Admission Of A Partner, Class 12, Accountancy PDF Download

 Page 1


19
ADMISSION OF A PARTNER
Kapil and Krish are running a partnership firm dealing in toys. They are
one of the most successful businessmen in the locality. They now decide
to start manufacturing toys that are electronically operated to diversify their
busmess. For this they need more capital and also technical expertise.
Mohit; their friend is an electronic engineer and has capital also.  They have
persuaded him to join their firm. In case, he joins the partnership firm, this
will be a case of admission of a partner. As a result, he may need to bring
in capital and share of goodwill. In this lesson, you will learn about goodwill
and other ajustments at the time of admission of a partner. Mohit will bring
in capital and share of goodwill. Some changes in the value of some assets
and liabilities of the existing firm are need to bring them at their realistic
value, on his admission. There may be other issues involing finance on his
admission. All this need accounting treatment. In this lesson you will learn
accounting treatment and adjustments to be made on the admission of a
partner.
OBJECTIVES
After studying this lesson, you will be able to :
l state the meaning of admission of a partner;
l calculate new profit sharing ratio and sacrificing ratio;
l state the meaning and factors affecting goodwill;
l explain the methods of valuation of goodwill;
l describe accounting treatment of goodwill;
l explain the need for revaluation of assets and reassessment of liabilities;
ACCOUNTANCY
MODULE - 4
Notes
Partnership Accounts
 140
Page 2


19
ADMISSION OF A PARTNER
Kapil and Krish are running a partnership firm dealing in toys. They are
one of the most successful businessmen in the locality. They now decide
to start manufacturing toys that are electronically operated to diversify their
busmess. For this they need more capital and also technical expertise.
Mohit; their friend is an electronic engineer and has capital also.  They have
persuaded him to join their firm. In case, he joins the partnership firm, this
will be a case of admission of a partner. As a result, he may need to bring
in capital and share of goodwill. In this lesson, you will learn about goodwill
and other ajustments at the time of admission of a partner. Mohit will bring
in capital and share of goodwill. Some changes in the value of some assets
and liabilities of the existing firm are need to bring them at their realistic
value, on his admission. There may be other issues involing finance on his
admission. All this need accounting treatment. In this lesson you will learn
accounting treatment and adjustments to be made on the admission of a
partner.
OBJECTIVES
After studying this lesson, you will be able to :
l state the meaning of admission of a partner;
l calculate new profit sharing ratio and sacrificing ratio;
l state the meaning and factors affecting goodwill;
l explain the methods of valuation of goodwill;
l describe accounting treatment of goodwill;
l explain the need for revaluation of assets and reassessment of liabilities;
ACCOUNTANCY
MODULE - 4
Notes
Partnership Accounts
 140
MODULE - 4
Partnership Accounts
Notes
 141
Admission of a Partner
ACCOUNTANCY
l illustrate the accounting treatment of changes arising from revaluation
of assets and reassessment of liabilities;
l describe accounting treatment of undistributed profits and reserves;
l explain the treatment of various adjustments in partners’ capitals ;
l prepare Revaluation Account, Partners’ Capital Accounts and balance
sheet of the reconstituted firm.
19.1 ADMISSION OF A PARTNER
Meaning, New Profit Sharing Ratio and Sacrificing Ratio
Meaning
An existing partnership firm may take up expansion/diversification of the
business. In that case it may need managerial help or additional capital. An
option before the partnership firm is to admit partner/partners, when a
partner is admitted to the existing partnership firm, it is called admission
of a partner.
According to the Partnership Act 1932, a person can be admitted into
partnership only with the consent of all the existing partners unless
otherwise agreed upon.
On admission of a new partner, the partnership firm is reconstituted with
a new agreement. For example, Rekha and Nitesh are partners sharing profit
in the ratio of 5:3. On April 1, 2006 they admitted Nitu as a new partner
with 1/4th share in the profit of the firm. In this case, with the admission
of Nitu as partner, the firm stands reconstituted.
