Admission of A Partner Class 12 Notes Accountancy - CBSE

Chapter:3

What are Admission of a Partner?

Meaning Of Admission Of A Partner

Admission of a partner is a mode of reconstituting the firm under which existing agreement comes to an end and a new agreement between all partners (including incoming partner) comes into existence.

Effects Of Admission Of A Partner

The effects of admission of a partner are :

  • Old partnership comes to an end and new partnership comes into existence and the firm continues.
  • Combined share of the old partners gets reduced, as the incoming partner becomes entitled to share future profits of the firm.
  • Incoming partner contributes an agreed amount of capital to the firm.
  • Incoming Partner becomes liable for the liabilities of the firm and also acquires right on the assets.
  • Adjustment is made in regard to reserves and accumulated profits and losses.
  • Assets are revalued and liabilities are reassessed. The net change is adjusted in old partners’ capital accounts.
  • Goodwill of the firm is valued to be paid to sacrificing partners by the gaining partners through their capital accounts.
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  • Endothecium: Layer below epidermis.
  • Middle layers: Layers below endothecium.
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Adjustments Required At The Time Of Admission

  • Computation of new ratio and sacrificing ratio.
  • Valuation and adjustment of goodwill.
  • Revaluation of assets and reassessment of liabilities.
  • Treatment of reserves, accumulated profits and losses.
  • Adjustment of capital.
  • Preparation of Balance Sheet after incorporating all the necessary changes.

New Profit Sharing Ratio

The ratio in which all the partners (including incoming partner) share the future profits and losses.
New Profits Sharing Ratio = Old Share – Sacrificing Share

Sacrificing Ratio

The ratio in which old partners agree to sacrifice their share of profit in favour of the incoming partner.
Sacrificing Ratio = Old Share – New Share
Case I When premium for goodwill is paid privately by a new partner In case a new partner pays premium to the old partners privately or directly or outside the business, it will not be recorded because it is an out of business transaction. However entry for capital brought in by a new partner will be recorded.
Cash/Bank A/c
To New Partner’s Capital A/c 		Dr.
Case II When premium for goodwill is brought in business by new partner and retained in the business (a) For bringing premium for goodwill and capital
Cash/Bank A/c
To New Partner’s Capital A/c
To Premium for Goodwill A/c 		Dr.
(b) For sharing of premium for goodwill by sacrificing partners
Premium for Goodwill A/c
To Sacrificing Partner’s Capital/Current A/c (in sacrificing ratio) 		Dr.
Case III When premium for goodwill is brought in business by new partner and retained in the business (a) For assets brought in by new partner
Assets A/c
To Premium for goodwill A/c
To New Partner’s Capital A/c 		Dr.
(b) For giving credit of incoming partner’s share of goodwill to sacrificing partners
Premium for Goodwill A/c
To Sacrificing Partners’ Capital/Current A/c (in sacrificing ratio) 		Dr.
Case IV When premium for goodwill is brought in by new partner and is withdrawn by old (sacrificing) partners fully or partly. In this case, in addition to the two entries of case II, an entry for drawings will also be passed as follows
For withdrawing of premium by old (sacrificing) partners
Old (sacrificing) Partner’s capital/ Current A/c (In sacrificing ratio) To Cash/Bank A/c 		Dr.
Case V When a new partner brings only a part of premium for goodwill in cash First entry will be same as in case II. Next, the following entry will be passed
Premium for Goodwill A/c (goodwill brought in cash)
New Partner’s Capital/Current A/c (goodwill not brought in cash)
To Sacrificing (Old) Partners’ Capital/Current A/c (in sacrificing ratio) 		Dr.
Dr.
Case VI When the new partner is unable to bring his share of premium for goodwill in cash New Partner’s Capital/Current A/c (With the share of new partner in goodwill of the firm)
To Sacrificing (Old) Partners’ Capital/Current A/c 		Dr.
(in sacrificing ratio)

Writing-off Existing Goodwill

Any goodwill already appearing in the book (balance sheet) will be immediately written-off (debited) to old partner’s capital account in old profit sharing ratio.

Old Partners’ Capital/Current A/c

To Goodwill A/c

Dr.

Hidden Or Inferred Goodwill

Hidden or inferred goodwill is the excess of desired total capital of the firm over the actual combined capital of all partners.

Calculation of Hidden Goodwill
A Net worth (including goodwill) on the basis of capital brought in by incoming partner
(Incoming partner’s capital × Reciprocal of share of incoming partner) 		...
B. (–) Net worth (excluding goodwill of the reconstituted firm including incoming partner’s capital) (...)
C Value of Hidden Goodwill (A – B) ...

Accounting Treatment of Reserves, Accumulated Profits/Losses
(1) For transfer of reserves and accumulated profits Reserves A/c Dr.
Profit and Loss A/c Dr.
Workmen Compensation Reserve A/c (Excess of reserve Dr. over actual liability)
Investment Fluctuation Reserve A/c (Excess of reserve over Dr. the difference between the book value and the market value of investments)
To Old Partner’s Capital or Current A/c (Individually) 		(Old Ratio)
(2) For transfer of accumulated losses Old Partners’ Capital or Current A/c (Individually) Dr.
To Profit and Loss A/c
To Deferred Revenue Expenditure A/c 		(Old Ratio)

Revaluation Of Assets And Reassessment Of Liabilities

Revaluation account is an account, which is prepared to record changes in the value of assets and liabilities at the time of admission, retirement, death and change in profit sharing ratio. (Revaluation account is prepared in the same manner as in case of change in profit sharing ratio)