Notes on Admission of Partner

Prepared by : VINEET RAJAN

M.No.9818168085
Reconstitution of Partnership :
When a new partner is admitted, following changes takes place :
 Change in Profit Sharing Ratio.
 Treatment of Goodwill.
 Revaluation of Asset and Liabilities.
 Capital Adjustments.
Change in Profit Sharing Ratio or Calculation of new ratio or sacrificing ratios :
Sacrificing Ratio = Old Ratio – New Ratio
Calculation of New Ratios in different circumstances:
Case I
When old ratio is given and new partners’ share is given.
e.g. A and B are partners sharing profits & Losses in the ratio of 3 : 2. C admits for ¼ th
share.Then new Profit Sharing Ratio can be calculated as :
Let total share of firm be 1
Remaining share of A & B = 1 – ¼ = ¾
A’s New Share = ¾ x 3/5 = 9/20
B’s New Share = ¾ x 2/5 = 6/20
New Ratio = 9/20 : 6/20 : ¼ or 9 : 6 : 5 (When L.C.M. is taken)
Case II
When old ratio & Future ratio of old partners are given and new partner’s share is given.
e.g. A and B are partners sharing profits & Losses in the ratio of 3 : 2. C admits for ¼ th
share.Future Ratio of A & B is 2 : 1.Then new Profit Sharing Ratio can be calculated as
Let total share be 1, then remaining share of A & B = 1 – ¼ = ¾
A’s New Share = ¾ x 2/3 = 6/12
B’s New Share = ¾ x 1/3 = 3/12
New Ratio = 6/12 : 3/12 : ¼ or 6 : 3 : 3 (when L.C.M. is taken) or 2 : 1 : 1
Sacrificing Ratio = Old – New i.e. A’s Ratio = 3/5 – 2/4 = 2/20 B’s Ratio = 2/5 – ¼ = 3/20 or 2:3.
Case III
When Old Ratio is given and new partners’ share is given, but new partner acquires or takes
his/her share from old partner.
e.g. A and B are partners sharing profits & Losses in the ratio of 3 : 2. C admits for 3/7 share,
which he acquires 2/7 from A and 1/7 from B.Then new Profit Sharing Ratio can be calculated as
A’s New Share = 3/5 – 2/7 = 11/35
B’s New Share = 2/5 – 1/7 = 9/35
New Ratio = 11/35 : 9/35 : 3/7 or 11 : 9 : 15 (when L.C.M. is taken).
Case IV
When Old Ratio is given and new partners’ share is not given, but old partner surrenders part of
his/her share in favour of new partner.
e.g. A and B are partners sharing profits & Losses in the ratio of 3 : 2. C admits, A surrenders 2/3
of his share where as B surrender 1/3 of his share in favour of C. Then new Profit Sharing Ratio
can be calculated as
A surrenders to C = 3/5 x 2/3 = 6/15
B surrenders to C = 2/5 x 1/3 = 2/15
C’s Share = 6/15 + 2/15 = 8/15
A’s new share = 3/5 –6/15 = 3/15
B’s new share = 2/5 – 2/15 = 4/15
Then, New Ratio = 3/15 : 4/15 : 8/15 or 3 : 4 : 8.

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Goodwill
Meaning It is the value of reputation of a firm in respect of the profits expected in
future over and above the normal profits earned by other similar firms belonging to the
same industry.
Nature of Goodwill
(a) It is regarded as intangible asset not a fictitious asset.
(b) It is valueable asset if the firm is earning profits.
Factors Affecting Goodwill
 Nature of Business.
 Size of Business.
 Favourable Loacation.
 Efficiency of Management.
 Market situation.
 Technical know how.
 Quality of product.
 After sales service.
 Management attitude towards fulfillment of commitments and many more.

Valuation of Goodwill
Needs :
(a) When there is change in Profit Sharing Ratio.
(b) When a new partner is admitted.
(c) When a partner retires.
(d) When a partner dies.
(e) When the firm is sold or amalgamated.
Methods :
i) Average Profit Method

Goodwill = Actual Average Profit x No. of years’ purchase.

Actual Average Profit = Total Actual Profits ÷ No. of years.
Actual Profit = Profit for the year – Abnormal Gain (like gain on sale of fixed Assets,
Speculative profit like winning of lottery etc.) + Abnormal loss (like loss due to theft,
fire, on sale of fixed assets etc.) – Expenses to be paid in future (like Remuneration to
partners etc.
ii) Weighted Average Profit
When the profits are rising, then weighted average method can be used
Year Profit Weights Product
(Profit x weights)
Goodwill = Total weighted average profit x No. of years purchase.

iii) Super Profit Method

Goodwill = Super Profit x No. of years’ Purchase

Super Profit = Actual Average Profits – Normal Profits.
Normal Profits = Capital employed x Normal Rate of Return
100

iv) Capitalisation Method

According to this method goodwill can be valued in two ways :

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 a) By Capitalising the average actual profits
Goodwill = Total Capitalised value of business – Net Assets
Total Capitalised Value of the firm = Actual Average Profit x 100
Rate of Normal Profit
Net Assets = Total Assets – Total Liabilities.

b) By Capitalising the Super Profits

Normal Profit = Capital employed (i.e. Total Assets – Liabilities) x Rate of
100 Normal Profit

Super Profit = Actual Average Profit – Normal Profit

Goodwill = Super Profit x 100
Rate of Return
v) Annuity Method
According to this method Goodwill is Calculated as follows:
Goodwill = Super Profit x value of Annuity.
Accounting treatment for goodwill

Methods of treatment of goodwill:

