ICAI Notes- Unit 3: Admission of a New Partner | Principles and Practice of Accounting - CA Foundation PDF Download

 Page 1


10.75 
PARTNERSHIP AND LLP ACCOUNTS 
 
LEARNING OUTCOMES 
UNIT – 3: ADMISSION OF A NEW PARTNER 
 
 
 
 
After studying this unit, you would be able to:  
? Understand the reasons for which revaluation of assets and re 
computation of liabilities is required in case of admission of a new 
partner. Also understand the logic of revaluation of assets and re 
computation of liabilities at the time of admission of a partner. 
? Learn the accounting treatments under two circumstances: 
(a) When revalued assets and recomputed liabilities are shown in 
the Balance Sheet, and 
(b) When revalued assets and recomputed liabilities are not shown 
in the Balance Sheet. 
? Learn the technique of treating reserve balance on admission of a 
partner. 
? See the technique of arriving at new profit-sharing ratio. 
? Observe the technique of inferring goodwill although figure of 
goodwill is not mentioned clearly. 
© The Institute of Chartered Accountants of India
Page 2


10.75 
PARTNERSHIP AND LLP ACCOUNTS 
 
LEARNING OUTCOMES 
UNIT – 3: ADMISSION OF A NEW PARTNER 
 
 
 
 
After studying this unit, you would be able to:  
? Understand the reasons for which revaluation of assets and re 
computation of liabilities is required in case of admission of a new 
partner. Also understand the logic of revaluation of assets and re 
computation of liabilities at the time of admission of a partner. 
? Learn the accounting treatments under two circumstances: 
(a) When revalued assets and recomputed liabilities are shown in 
the Balance Sheet, and 
(b) When revalued assets and recomputed liabilities are not shown 
in the Balance Sheet. 
? Learn the technique of treating reserve balance on admission of a 
partner. 
? See the technique of arriving at new profit-sharing ratio. 
? Observe the technique of inferring goodwill although figure of 
goodwill is not mentioned clearly. 
© The Institute of Chartered Accountants of India
 
ACCOUNTING
1.
76
10.76 
3.1 INTRODUCTION 
New partners are admitted for the benefit of the partnership firm. New partner is admitted 
either for increasing the partnership capital or for strengthening the management of the firm. 
When a new partner joins a firm, it is desirable to bring all appreciation or reduction in the 
value of assets into accounts as on the date of admission. Similarly, if the books contain any 
liability which has not been paid or if the books do not contain a liability which has to be paid, 
suitable entries should be passed. The purpose of such entries is to make an updated Balance 
Sheet on the date of admission. Also, all profits which have accrued but not yet brought into 
books and similarly, all losses which have occurred but not recorded, should now be brought 
into books so that the Capital Accounts of the old partners reflect the proper figure. As a 
Admission 
of partner
Revaluation 
Account or Profit 
and Loss 
Adjustment 
Account for 
revaluation of 
assets and 
liabilities
Admission 
Adjustment of 
goodwill amongst 
the old partners in 
their sacrificing 
ratio
Profit/loss on 
revaluation 
account is 
transfered to old 
partners in their 
old profit sharing 
ratio
Admission 
Reserves lying in 
the balance sheet 
transferred to the 
capital accounts 
of old partners in 
their old profit 
sharing ratio
UNIT OVERVIEW
© The Institute of Chartered Accountants of India
Page 3


10.75 
PARTNERSHIP AND LLP ACCOUNTS 
 
LEARNING OUTCOMES 
UNIT – 3: ADMISSION OF A NEW PARTNER 
 
 
 
 
After studying this unit, you would be able to:  
? Understand the reasons for which revaluation of assets and re 
computation of liabilities is required in case of admission of a new 
partner. Also understand the logic of revaluation of assets and re 
computation of liabilities at the time of admission of a partner. 
? Learn the accounting treatments under two circumstances: 
(a) When revalued assets and recomputed liabilities are shown in 
the Balance Sheet, and 
(b) When revalued assets and recomputed liabilities are not shown 
in the Balance Sheet. 
? Learn the technique of treating reserve balance on admission of a 
partner. 
? See the technique of arriving at new profit-sharing ratio. 
? Observe the technique of inferring goodwill although figure of 
goodwill is not mentioned clearly. 
© The Institute of Chartered Accountants of India
 
