the profits.
Case 2: When a new or incoming partner acquires his
share from the old or existing partners in a particulars
ratio.
If new or incoming partner acquires a part of share of
profits from one partner and a part of share of profits form
another partner. In such a case, the existing partner’s
profit-sharing ratio will change to the extent of share
sacrificed on admission of the new or incoming partner.
The existing partner’s share of profits in the reconstituted
firm is determined by deducting the sacrificed made from
the existing share of profits.
Illustration: A and B are in partnership sharing profits and
losses in the ratio of 5 :3. C is admitted as a partner for
1/5th share which he takes 1/10th from A and 1/10th form B.
Calculate the new profit-sharing ratio of the partners.
Sacrificing Ratio
Sacrificing Ratio is the ratio in which the told or existing
partners forego, i.e., sacrifice their share of profit in
favour of the new or incoming partner. Thus, Sacrificing
Ratio can be defined as the ratio in which the new partner
is given the share by the old partners. This share may be
given to the new or incoming partner by all the old
partners equally or by all or some of the partners in
agreed share.
Let us discuss how the sacrificing ratio is determined.
1. When share of a new partner is given without giving the
details of the sacrifice made by the old partners.
2. When the old ratio of the old partners and the new ratio
of all the partners if given; and
3. When the new or incoming partner acquires his share
by surrender of a particular fraction of shares by old
partners.
Situation 1: When share of a new or incoming partner is
given without giving the details of the sacrifice made by
the old or existing partners.
In this situation, it is assumed that the old partners make
sacrifice in their old profit-sharing ratio. Therefore, the
sacrificing ratio is always in the old profit-sharing ratio.
Illustration:- (Partners make sacrifice in the old ratio). A
and B are partners sharing profits in the ratio of 3:1. C is
admitted into partnership for 1/8th of the profits. Calculate
the sacrificing ratio and the new ratio.
Solution:- Since, C’s share is given without mentioning as
to what c acquires from A and B separately, It is assumed
that c takes it from the partners in their old-profit sharing
ratio. Therefore, the sacrifice made by A and b is in the
ratio of 3:1.
Situation 2: When the old ratio of the old or existing
partners and the new ratio of all the partners are given.
In this situation, sacrificing ratio of the old partners is the
difference between old ratio and the new ratio, i.e, it is
calculated by deducting the new share from the old share
of the old partners.
Illustration: (New ratio of all partners are given). A and B
are partners sharing profits in the ratio of 3:2. C is
admitted into partnership. The new-profit sharing ratio
among A.B and c is 5:3:2. Find out the sacrificing ratio.
Situation: When the new or incoming partner acquires the
share by surrender of a particular fraction of shares by
old partners.
In this situation, shares surrendered by the old partners in
favour of a incoming partner are added. It is the share of
the new partner. The share surrendered by the old partner
is deducted from his old share to determine the share of
new or incoming partner in the reconstruction firm.
Illustration:- (Old partners surrender a particular fraction
of their shares in Favour of a new Partner). A and B are
partners in a firm sharing profits and losses in the ratio of
5:3. A surrenders 1/20th of his share, whereas b
surrenders 1/24th of his share in favour of c, a new partner.
Calculate the new profit-sharing ratio and the sacrificing
ratio.
Distinction between Sacrificing Ratio and new ProfitSharing Ratio
Basis
Sacrificing Ratio
New Profit-Sharing Ratio
1. Meaning
It is the ratio in which the old
partners agree to sacrifice their
shares in profits in favour of a new
partner.
It is the ratio in which all
partners including the
incoming partner share
the future profits and
losses.
2. Related Partners
It is related to the old partners only.
It is related to all partners
including the new partner
3. Calculation
Sacrificing Ratio=Old Ratio-New Ratio
TREATMENT OF GOODWILL
AS-26 prescribes that goodwill be recorded in the books
only when consideration in money or money’s worth has
been paid for it, i.e., goodwill is purchased. Thus in case of
admission or retirement/death of a partner or in case of
change in the profit-sharing ratio among partners,
goodwill, should not be raised in the books of the firm
because no consideration in money or money’s worth is
paid for it. If any partner brings any premium over and
above his capital contribution at the time of his admission,
such premium should be distributed among the existing
partners in their sacrificing ratios.
If goodwill is evaluated at the time of change in the
constitution
of
the
firm
(by
way
of
admission/retirement/death/change in profit-sharing ratio),
the goodwill should not be brought in books since it is
inherent goodwill. The value of goodwill should be
adjusted through partners capital accounts.
1. Goodwill (premium for goodwill) paid privately: when
goodwill premium is paid privately (i.e.. Outside the
business) by the new or incoming partner to the old
partners, no entry is recorded in the banks of accounts.
2. Goodwill/Premium for goodwill brought in cash by the
new or incoming partner and retained in the business:
when the new partner brings cash for his share of
goodwill, it is transferred to the capital accounts of the
sacrificing partners. In other words, the amount of
goodwill brought in by the partner is shared by the
sacrificing partners in their sacrificing ratio.