On the admission of a new partner, the following adjustments become
necessary:
(i) Adjustment in profit sharing ratio;
(ii) Adjustment of Goodwill;
(iii) Adjustment for revaluation of assets and reassessment of liabilities;
(iv) Distribution of accumulated profits and reserves; and
(v) Adjustment of partners’ capitals.
Adjustment in Profit sharing Ratio
When a new partner is admitted he/she acquires his/her share in profit from
the existing partners. As a result, the profit sharing ratio in the new firm
is decided mutually between the existing partners and the new partner. The
Page 3


19
ADMISSION OF A PARTNER
Kapil and Krish are running a partnership firm dealing in toys. They are
one of the most successful businessmen in the locality. They now decide
to start manufacturing toys that are electronically operated to diversify their
busmess. For this they need more capital and also technical expertise.
Mohit; their friend is an electronic engineer and has capital also.  They have
persuaded him to join their firm. In case, he joins the partnership firm, this
will be a case of admission of a partner. As a result, he may need to bring
in capital and share of goodwill. In this lesson, you will learn about goodwill
and other ajustments at the time of admission of a partner. Mohit will bring
in capital and share of goodwill. Some changes in the value of some assets
and liabilities of the existing firm are need to bring them at their realistic
value, on his admission. There may be other issues involing finance on his
admission. All this need accounting treatment. In this lesson you will learn
accounting treatment and adjustments to be made on the admission of a
partner.
OBJECTIVES
After studying this lesson, you will be able to :
l state the meaning of admission of a partner;
l calculate new profit sharing ratio and sacrificing ratio;
l state the meaning and factors affecting goodwill;
l explain the methods of valuation of goodwill;
l describe accounting treatment of goodwill;
l explain the need for revaluation of assets and reassessment of liabilities;
ACCOUNTANCY
MODULE - 4
Notes
Partnership Accounts
 140
MODULE - 4
Partnership Accounts
Notes
 141
Admission of a Partner
ACCOUNTANCY
l illustrate the accounting treatment of changes arising from revaluation
of assets and reassessment of liabilities;
l describe accounting treatment of undistributed profits and reserves;
l explain the treatment of various adjustments in partners’ capitals ;
l prepare Revaluation Account, Partners’ Capital Accounts and balance
sheet of the reconstituted firm.
19.1 ADMISSION OF A PARTNER
Meaning, New Profit Sharing Ratio and Sacrificing Ratio
Meaning
An existing partnership firm may take up expansion/diversification of the
business. In that case it may need managerial help or additional capital. An
option before the partnership firm is to admit partner/partners, when a
partner is admitted to the existing partnership firm, it is called admission
of a partner.
According to the Partnership Act 1932, a person can be admitted into
partnership only with the consent of all the existing partners unless
otherwise agreed upon.
On admission of a new partner, the partnership firm is reconstituted with
a new agreement. For example, Rekha and Nitesh are partners sharing profit
in the ratio of 5:3. On April 1, 2006 they admitted Nitu as a new partner
with 1/4th share in the profit of the firm. In this case, with the admission
of Nitu as partner, the firm stands reconstituted.
On the admission of a new partner, the following adjustments become
necessary:
(i) Adjustment in profit sharing ratio;
(ii) Adjustment of Goodwill;
(iii) Adjustment for revaluation of assets and reassessment of liabilities;
(iv) Distribution of accumulated profits and reserves; and
(v) Adjustment of partners’ capitals.
Adjustment in Profit sharing Ratio
When a new partner is admitted he/she acquires his/her share in profit from
the existing partners. As a result, the profit sharing ratio in the new firm
is decided mutually between the existing partners and the new partner. The
ACCOUNTANCY
MODULE - 4
Notes
Admission of a Partner
Partnership Accounts
 142
incoming partner acquires his/her share of future profits either incoming
from one or more existing partner. The existing partners sacrifice a share
of their profit in the favour of new partner, hence the calculation of new
profit sharing ratio becomes necessary.
Sacrificing Ratio
At the time of admission of a partner, existing partners have to surrender
some of their share in favour of the new partner. The ratio in which they
agree to sacrifice their share of profits in favour of incoming partner is called
sacrificing ratio. Some amount is paid to the existing partners for their
sacrifice. The amount of compensation is paid by the new partner to the
existing partner for acquiring the share of profit which they have surrendered
in the favour of the new partner.
