Key Points - Accounting for Partnership Firms

Admission of a partner
Meaning:
When a new partner is admitted in a running business due to the requirement of more capital or may be to take advantage of the experience and competence of the newly admitted partner or any other reason, it is called admission of a partner in partnership firm.
According to section 31(1) of Indian partnership Act,1932, “A new partner can be admitted only with the consent of all the existing partners.”
At the time of admission of a new partner, following adjustments are required:

1. Calculation of new profit sharing ratio and sacrificing ratio.

2. Accounting treatment of Goodwill.

3. Accounting treatment of accumulated profit.

4. Accounting treatment of revaluation of assets and reassessment of liabilities.

5. Adjustment of capital in new profit sharing ratio.

1. Calculation of new profit sharing ratio.
Following types of problems may arise for the calculation of new profit sharing ratio.

Case (i) When old ratio is given and share of new partner is given.
Illustration 1. (When new partner acquires his share from all partners in their old ratio)
A and B are partners in a firm sharing profits and losses in the ratio 1:2.They admitted C into the partnership and decided to give him 1/3rd share of the future profits. Find the new ratio of the partners.
Solution (i)
Calculation of Sacrifice Share:
A’s sacrifice = 1/3 of 1/3 = 1/9
B’s sacrifice = 2/3 of 1/3 = 2/9
Sacrificing Ration = 1/9 : 2/9 = 1:2 which is equal to old ratio (ii)
Calculation of New Profit sharing Ratio:
New share=Old share­ Sacrifice share
A’s new share =1/3­1/9=3­1/9=2/9
B’s new share =2/3­2/9=6­2/9=4/9
C’s new share =1/9+ 2/9 = 3/9
New ratio among A,B and C: 2/9:4/9:3/9=2:4:3 respectively
Note: Unless agreed otherwise, it is presumed that the new partner acquires his share in profits

from the old partners in their old profit sharing ratio.
Alternative Method :
Old Ratio =
A:B

1.2
Let the profit of the firm = 1
C's share (New Partner) = 1/3
Remaining Profit = 1­1/3 = 2/3
Now this profit 2/3 will be divided between the old partners in their old ratio i.e., 1:2
A's new Profit = 1/3 of 2/3 = 1/3 x2/3 = 2/9
B's new Profit = 2/3 of 2/3 = 2/3x2/3 = 4/9
C's profit = 1/3 or 1/3 x 3/3 = 3/9
Hence the new ratio = 2:4:3
Note­ In this case only New Partner's share is given then
Sacrificing Ratio = Old Ratio
= 1:2
There is no need to calculate it
Case (ii) When new partner acquires his/her share from all partners in agreed share.
Illustration 2. (When new partner acquires his share from all partners in agreed share)
L and M are partners in a firm sharing profits and losses in the ratio of 7: 3. They admitted N for

3.7th share,which he takes 2/7th from L and 1/7 from M. Calculate the new profit sharing ratio.(CBSE

1.99 Compt., 2001, 2003)
Solution. (i) As sacrifice share of old partners are given in the question itself, hence there is no need to calculate it. (ii) Calculation of New profit sharing ratio:
New share=old share­sacrifice share
L’s new share =7/10­2/7=49­20/70=29/70
M’s new share =3/10­1/7=21­10/70=11/70
N’s new share =2/7+1/7=3/7(given)
New ratio among L,M and N =29/70:11/70:3/7 = 29:11:30/70 =29:11:30
Case (iii) When new partner acquires his/her share from all partners in certain ratio.
Case (iv) When new partner acquires his share from all partners as a fraction of their share.
Case (v) When new partner does not acquire his/her share from all partners
Illustration 5. (when new partner does not acquire his share from all partners)
Case (vi) When more than one partner is admitted.
Illustration 6. (when more than one partner is admitted simultaneously)
X and Y are partners sharing profits in the ratio of 3:2. They admit P and Q as new partners. X surrendered 1/3 of his share in favour of P and Y surrendered ¼ of his share in favour of Q.
Calculate the new profit sharing ratio of X, Y, P and Q. (CBSE 2002 Compt.)
Solution. (i) Calculation of sacrifice share : (only A and B will sacrifice in the ratio 3:2)
X surrenders 1/3 of his share in favour of P = 1/3 of 5/3 = 3/15 or 1/5
Y surrenders 1/4 of his share in favour of Q = 1/4 of 2/5 = 2/20 or 1/10

2. Accounting Treatment of Goodwill.
At the time of admission of a partner, treatment of Goodwill is necessary to compensate the old partners for their sacrifice. The incoming partner must compensate the existing partners because he is going to acquire the right to share future profits and this share is sacrificed by old partners. If goodwill (Premium) is paid to old partners privately or outside the business by the new partner then no entry is required in the books of the firm.
There may be different situations about the treatment of goodwill at the time of the admission of the new partner : (i) Goodwill (premium) brought in by the new partner in cash and retained in the business

Note :(i) Calculation of sacrificing ratio :
A’s sacrifice, 1/5 of his share = 1/5 of 3/5 = 3/25
B’s sacrifice, 2/5 of his share = 2/5 of 2/5 = 4/25
Sacrificing ratio between A and B i.e., 3/25:4/25 = 3:4 (ii) Calculation of C’s share of profit :
C’s share of profit = 3/25+4/25 = 7/25 (iii) Calculation of C’s share of goodwill :

7.,000 x 7/25 = 21,000
Treatment of Existing Goodwill shown in the books
If goodwill already shown in the balance sheet, it should be written off by debiting old partners in their old profit sharing ratio.

Case (iii) Amount of goodwill which was brought in by new partner, is withdrawn by old partners:
In this case one additional Journal entry may be passed :
Old Partners’ Capital A/c Dr.
To Bank/Cash A/c (Cash withdrawn by old partners)
Case (iv) when the new partner is unable to bring his share of goodwill in cash

Sometimes the new partner does not bring his share of goodwill in cash. Then his share of goodwill is calculated and adjusted by the following Journal entry.
Now Partners' Capital A/c Dr.
To old partners Capital A/cs (in the sacrificing ratio).

3. Accounting treatment of Accumulated Profits.
Accumulated profits and reserves are distributed to partners in their old profit sharing ratio.
If old partners are not interested to distribute, these accumulated profits are adjusted in the same manner as goodwill and the following adjusting entry will be passed.
New Partner’s capital A/c Dr. (New share)
To old partners’ capital A/c (Sacrificing ratio)

4. Accounting treatment for revaluation of assets and re ­assessment of liabilities :
The assets and liabilities are generally revalued at the time of admission of a new partner.
Revaluation Account is prepared for this purpose in the same way as in case of change in profit sharing ratio. This account is debited with all losses and credited with all gains. Balance of Revaluation Account is transferred to old partners in their old ratio.