ACCOUNTING
1.
76
10.76 
3.1 INTRODUCTION 
New partners are admitted for the benefit of the partnership firm. New partner is admitted 
either for increasing the partnership capital or for strengthening the management of the firm. 
When a new partner joins a firm, it is desirable to bring all appreciation or reduction in the 
value of assets into accounts as on the date of admission. Similarly, if the books contain any 
liability which has not been paid or if the books do not contain a liability which has to be paid, 
suitable entries should be passed. The purpose of such entries is to make an updated Balance 
Sheet on the date of admission. Also, all profits which have accrued but not yet brought into 
books and similarly, all losses which have occurred but not recorded, should now be brought 
into books so that the Capital Accounts of the old partners reflect the proper figure. As a 
Admission 
of partner
Revaluation 
Account or Profit 
and Loss 
Adjustment 
Account for 
revaluation of 
assets and 
liabilities
Admission 
Adjustment of 
goodwill amongst 
the old partners in 
their sacrificing 
ratio
Profit/loss on 
revaluation 
account is 
transfered to old 
partners in their 
old profit sharing 
ratio
Admission 
Reserves lying in 
the balance sheet 
transferred to the 
capital accounts 
of old partners in 
their old profit 
sharing ratio
UNIT OVERVIEW
© The Institute of Chartered Accountants of India
10.77 
PARTNERSHIP AND LLP ACCOUNTS 
result of passing of such entries, any subsequent profits or losses will be automatically shared 
by the incoming partner along with old partners. 
Also the value of goodwill is to be assessed and proper accounting treatment is required to 
bring the value of goodwill into books of accounts. Treatment for goodwill has already been 
discussed in unit 2 of this chapter.  
3.2 REVALUATION ACCOUNT OR PROFIT AND LOSS 
ADJUSTMENT ACCOUNT 
When a new partner is admitted into the partnership, assets are revalued and liabilities are 
reassessed. A Revaluation Account (or Profit and Loss Adjustment Account) is opened for the 
purpose. This account is debited with all reduction in the value of assets and increase in 
liabilities and credited with increase in the value of assets and decrease in the value of 
liabilities. The difference in two sides of the account will show profit or loss. This is transferred 
to the Capital Accounts of old partners in the old profit sharing ratio. The entries to be passed 
are: 
1. Revaluation Account Dr. 
To Assets Account 
(individually which show a
with the reduction in the value of the 
assets
decrease) 
To the Liabilities Accounts 
(Individually which have to be 
increased) 
with the increase in the liabilities. 
2. Assets Account (Individually) Dr. with the increase in the value of the of 
assets. 
Liabilities Accounts Dr. with the reduction in the amount 
liabilities. 
To Revaluation Account 
3. Revaluation Account Dr. with the profit in the old profit sharing 
ratio.
To Capital A/cs of the old partners 
 or 
Capital A/cs of the old partners Dr. with the loss in old profit sharing ratio. 
To Revaluation Account 
© The Institute of Chartered Accountants of India
Page 4


10.75 
PARTNERSHIP AND LLP ACCOUNTS 
 
LEARNING OUTCOMES 
UNIT – 3: ADMISSION OF A NEW PARTNER 
 
 
 
 
After studying this unit, you would be able to:  
? Understand the reasons for which revaluation of assets and re 
computation of liabilities is required in case of admission of a new 
partner. Also understand the logic of revaluation of assets and re 
computation of liabilities at the time of admission of a partner. 
? Learn the accounting treatments under two circumstances: 
(a) When revalued assets and recomputed liabilities are shown in 
the Balance Sheet, and 
(b) When revalued assets and recomputed liabilities are not shown 
in the Balance Sheet. 
? Learn the technique of treating reserve balance on admission of a 
partner. 
? See the technique of arriving at new profit-sharing ratio. 
? Observe the technique of inferring goodwill although figure of 
goodwill is not mentioned clearly. 
© The Institute of Chartered Accountants of India
 