Illustration:- A and B are partners in the firm sharing profit
in the ratio of 3:2. A and B surrender 1/2th of their
respective shares in favour of C. C is to bring his share of
premium for goodwill in cash. The goodwill of the firm is
estimated at rs40,000. pass the necessary journal entries
for recording of the goodwill in the above case.
Solution:JOURNAL
Date
Particulars
Cash A/c
Dr….
To Premium for Goodwill A/c
(Being the share of premium brought in cash by
C)
Premium for Goodwill A/c
To A’s Capital A/c
To B,s Capital A/c
(Being the distribution of premium among old
partners in their sacrificing ratio, i.e., 3:2) (Note)
L.F.
Dr.
cr
20,000
20,000
20,000
12,000
8,000
3. Premium for Goodwill (Goodwill) brought in Kind: New
or incoming partner may bring his share of premium for
goodwill in the form of assets. In this situation, the value of
assets brought in is debited and premium for goodwill or
goodwill account is credited for his share of goodwill
besides crediting the new partner’s capital account for his
capital. Thereafter, premium (Share of Goodwill) is
transferred to the capital accounts of the sacrificing
partners in their sacrificing ratio.
Accounting Entries
For assets brought in by the new partner:
Assets A/c
To New partner’s capital
To Premium for Goodwill A/c
For giving credit of goodwill to sacrificing partners in their
sacrificing ratio:
PREMIUM FOR GOODWILL A/C
To Sacrificing Partner’s Capital A/cs
Illustration:- (Premium brought in Kind). X and Y are
partners in a firm sharing profits in the ratio of 3:2. on 1st
April, 2012, they admit Z as a new partner for 3/13th share
in the profits. The new ratio will be 5:5:3. Z contributed the
following assets to his capital and his share for goodwill:
stock rs80,000. debtors rs1,20,000; Land rs2,00,000; Plant
and Machinery rs1,20,000. on the date of admission of Z,
goodwill of firm was valued at rs10,00,000. record the
necessary journal entries in the books of the firm on Z’s
admission.
Solution
Date
2012
April
Particulars
L.F.
Dr.
Stock A/c
…..Dr
Debtors A/c
…..Dr.
Land A/c
…..Dr.
Plant and Machinery A/c
…..Dr.
To Z,s Capital A/c
To Premium for Goodwill A/c (WN 1)
(Being the assets contributed by Z on his admission
as his capital and his share of goodwill premium)
80,000
1,20,000
2,00,000
1,20,000
Premium for Goodwill A/c
……Dr..
To X’s capital A/c
To Y’s capital A/c
(Being the goodwill premium transferred to the
capital accounts of X and Y on Z’s admission in
their sacrificing ratio) (WN 2)
2,40,000
Cr.
2,80,000
2,40,000
2,24,000
16,000
4. Goodwill/Premium for goodwill is brought by the New or
Incoming Partner and is withdrawn by the old partners
fully or partly: The premium brought by the new or
incoming partner is shared by the old partners in the
sacrificing ratio. The sacrificing partners may withdraw
the premium amount fully or partly.
Accounting entries
For premium for goodwill brought in cash by the partner:
Cash/Bank A/c
Dr.
Amount of premium
To premium for goodwill A/c
For sharing of premium for goodwill
Premium for goodwill A/c
Dr.
Amount of premium
For withdrawal of
premium money fully/partly Dr.
Sacrificing partner’s capital A/cs
Amount withdrawal
5. When only a part of the Goodwill/ Premium for Goodwill
is brought by a New or Incoming partner in cash: The new
or incoming partner may not be able to bring the full
amount of his share of goodwill/premium for goodwill in
cash, i.e. brings only a part in cash. In this case, the
premium for goodwill account is credited for the amount of
premium brought by him. At the time of recording the
transfer entry, the new or incoming partner’s Capital
Account is debited with his unpaid share of premium
besides debiting the premium for goodwill account with
the amount of premium brought by him.
Illustration 25 And B are partners sharing profits and
losses in the ratio of 3:2. they admit C into the firm for
1/4th share in profits which he takes 1/6th from A and 1/12th
from B. C brings Rs. 18,000 as goodwill out of his share of
Rs. 30,000.No Goodwill Account appears in the books of
the firm.
Solution
Dat
e
Particulars
L.F.
Dr. (Rs.)
Cash A/c
…..Dr
To premium for goodwill A/c
(Being the amount brought in by C as his share of goodwill
18,000
Premium for Goodwill A/c
……Dr..
C’s Capital A/c (Rs.30,000-Rs.18000)
…….Dr.
To A’s capital A/c
To B’s capital A/c
(Being the goodwill credited to the sacrificing partners in their
sacrificing ratio, i.e., 2:1)
18,000
12,000
Cr. (Rs.)
18,000
20,000
10,000
3.Revaluation of assets and reassessment of liabilities
The value of assets may be different from its book value
because with the time, value of some assets increases
while of some decreases. In the case of liabilities, It is
possible that the amount payable is different from the
value recorded in the books. It is also possible that some
assets or liabilities are not recorded in the books. The
value of assets and the liabilities payable need to be
brought to their correct value so that the incoming partner
is not put to an advantage or a disadvantage. For this
purpose, a Revaluation Account or Profit and Loss
Adjustment Account is opened in the books of the firm.
