Key Notes - Reconstitution of a Partnership Firm : Admission of a Partner | Accounting for A Level PDF Download

Reconstitution of Partnership 

(Change in Profit Sharing Ratio among the existing partners, admission of a partner, retirement/death of a partner)

 Admission of a Partner

Learning objectives:-
After studying this lesson, the students will be able to:
• Identify and deal effectively with the situation of reconstitution of partnership.
• Identify the problem arising due to admission of a partner in the firm.
• Calculate new and sacrifice ratio in different cases.
• Understand, calculate and make treatment of goodwill in different cases.
• Make accounting treatment of the revaluation of assets and liabilities and distribute the
profit and loss on revaluation among the old partners.
• Make accounting treatment of unrecorded assets and liabilities
• Prepare capital Accounts, Cash A/c and Balance Sheet of the New firm
• Adjust the Partners‘ Capital Accounts

Salient Points:-
1. Goodwill is the monetary value of business reputation. It is an intangible asset.

2. Goodwill may be of two types:
a. Purchased goodwill
b. Non-purchased goodwill

3. When existing firm faces problem of limited financial resources and man power then one new additional partner enters into firm.

4. There are three methods of valuation of goodwill:
a. Average Profit Method
b. Super Profit method
c. Capitalisation Method

5. When new partner is admitted into existing partnership then existing partners have to sacrifice in favour of new partner, it is called sacrificing ratio.

6. Share of goodwill of new partner will be credited to sacrificing partners into their
sacrificing ratio.

7. At the admission of new partner Profit & Loss on revaluation of assets and liabilities and balances of accumulated profits & losses will be distributed among old partners (only) in old ratio.

Retirement of a Partner

LEARNING OBJECTIVES:
After studying this lesson, we are confident; you should be competent enough to:
• Identify adjustments arising due to retirement of a partner.
• Calculate new and gaining ratio.
• Make accounting treatment of goodwill in different cases.
• Make accounting treatment of the revaluation of assets and liabilities and distribution of profit or loss on revaluation among partners.
• Make accounting treatment of undistributed profit or loss.
• Determine the amount payable to retiring partner and make payment as per agreement and provisions of law.
• Make adjustment of partners‘ capital account

Salient Points:-
1. An existing partner may wish to withdraw from a firm for various reasons.

2. The amount due to a retiring partner will be the total of :-
a. His capital in the firm
b. His share in firm‘s accumulated profits and losses.
c. His share of profit or loss on revaluation of assets and liabilities
d. His share of profits till the date of retirement
e. His remuneration and interest on capital.
f. His share in firm‘s goodwill.

3. The ratio in which the continuing (remaining) partners have acquired the share from the outgoing partner is called gaining ratio.

4. Share of goodwill of outgoing partner will be debited to gaining partners in their
gaining ratio.

5. At the retirement of a partner Profit & Loss on Revaluation of Assets and liabilities and balances of accumulated Profits and losses will be distributed among all partners (including outgoing partner) in their old ratio.

6. The outstanding balance of outgoing partner‘s capital A/C may be settled by fully or partly payment and (or) transferring into his loan account.

DEATH OF A PARTNER

Learning Objectives:

After studying this Unit, students will be able to understand and prepare:
a) Deceased partners capital account
b) Deceased partners Executor account
c) Executors loan account
d) Calculation of share of profit and Goodwill of the deceased partner.

SALIENT POINTS:
• Gaining Ratio: When the partner retires or dies, his share of profit is taken over by
the remaining partners.
• Gaining ratio is applied for the purpose of calculating Goodwill to be paid off to
the deceased partner.
• The deceased partner s share of profit till the date of death will be calculated by
preparing Profit and Loss Suspense account on the date of Death.

DISSOLUTION OF PARTNERSHIP FIRM

Learning Objectives
 After Studying this unit, the students will be able to understand:
* Meaning of Dissolution
* Distinction between Dissolution of Partnership and Dissolution of Partnership firm.
* Preparation of Realisation Account
* Procedure of settlement of accounts
* Preparation of Memorandum Balance sheet (to find out missing figures)
* Necessary journal entries to close the books of the firm.

SALIENT POINTS:
• Dissolution : Dissolution of the firm is different from Dissolution of Partnership.
• Realisation account : It is prepared to realize the various assets and pay off the liabilities.
• Closure of the Books of Accounts : When the firm is dissolved, finally all the books of accounts are closed through Bank Account.