Treatment of Advertisement Expense in Admission of Partner

When a partnership firm admits a new partner, it is necessary to adjust all the accounts to reflect the new partner's entry. One of the adjustments that need to be made is the treatment of advertisement expenses that are carried forward from the previous accounting year.

Adjustment in the Capital Accounts

The adjustment for advertisement expenses is made in the capital accounts of all the partners. The amount of the expense is added to the capital account of the old partners, and the new partner's capital account is debited with their share of the expense.

Example

Suppose a partnership firm has two partners, A and B, with capital balances of Rs. 50,000 and Rs. 30,000, respectively. The firm's advertisement expense for the previous year was Rs. 10,000, which was not yet adjusted. If the firm admits a new partner, C, with a capital contribution of Rs. 20,000, the adjustment for the advertisement expense would be as follows:

- A's capital account would be increased by Rs. 6,000 (i.e., 60% of Rs. 10,000)
- B's capital account would be increased by Rs. 4,000 (i.e., 40% of Rs. 10,000)
- C's capital account would be debited with Rs. 2,000 (i.e., 20% of Rs. 10,000)

Treatment in the Profit and Loss Account

The advertisement expense that is carried forward to the next accounting year is treated as a deferred revenue expenditure in the profit and loss account. This means that the amount is not shown as an expense in the current year's profit and loss account but is carried forward to the next year's accounts.

Conclusion

In conclusion, while admitting a new partner, it is necessary to adjust all the accounts, including the treatment of advertisement expenses carried forward from the previous accounting year. The expense is added to the old partners' capital accounts, and the new partner's account is debited with their share of the expense. The expense is treated as a deferred revenue expenditure in the profit and loss account.