Sacrificing Ratio is calculated as follows:
Sacrificing Ratio = Existing Ratio – New Ratio
Following cases may arise for the calculation of new profit sharing ratio
and sacrificing ratio:
(i) Only the new partner’s share is given
In this case, it is presumed that the existing partners continue to share the
remaining profit in the same ratio in which they were sharing before the
admission of the new partner. Then, existing partner’s new ratio is
calculated by dividing remaining share of the profit in their existing ratio.
Sacrificing ratio is calculated by deducting new ratio from the existing ratio.
Illustration 1
Deepak and Vivek are partners sharing profit in the ratio of 3 : 2. They admit
Ashu as a new partner for 1/5 share in profit. Calculate the new profit
sharing ratio and sacrificing ratio.
Solution:
Calculation of new profit sharing ratio:
Let total Profit = 1
New partner’s share = 1/5
Remaining share = 1 – 1/5 = 4/5
Deepak’s new share = 3/5 of 4/5 i.e. 12/25
Page 4


19
ADMISSION OF A PARTNER
Kapil and Krish are running a partnership firm dealing in toys. They are
one of the most successful businessmen in the locality. They now decide
to start manufacturing toys that are electronically operated to diversify their
busmess. For this they need more capital and also technical expertise.
Mohit; their friend is an electronic engineer and has capital also.  They have
persuaded him to join their firm. In case, he joins the partnership firm, this
will be a case of admission of a partner. As a result, he may need to bring
in capital and share of goodwill. In this lesson, you will learn about goodwill
and other ajustments at the time of admission of a partner. Mohit will bring
in capital and share of goodwill. Some changes in the value of some assets
and liabilities of the existing firm are need to bring them at their realistic
value, on his admission. There may be other issues involing finance on his
admission. All this need accounting treatment. In this lesson you will learn
accounting treatment and adjustments to be made on the admission of a
partner.
OBJECTIVES
After studying this lesson, you will be able to :
l state the meaning of admission of a partner;
l calculate new profit sharing ratio and sacrificing ratio;
l state the meaning and factors affecting goodwill;
l explain the methods of valuation of goodwill;
l describe accounting treatment of goodwill;
l explain the need for revaluation of assets and reassessment of liabilities;
ACCOUNTANCY
MODULE - 4
Notes
Partnership Accounts
 140
MODULE - 4
Partnership Accounts
Notes
 141
Admission of a Partner
ACCOUNTANCY
l illustrate the accounting treatment of changes arising from revaluation
of assets and reassessment of liabilities;
l describe accounting treatment of undistributed profits and reserves;
l explain the treatment of various adjustments in partners’ capitals ;
l prepare Revaluation Account, Partners’ Capital Accounts and balance
sheet of the reconstituted firm.
19.1 ADMISSION OF A PARTNER
Meaning, New Profit Sharing Ratio and Sacrificing Ratio
Meaning
An existing partnership firm may take up expansion/diversification of the
business. In that case it may need managerial help or additional capital. An
option before the partnership firm is to admit partner/partners, when a
partner is admitted to the existing partnership firm, it is called admission
of a partner.
According to the Partnership Act 1932, a person can be admitted into
partnership only with the consent of all the existing partners unless
otherwise agreed upon.
On admission of a new partner, the partnership firm is reconstituted with
a new agreement. For example, Rekha and Nitesh are partners sharing profit
in the ratio of 5:3. On April 1, 2006 they admitted Nitu as a new partner
with 1/4th share in the profit of the firm. In this case, with the admission
of Nitu as partner, the firm stands reconstituted.
On the admission of a new partner, the following adjustments become
necessary:
(i) Adjustment in profit sharing ratio;
(ii) Adjustment of Goodwill;
(iii) Adjustment for revaluation of assets and reassessment of liabilities;
(iv) Distribution of accumulated profits and reserves; and
(v) Adjustment of partners’ capitals.
