Questions
7–9 questions
Difficulty
Medium-Hard
Importance
Key for Class 12 boards
Overview
Admission of a partner represents a fundamental change in the reconstitution of a partnership firm, requiring precise accounting adjustments to existing asset valuations and profit distribution. Mastery of this topic is critical for board exams as it integrates multiple accounting concepts into a single comprehensive ledger problem. Success depends on understanding how goodwill and revaluation surplus redistribute firm wealth.
New Profit Sharing Ratio and Sacrificing Ratio
When a new partner joins, the existing partners must sacrifice a portion of their profit share. Calculating the new ratio is the foundational step, as all subsequent goodwill and capital adjustments rely on these figures.
- New Ratio = Old Ratio - Sacrificing Share
- Sacrificing Ratio = Old Ratio - New Ratio
- If a partner acquires a share directly from a single partner, subtract only from that partner's share
- Total share of all partners must always equal one
Goodwill Calculation and Treatment
Goodwill is the monetary value of the firm's reputation and must be adjusted upon admission to compensate existing partners. The treatment depends on whether the new partner brings their share of goodwill in cash or if it is raised in the books.
- Premium for Goodwill is distributed to sacrificing partners in their sacrificing ratio
- When goodwill is paid privately, no entry is passed in the firm's books
- If the new partner fails to bring cash, debit their Current Account
- Existing goodwill appearing in the balance sheet must be written off in the old profit sharing ratio
Revaluation Account and Reserves
Assets and liabilities must be revalued to ensure the incoming partner neither gains nor loses from past fluctuations. Any gain or loss on revaluation is transferred to the old partners' capital accounts before the new partner joins.
- Increase in assets or decrease in liabilities is credited to Revaluation A/c
- Decrease in assets or increase in liabilities is debited to Revaluation A/c
- Unrecorded assets must be credited to Revaluation A/c
- General Reserve and P&L (Cr) balance are distributed among old partners in the old ratio
Capital Adjustment
Post-admission, capital accounts are often adjusted to reflect the new profit-sharing ratio to ensure equitable ownership stakes. This process may involve the transfer of excess capital to a current account or additional cash infusion.
- Adjusted capital based on new partner's capital is calculated as (New Partner's Capital * New Partner's Total Share Reciprocal)
- Surplus or deficit is typically transferred to Cash/Bank or Current Account as instructed
- Ensure all prior adjustments (revaluation profit, goodwill, reserves) are posted before calculating closing capital balances
Formula Sheet
New Share = Old Share - Sacrificed Share
Sacrificing Ratio = Old Ratio - New Ratio
Adjusted Capital = (Total Firm Capital * Partner's Share)
Exam Tip
Always prepare the Revaluation Account and distribute all reserves before calculating the final closing capital balances to avoid errors in the new partner's capital adjustment.
Common Mistakes
- Distributing the premium for goodwill in the new profit sharing ratio instead of the sacrificing ratio.
- Forgetting to write off existing goodwill from the old balance sheet before calculating the new partner's entry.
- Failing to account for unrecorded liabilities or assets when preparing the revaluation account.
More Revision Notes
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