ACCOUNTING
1.
76
10.76 
3.1 INTRODUCTION 
New partners are admitted for the benefit of the partnership firm. New partner is admitted 
either for increasing the partnership capital or for strengthening the management of the firm. 
When a new partner joins a firm, it is desirable to bring all appreciation or reduction in the 
value of assets into accounts as on the date of admission. Similarly, if the books contain any 
liability which has not been paid or if the books do not contain a liability which has to be paid, 
suitable entries should be passed. The purpose of such entries is to make an updated Balance 
Sheet on the date of admission. Also, all profits which have accrued but not yet brought into 
books and similarly, all losses which have occurred but not recorded, should now be brought 
into books so that the Capital Accounts of the old partners reflect the proper figure. As a 
Admission 
of partner
Revaluation 
Account or Profit 
and Loss 
Adjustment 
Account for 
revaluation of 
assets and 
liabilities
Admission 
Adjustment of 
goodwill amongst 
the old partners in 
their sacrificing 
ratio
Profit/loss on 
revaluation 
account is 
transfered to old 
partners in their 
old profit sharing 
ratio
Admission 
Reserves lying in 
the balance sheet 
transferred to the 
capital accounts 
of old partners in 
their old profit 
sharing ratio
UNIT OVERVIEW
© The Institute of Chartered Accountants of India
10.77 
PARTNERSHIP AND LLP ACCOUNTS 
result of passing of such entries, any subsequent profits or losses will be automatically shared 
by the incoming partner along with old partners. 
Also the value of goodwill is to be assessed and proper accounting treatment is required to 
bring the value of goodwill into books of accounts. Treatment for goodwill has already been 
discussed in unit 2 of this chapter.  
3.2 REVALUATION ACCOUNT OR PROFIT AND LOSS 
ADJUSTMENT ACCOUNT 
When a new partner is admitted into the partnership, assets are revalued and liabilities are 
reassessed. A Revaluation Account (or Profit and Loss Adjustment Account) is opened for the 
purpose. This account is debited with all reduction in the value of assets and increase in 
liabilities and credited with increase in the value of assets and decrease in the value of 
liabilities. The difference in two sides of the account will show profit or loss. This is transferred 
to the Capital Accounts of old partners in the old profit sharing ratio. The entries to be passed 
are: 
1. Revaluation Account Dr. 
To Assets Account 
(individually which show a
with the reduction in the value of the 
assets
decrease) 
To the Liabilities Accounts 
(Individually which have to be 
increased) 
with the increase in the liabilities. 
2. Assets Account (Individually) Dr. with the increase in the value of the of 
assets. 
Liabilities Accounts Dr. with the reduction in the amount 
liabilities. 
To Revaluation Account 
3. Revaluation Account Dr. with the profit in the old profit sharing 
ratio.
To Capital A/cs of the old partners 
 or 
Capital A/cs of the old partners Dr. with the loss in old profit sharing ratio. 
To Revaluation Account 
© The Institute of Chartered Accountants of India
  
ACCOUNTING 
1.
78 
10.78 
As a result of the above entries, the capital account balances of the old partners will change 
and the assets and liabilities will have to be adjusted to their proper values. They will now 
appear in the Balance Sheet at revised figures.  
When the revised values are not to be Recognised in the books 
Sometimes all the partners including the new partner may agree to keep the assets and 
liabilities at the old values even when they agree to revalue them. To record these, a 
Memorandum Revaluation Account is opened. This account is divided into two parts. 
(a) In the first part the entries for the revaluation of assets and liabilities are made in the 
usual way as explained earlier. No record for the revaluation of assets and liabilities is made 
through the respective ledger accounts. The resultant profit or loss on revaluation in the first 
part of this account is transferred to the capital accounts of old partners only in the old profit 
and loss sharing ratio.  
(b) In order to complete the double entry, entries made in the first part of Memorandum 
Revaluation Account are reversed in the second part so that the values of the assets and 
liabilities remain unchanged. The balance of the second part is transferred to the capital 
accounts of all the partners including new partner in their new profit and loss sharing ratio. 
Thus if there is a profit in the first part there will be a loss of the same amount in the second 
part. The only point to be remembered is that the result of the first part of Memorandum 
Revaluation Account is shared by old partners in the old profit sharing ratio, while the result 
of the second part is shared by all partners including the new one in the new profit sharing 
ratio. 
Alternatively, the partners may agree that revalued figures will not be shown in the Balance 
Sheet and Assets and liabilities would appear in the Balance Sheet at their old values.  
In this case, Memorandum Revaluation Account is opened. Any increase in the value of assets 
and/or decrease in the liabilities is credited to Memorandum Revaluation Account. The journal 
entry will be: 
Assets Accounts   Dr. (with increase in the value of individual assets) 
Liabilities Accounts   Dr.  (With decrease in the value of individual liabilities) 
 To Memorandum Revaluation Account 
Similarly, any decrease in the value of assets and/or increase in the liabilities is debited to 
Memorandum Revaluation Account. The journal entry will be: 
Memorandum Revaluation Account Dr.
 To Assets Accounts   (with increase in the value of individual assets) 
 To Liabilities Accounts  (with decrease in the value of individual liabilities) 
© The Institute of Chartered Accountants of India
Page 5