Adjustment in Profit sharing Ratio
When a new partner is admitted he/she acquires his/her share in profit from
the existing partners. As a result, the profit sharing ratio in the new firm
is decided mutually between the existing partners and the new partner. The
ACCOUNTANCY
MODULE - 4
Notes
Admission of a Partner
Partnership Accounts
 142
incoming partner acquires his/her share of future profits either incoming
from one or more existing partner. The existing partners sacrifice a share
of their profit in the favour of new partner, hence the calculation of new
profit sharing ratio becomes necessary.
Sacrificing Ratio
At the time of admission of a partner, existing partners have to surrender
some of their share in favour of the new partner. The ratio in which they
agree to sacrifice their share of profits in favour of incoming partner is called
sacrificing ratio. Some amount is paid to the existing partners for their
sacrifice. The amount of compensation is paid by the new partner to the
existing partner for acquiring the share of profit which they have surrendered
in the favour of the new partner.
Sacrificing Ratio is calculated as follows:
Sacrificing Ratio = Existing Ratio – New Ratio
Following cases may arise for the calculation of new profit sharing ratio
and sacrificing ratio:
(i) Only the new partner’s share is given
In this case, it is presumed that the existing partners continue to share the
remaining profit in the same ratio in which they were sharing before the
admission of the new partner. Then, existing partner’s new ratio is
calculated by dividing remaining share of the profit in their existing ratio.
Sacrificing ratio is calculated by deducting new ratio from the existing ratio.
Illustration 1
Deepak and Vivek are partners sharing profit in the ratio of 3 : 2. They admit
Ashu as a new partner for 1/5 share in profit. Calculate the new profit
sharing ratio and sacrificing ratio.
Solution:
Calculation of new profit sharing ratio:
Let total Profit = 1
New partner’s share = 1/5
Remaining share = 1 – 1/5 = 4/5
Deepak’s new share = 3/5 of 4/5 i.e. 12/25
MODULE - 4
Partnership Accounts
Notes
 143
Admission of a Partner
ACCOUNTANCY
Vivek’s new share = 2/5 of 4/5 i.e. 8/25
Ashu’s Share = 1/5
The new profit sharing ratio of Deepak, Vivek and Ashu is :
= 12/25 : 8/25 : 1/5 = 12 : 8 : 5/25 = 12 : 8 : 5
So Deepak Sacrificed = 3/5 – 12/25 = 15 – 12/25 = 3/25
Vivek Sacrificed = 2/5 – 8/25 = 10 – 8/25 = 2/25
Sacrificing Ratio = 3 : 2
Sacrificing ratio of the existing partners is same as their existing ratio.
(ii) The new partner purchases his/her share of the profit from the
Existing partner in a particular ratio.
In this case : the new profit sharing ratio of the existing partners is to be
ascertained after deducting the sacrifice agreed from his share. It means the
incoming partner has purchased some share of profit in a particular ratio
from the existing partners.
Illustration 2
Neha and Parteek are partners, sharing profit in the ratio of 5 : 3. They admit
Nisha as a new partner for 1/6 share in profit. She acquires this share as
1/8 from Neha and 1/24 share from Parteek. Calculate the new profit sharing
ratio and sacrificing ratio.
Solution
Neha’s and Parteek existing ratio is 5 : 3
Neha’s new share = 5/8-1/8 = 4/8 or 12/24
Parteek’s new share = 3/8-1/24 = 8/24
Nisha’s share = 1/8+1/24 =4/24
The new profit sharing ratio of Neha, Parteek and Nisha is
12/24 : 8/24 : 4/24
= 12 : 8 : 4 = 3 : 2 : 1
(ii) Sacrifice ratio = 1/8 : 1/24 or 3 : 1
(iii) Existing partners surrender a particular portion of their share in
favour of a new partner.
In this case, sacrificied share of the each partner is to be ascertained. This
ascertained by multiplying the existing partner share in the ratio of their
Page 5


19
ADMISSION OF A PARTNER
Kapil and Krish are running a partnership firm dealing in toys. They are
one of the most successful businessmen in the locality. They now decide
to start manufacturing toys that are electronically operated to diversify their
busmess. For this they need more capital and also technical expertise.