Premium Method
When a new partner is admitted, he is to introduce a certain sum of money as his capital. In
addition to this, the new partner brings in cash the amount of premium equal to his share of
goodwill. There are three alternatives.
a) When new partner brings his share of goodwill in cash and the same is paid to old
partners privately. – No entry is to be made in the books.
b) Then new partner brings goodwill in cash and retained in business.
Journal entries :

Cash A/c Dr. (with the total amount of Capital & goodwill
To New Partners’ Capital A/c brought into business)
(Being amount actually brought in for
goodwill and Capital)

On distribution on amount of goodwill among old partners :

Premium a/c Dr. (with only amount of goodwill to be distributed

To Old Partners’ Capital a/c in Sacrificing Ratio)
(Being the amount of goodwill brought in
by new partner transferred to old partners)

c) When amount of goodwill is withdrawn form the firm by the old partners.

First two entries will be same as passed in case (b), the following additional entry is also
passed :
Old Partners’ Capital A/c Dr. (with the amount of goodwill withdrawn by old
To Cash A/c partners in sacrificing ratio).
(Being amount of goodwill withdrawn
by old partners)

Revaluation Method

If goodwill already appears in the Balance Sheet/ Books, then following entry will be passed :
Old Partners’ Capital A/c Dr. (With the difference amount between goodwill
To Goodwill A/c already appears less goodwill calculated as per

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 (Being amount of goodwill New terms in old ratio)
written back)

The following entry will be passed to record goodwill :

New Partners’ Capital A/c Dr. (with the amount of new partners’ share of
To Old Partners’ Capital A/c goodwill to be distributed in sacrificing ratio)
(Being the amount of goodwill not
brought by new partner)

When goodwill brought by new partner is less than his share e.g. If new partner brings only part
of his share i.e. Rs.5,000 for ¼ th share, but his share of goodwill calculated as Rs.8,000. Then, in
addition to entries passed in Case (b) of Premium method of treatment of goodwill, following
additional entry will be passed:
New Partner Capital A/c Dr (8000 – 5000) = 3,000
To Old Partners’ Capital A/c 3,000
(Being deficiency of goodwill not brought by
new partner in sacrificing ratio).

In case of hidden goodwill i.e. when no amount of goodwill is given but it is necessary to record
goodwill then amount of goodwill will be calculated in following manner
‘*’ marked item has been calculated with the help of following formula
= (New Partners’ Share of capital) x Reciprocal of new partners’ share – (Capital of all partners
including new partner).
Following entry will be passed to record goodwill in above case:
New Partners’ Capital A/c Dr. (with the amount of new partners’ share of
To Old Partners’ Capital A/c goodwill to be distributed in sacrificing ratio)
(Being the amount of goodwill not
brought by new partner)
Proforma of Revaluation A/c or Profit & Loss Adjustment A/c

Revaluation A/c

Particulars Amount Particulars Amount

To Assets (name, if there *** By Assets (name, if there is ***
Decrease in value) increase in value)
To Liabilities (name, if *** By Liabilities (name if, there
There increase in value) is decrease in value) ***
To Unrecorded liabilities *** By unrecorded Asset ***
To Profit transferred to old By Loss transferred to old
Partners’ Capital A/c *** partners’ Capital A/c ***
(in old Ratio, Balancing figure) (in old Ratio, Balancing figure)
*** ***

Proforma of Partners’ Capital Account

Particulars
To Old Partners’ Capital A/c
To Old Partners’ Capital A/c
(Goodwill not brought by new
Partners in sacrificing ratio)
To Revaluation A/c (Loss)
To Cash A/c (Goodwill with-
Drawn by old partners)
Partners’ Capital A/c
old old New Particulars old old New
*** By balance b/d *** ***
*** (Opening balance of Capital)
By Cash (Amount of Capital ***
& Goodwill brought in cash)
*** *** By Revaluation A/c (Profit) *** ***
By Premium A/c *** ***
*** *** (Goodwill brought in cash t/fd.

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To P&L, Deferred Expenditure *** *** to old partners in S. Ratio)
(given on Asset side in old ratio) By New Partner capital a/c *** ***
(Goodwill written off after (Goodwill not brought by new
being raised) By Joint Life Policy *** ***
To Goodwill A/c *** *** (Surrender Value)
(Goodwill already appears, By General Reserve,W.C.F. *** ***
written off) By P & L (Liabilities side) *** ***
To Balance C/d *** *** ***
(Balancing figure)
*** *** *** *** *** ***

Capital Adjustments :

Case I When new Partner’s Capital is not given. He has to Contribute

proportionate capital.

Step I Prepare Revaluation & Capital A/c in same manner and take out the closing
Capital balances of old partners.
Step II Let total capital be X
Step III Equation is prepared for finding out total capital in this manner:
Add Capital balances (closing) of old partners + (New Partners’ share × X) = X
Step IV Find out the value of X i.e. The total capital of the firm and calculate the new
partners’ share by multiplying his share with total capital.

Case II When new partners’ capital is given and old partners capital has been
adjusted on the basis of the proportion of new partners’ capital and the
difference i.e. deficiency or surplus should be transferred to Cash/ Current
A/cs.

Step I Calculate total Capital = (New Partners’ Capital) x Reciprocal of New partners’
share.
Step II Total Capital calculated in step I will be divided in new profit sharing ratio and
should be written in Capital A/c as closing balance i.e. To Balance C/d.
Step III Difference has to be calculated in Capital A/c and this difference should be
transferred to cash/current A/c. If difference has been transferred to current A/c,
It should directly be taken into Balance Sheet.