10.75 
PARTNERSHIP AND LLP ACCOUNTS 
 
LEARNING OUTCOMES 
UNIT – 3: ADMISSION OF A NEW PARTNER 
 
 
 
 
After studying this unit, you would be able to:  
? Understand the reasons for which revaluation of assets and re 
computation of liabilities is required in case of admission of a new 
partner. Also understand the logic of revaluation of assets and re 
computation of liabilities at the time of admission of a partner. 
? Learn the accounting treatments under two circumstances: 
(a) When revalued assets and recomputed liabilities are shown in 
the Balance Sheet, and 
(b) When revalued assets and recomputed liabilities are not shown 
in the Balance Sheet. 
? Learn the technique of treating reserve balance on admission of a 
partner. 
? See the technique of arriving at new profit-sharing ratio. 
? Observe the technique of inferring goodwill although figure of 
goodwill is not mentioned clearly. 
© The Institute of Chartered Accountants of India
 
ACCOUNTING
1.
76
10.76 
3.1 INTRODUCTION 
New partners are admitted for the benefit of the partnership firm. New partner is admitted 
either for increasing the partnership capital or for strengthening the management of the firm. 
When a new partner joins a firm, it is desirable to bring all appreciation or reduction in the 
value of assets into accounts as on the date of admission. Similarly, if the books contain any 
liability which has not been paid or if the books do not contain a liability which has to be paid, 
suitable entries should be passed. The purpose of such entries is to make an updated Balance 
Sheet on the date of admission. Also, all profits which have accrued but not yet brought into 
books and similarly, all losses which have occurred but not recorded, should now be brought 
into books so that the Capital Accounts of the old partners reflect the proper figure. As a 
Admission 
of partner
Revaluation 
Account or Profit 
and Loss 
Adjustment 
Account for 
revaluation of 
assets and 
liabilities
Admission 
Adjustment of 
goodwill amongst 
the old partners in 
their sacrificing 
ratio
Profit/loss on 
revaluation 
account is 
transfered to old 
partners in their 
old profit sharing 
ratio
Admission 
Reserves lying in 
the balance sheet 
transferred to the 
capital accounts 
of old partners in 
their old profit 
sharing ratio
UNIT OVERVIEW
© The Institute of Chartered Accountants of India
10.77 
PARTNERSHIP AND LLP ACCOUNTS 
result of passing of such entries, any subsequent profits or losses will be automatically shared 
by the incoming partner along with old partners. 
Also the value of goodwill is to be assessed and proper accounting treatment is required to 
bring the value of goodwill into books of accounts. Treatment for goodwill has already been 
discussed in unit 2 of this chapter.  
3.2 REVALUATION ACCOUNT OR PROFIT AND LOSS 
ADJUSTMENT ACCOUNT 
When a new partner is admitted into the partnership, assets are revalued and liabilities are 
reassessed. A Revaluation Account (or Profit and Loss Adjustment Account) is opened for the 
purpose. This account is debited with all reduction in the value of assets and increase in 
liabilities and credited with increase in the value of assets and decrease in the value of 
liabilities. The difference in two sides of the account will show profit or loss. This is transferred 
to the Capital Accounts of old partners in the old profit sharing ratio. The entries to be passed 
are: 
1. Revaluation Account Dr. 
To Assets Account 
(individually which show a
with the reduction in the value of the 
assets
decrease) 
To the Liabilities Accounts 
(Individually which have to be 
increased) 
with the increase in the liabilities. 
2. Assets Account (Individually) Dr. with the increase in the value of the of 
assets. 
Liabilities Accounts Dr. with the reduction in the amount 
liabilities. 
To Revaluation Account 
3. Revaluation Account Dr. with the profit in the old profit sharing 
ratio.
To Capital A/cs of the old partners 
 or 
Capital A/cs of the old partners Dr. with the loss in old profit sharing ratio. 
To Revaluation Account 
© The Institute of Chartered Accountants of India
  