Mohit; their friend is an electronic engineer and has capital also.  They have
persuaded him to join their firm. In case, he joins the partnership firm, this
will be a case of admission of a partner. As a result, he may need to bring
in capital and share of goodwill. In this lesson, you will learn about goodwill
and other ajustments at the time of admission of a partner. Mohit will bring
in capital and share of goodwill. Some changes in the value of some assets
and liabilities of the existing firm are need to bring them at their realistic
value, on his admission. There may be other issues involing finance on his
admission. All this need accounting treatment. In this lesson you will learn
accounting treatment and adjustments to be made on the admission of a
partner.
OBJECTIVES
After studying this lesson, you will be able to :
l state the meaning of admission of a partner;
l calculate new profit sharing ratio and sacrificing ratio;
l state the meaning and factors affecting goodwill;
l explain the methods of valuation of goodwill;
l describe accounting treatment of goodwill;
l explain the need for revaluation of assets and reassessment of liabilities;
ACCOUNTANCY
MODULE - 4
Notes
Partnership Accounts
 140
MODULE - 4
Partnership Accounts
Notes
 141
Admission of a Partner
ACCOUNTANCY
l illustrate the accounting treatment of changes arising from revaluation
of assets and reassessment of liabilities;
l describe accounting treatment of undistributed profits and reserves;
l explain the treatment of various adjustments in partners’ capitals ;
l prepare Revaluation Account, Partners’ Capital Accounts and balance
sheet of the reconstituted firm.
19.1 ADMISSION OF A PARTNER
Meaning, New Profit Sharing Ratio and Sacrificing Ratio
Meaning
An existing partnership firm may take up expansion/diversification of the
business. In that case it may need managerial help or additional capital. An
option before the partnership firm is to admit partner/partners, when a
partner is admitted to the existing partnership firm, it is called admission
of a partner.
According to the Partnership Act 1932, a person can be admitted into
partnership only with the consent of all the existing partners unless
otherwise agreed upon.
On admission of a new partner, the partnership firm is reconstituted with
a new agreement. For example, Rekha and Nitesh are partners sharing profit
in the ratio of 5:3. On April 1, 2006 they admitted Nitu as a new partner
with 1/4th share in the profit of the firm. In this case, with the admission
of Nitu as partner, the firm stands reconstituted.
On the admission of a new partner, the following adjustments become
necessary:
(i) Adjustment in profit sharing ratio;
(ii) Adjustment of Goodwill;
(iii) Adjustment for revaluation of assets and reassessment of liabilities;
(iv) Distribution of accumulated profits and reserves; and
(v) Adjustment of partners’ capitals.
Adjustment in Profit sharing Ratio
When a new partner is admitted he/she acquires his/her share in profit from
the existing partners. As a result, the profit sharing ratio in the new firm
is decided mutually between the existing partners and the new partner. The
ACCOUNTANCY
MODULE - 4
Notes
Admission of a Partner
Partnership Accounts
 142
incoming partner acquires his/her share of future profits either incoming
from one or more existing partner. The existing partners sacrifice a share
of their profit in the favour of new partner, hence the calculation of new
profit sharing ratio becomes necessary.
Sacrificing Ratio
At the time of admission of a partner, existing partners have to surrender
some of their share in favour of the new partner. The ratio in which they
agree to sacrifice their share of profits in favour of incoming partner is called
sacrificing ratio. Some amount is paid to the existing partners for their
sacrifice. The amount of compensation is paid by the new partner to the
existing partner for acquiring the share of profit which they have surrendered
in the favour of the new partner.
Sacrificing Ratio is calculated as follows:
Sacrificing Ratio = Existing Ratio – New Ratio
Following cases may arise for the calculation of new profit sharing ratio
and sacrificing ratio:
(i) Only the new partner’s share is given
In this case, it is presumed that the existing partners continue to share the
remaining profit in the same ratio in which they were sharing before the
admission of the new partner. Then, existing partner’s new ratio is
calculated by dividing remaining share of the profit in their existing ratio.
Sacrificing ratio is calculated by deducting new ratio from the existing ratio.
Illustration 1
Deepak and Vivek are partners sharing profit in the ratio of 3 : 2. They admit
Ashu as a new partner for 1/5 share in profit. Calculate the new profit
sharing ratio and sacrificing ratio.