The value of assets and liabilities nor recorded in the
books is accounted through the Revaluation Account. The
profits' losses arising there from are adjusted in the Old
Partners’ Capital Accounts in their old profit-sharing ratio.
When the assets and liabilities Appear in the Books at the
New Values
The adjustments in the value of assets and liabilities are
effected through an account called Revaluation Account or
Profit and Loss Adjustments account. It is debited by
decrease in the value of assets and increase in the amount
of liabilities and credited by the increase in the value of
assets of decrease in the amount of liabilities.
Accounting Entries
1. For an increase in the value of assets
Assets A/c (Individually)
…Dr.
To Revaluation (or Profit and Loss Adjustment) A/c
2. For a decrease in the value of assets
Revaluation (or Profit and Loss Adjustment) A/c
To assets A/c (Individually)
...…Dr.
3. For an increase in the amount of liabilities
Revaluation (or Profit and Loss Adjustment) A/c
To Liabilities A/c (Individually)
………Dr.
4. For a decrease in the amount of liabilities
Liabilities A/c (Individually)
…….Dr.
To Revaluation (or Profit and Loss Adjustment) A/c
5. For accounting unrecorded assets
Assets A/c (Individually)
……..Dr.
To Revaluation (or Profit and Loss Adjustment) A/c
6. For accounting unrecorded liabilities
Revaluation (or Profit and Loss Adjustment) A/c
…….Dr.
Reserves and Accumulated (Undistributed) Profit/Losses
If, before the admission of a new partner, there is balance
in a Reserve Fund and accumulated profit/losses in the
Balance Sheet, they are transferred to the Old Partners’
Capital Accounts in their old ratio. They are transferred the
Old Partners’ Capital Accounts because they had been set
aside out of the profits in the earlier periods, i.e., before
the new partner was admitted.
Thus the Journey will be:
Profit and Loss A/c
Reserve Fund or General Reserve
Workmen’s Compensation Reserve
Investments Fluctuation Reserve
To Old Partners’ Capital A/cs
……Dr.
……Dr.
..Dr.{Excess of Reserve over Actual Liability}
……Dr. {Excess of Reserve over the difference
between Book Value and Market Value}
[In old ratio]
Adjustment of Capital
It may be decided on the admission of a new partner that
either the new partner will contribute as capital an amount
in proportion to his share of profit or that the capitals of
other partners will be adjusted to make them
proportionate to their respective shares of profit. So, we
shall discuss adjustment of capital as under”
1. Adjustment of old partners’ capitals on the basis of
incoming partners’ capital or
2. Calculating the capital of incoming partner on the basis
of the old partners’ capitals.
1. Adjustment of the Old Partners’ Capital Accounts on the
Basis of the Incoming Partners’ Capital: For this, we
take the following steps:
Step2. Determine the new capital of each partner. Total
capital is divided in their new profit-sharing ratio.
Step3: Ascertain the present capital of the old partners
(after all adjustment).
Step4: Find out the surplus capital/deficit capital by
comparing the proportionate capital (ascertained by step
2) and the present capital (ascertained in Step 3).
Surplus= Present capital > Proportionate Capital (New capital)
Deficit= Present capital< Proportionate Capital (New capital)
Step5: Pass the necessary Journal entry for adjusting the
above surplus/deficit.
Journal Entry
(i) In case the present capital in less than the New Capital:
Cash A/c or Concerned partner’s current A/c
..Dr.
To Concerned Partner’s capital A/c
(ii) In case the present capital is more than the new
Capital:
Concerned Partner’s Capital A/c
..Dr.
To Cash A/c or concerned Partner’s Current A/c
Illustration 52: X and Y are partners in a firm sharing
profits in the ratio of 3:2. The remaining capitals of X and Y
after adjustment are Rs. 80,000 and Rs. 60,000
respectively. They admit Z as a partner on his contribution
of Rs. 35,000 as capital for 1/5th share of profits to be
acquired equally from both X and Y.
Solution:
(i) Calculation of New PROFIT-SHARING Ratio:
(a) Their Existing Shares
X
Y
(b) Share transferred to Z
3/5
2/5
(c) Their New Share (a-b)
1/10 1/10
(d) New Profit-Sharing ratio of X, Y and Z=5/10
:3/10:1/5= 5: 3: 2.
(ii) Calculation of Total capital of the Reconstituted Firm:
Total capital of the firm = Capital of the new partner x Reciprocal of
share of profit of the partner
Total capital = Rs. 35,000x5/1=Rs. 1,75,000.
(iii) Calculation of New Capitals of All Partners:
New capitals (Rs.1,75,000 in ratio of 5:3:2)
X
Rs. 57,500,
Y
Z
Rs.52,500, Rs.35,000
(iv) Calculation of Actual Cash to be Paid off/Brought in by
Old Partners:
X (Rs.)
Y (Rs.)
(a) New Capitals
87,500
52,500
(b) Existing Capitals
80,000
60,000
(c) Cash to be paid (to be brought in)
7,500
7,500