ACCOUNTING 
1.
78 
10.78 
As a result of the above entries, the capital account balances of the old partners will change 
and the assets and liabilities will have to be adjusted to their proper values. They will now 
appear in the Balance Sheet at revised figures.  
When the revised values are not to be Recognised in the books 
Sometimes all the partners including the new partner may agree to keep the assets and 
liabilities at the old values even when they agree to revalue them. To record these, a 
Memorandum Revaluation Account is opened. This account is divided into two parts. 
(a) In the first part the entries for the revaluation of assets and liabilities are made in the 
usual way as explained earlier. No record for the revaluation of assets and liabilities is made 
through the respective ledger accounts. The resultant profit or loss on revaluation in the first 
part of this account is transferred to the capital accounts of old partners only in the old profit 
and loss sharing ratio.  
(b) In order to complete the double entry, entries made in the first part of Memorandum 
Revaluation Account are reversed in the second part so that the values of the assets and 
liabilities remain unchanged. The balance of the second part is transferred to the capital 
accounts of all the partners including new partner in their new profit and loss sharing ratio. 
Thus if there is a profit in the first part there will be a loss of the same amount in the second 
part. The only point to be remembered is that the result of the first part of Memorandum 
Revaluation Account is shared by old partners in the old profit sharing ratio, while the result 
of the second part is shared by all partners including the new one in the new profit sharing 
ratio. 
Alternatively, the partners may agree that revalued figures will not be shown in the Balance 
Sheet and Assets and liabilities would appear in the Balance Sheet at their old values.  
In this case, Memorandum Revaluation Account is opened. Any increase in the value of assets 
and/or decrease in the liabilities is credited to Memorandum Revaluation Account. The journal 
entry will be: 
Assets Accounts   Dr. (with increase in the value of individual assets) 
Liabilities Accounts   Dr.  (With decrease in the value of individual liabilities) 
 To Memorandum Revaluation Account 
Similarly, any decrease in the value of assets and/or increase in the liabilities is debited to 
Memorandum Revaluation Account. The journal entry will be: 
Memorandum Revaluation Account Dr.
 To Assets Accounts   (with increase in the value of individual assets) 
 To Liabilities Accounts  (with decrease in the value of individual liabilities) 
© The Institute of Chartered Accountants of India
10.79 
PARTNERSHIP AND LLP ACCOUNTS 
If the credit side of the Memorandum Revaluation Account is more than the debit side, there 
is a profit. This profit should be transferred to old Partner’s Capital Accounts in the old profit 
sharing ratio. The journal entry will be: 
Memorandum Revaluation Account   Dr. 
 To Old Partners’ Capital Accounts 
If the debit side of the Memorandum Revaluation Account is more than the credit side, there 
is a loss which is transferred to old Partner’s Capital Accounts in the old profit sharing ratio. 
The journal entry will: 
Old Partners’ Capital Accounts  Dr.  
 To Memorandum Revaluation Account 
After completing the above procedure, reverse entries are made for increase in the values of 
assets and/or decrease in the liabilities, and decrease in the values of assets and/or increase 
in the liabilities) in the later portion of the Memorandum Revaluation Account.  The profit on 
revaluation is to be transferred to all Partners’ Capital Accounts in the new profit sharing ratio. 
The journey entry will be: 
Memorandum Revolution Account  Dr. 
 To All Partners’ Capital Accounts  (New profit and loss sharing ratio) 
The loss on revaluation should be transferred to all Partners’ Capital Accounts in the new profit 
sharing ratio. The journal entry will be: 
All Partners’ Capital Accounts  Dr. (New profit and loss sharing ratio) 
 To Memorandum Revaluation Account 
It should be noted that if there is a profit in the first half of the Memorandum Revaluation 
Account, the later half of the Memorandum Revaluation Account must show a loss. Conversely, 
if the first half of the Memorandum Revaluation Account shows a loss, the later half of the 
Memorandum Revaluation Account must show a profit. 
When a Memorandum Revaluation Account is prepared, the book values of assets and 
liabilities do not change. In effect, the resultant profit or loss on revaluation is adjusted 
through the Partners’ Capital Accounts. In this way, the amount invested as a capital by the 
incoming partner may be set at a level that reflects the current fair value of the partnership, 
even though the book values of assets and liabilities of the existing partnership remain 
unchanged in the books of accounts.  
 
© The Institute of Chartered Accountants of India