Solution:
Calculation of new profit sharing ratio:
Let total Profit = 1
New partner’s share = 1/5
Remaining share = 1 – 1/5 = 4/5
Deepak’s new share = 3/5 of 4/5 i.e. 12/25
MODULE - 4
Partnership Accounts
Notes
 143
Admission of a Partner
ACCOUNTANCY
Vivek’s new share = 2/5 of 4/5 i.e. 8/25
Ashu’s Share = 1/5
The new profit sharing ratio of Deepak, Vivek and Ashu is :
= 12/25 : 8/25 : 1/5 = 12 : 8 : 5/25 = 12 : 8 : 5
So Deepak Sacrificed = 3/5 – 12/25 = 15 – 12/25 = 3/25
Vivek Sacrificed = 2/5 – 8/25 = 10 – 8/25 = 2/25
Sacrificing Ratio = 3 : 2
Sacrificing ratio of the existing partners is same as their existing ratio.
(ii) The new partner purchases his/her share of the profit from the
Existing partner in a particular ratio.
In this case : the new profit sharing ratio of the existing partners is to be
ascertained after deducting the sacrifice agreed from his share. It means the
incoming partner has purchased some share of profit in a particular ratio
from the existing partners.
Illustration 2
Neha and Parteek are partners, sharing profit in the ratio of 5 : 3. They admit
Nisha as a new partner for 1/6 share in profit. She acquires this share as
1/8 from Neha and 1/24 share from Parteek. Calculate the new profit sharing
ratio and sacrificing ratio.
Solution
Neha’s and Parteek existing ratio is 5 : 3
Neha’s new share = 5/8-1/8 = 4/8 or 12/24
Parteek’s new share = 3/8-1/24 = 8/24
Nisha’s share = 1/8+1/24 =4/24
The new profit sharing ratio of Neha, Parteek and Nisha is
12/24 : 8/24 : 4/24
= 12 : 8 : 4 = 3 : 2 : 1
(ii) Sacrifice ratio = 1/8 : 1/24 or 3 : 1
(iii) Existing partners surrender a particular portion of their share in
favour of a new partner.
In this case, sacrificied share of the each partner is to be ascertained. This
ascertained by multiplying the existing partner share in the ratio of their
ACCOUNTANCY
MODULE - 4
Notes
Admission of a Partner
Partnership Accounts
 144
sacrifice. The share sacrificed by the existing partners should be deducted
from his existing share. Therefore, the new share of the existing partners
is determined. The share of the incoming partner is the sum of sacrifice by
the existing partners.
Illustration 3
Him and Raj shared profits in the ratio of 5:3. Jolly was admitted as a
partner. Him surrendered 1/5 of his share and Raj 1/3 of his share in favour
of Jolly. Calculate the new profit sharing ratio.
Solution :
Him surrenders 1/5 of his share, i.e., = 1/5 of 5/8 = 1/8
Raj surrenders 1/3 of his share, i.e., = 1/3 of 3/8 = 1/8
So, sacrificing ratio of Him and Raj is 1/8 : 1/8 or equal.
Him’s new share = 5/8 – 1/8 = 4/8
and Raj’s new share = 3/8 – 1/8 = 2/8
Jolly’s New share = 1/8 + 1/8 = 2/8
New profit sharing ratio of Him’s, Raj’s and Jolly’s is
= 4/8 : 2/8 : 2/8 or 4 : 2 : 2 or 2 : 1 : 1.
INTEXT QUESTIONS 19.1
I. Fill in the blanks with appropriate word/words :
(i) Sacrificing ratio is calculated by deducting .................. share of
profit from .................. share of profit of the existing partners.
(ii) On admission of a new partner, the partnership firm is ..................
(iii) The ratio in which partners surrender their profits is known as
..................
(iv) The new ratio of existing partners is calculated by dividing
remaining share of the profit in their ..................
II. If Tarun and Nisha are partners sharing profits in the ratio of 5:3. What
will be their sacrificing ratio if Rahul is admitted for 1/8 share of profit
in the firm?