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Accounting for Partnership Firms :
Admission of a partner
When a new partner is admitted in a running business due to the requirement of more capital or may be to take advantage of the experience and competence of the newly admitted partner or any other reason, it is called admission of a partner in partnership firm. According to section 31(1) of Indian partnership Act,1932, “A new partner can be admitted only with the consent of all the existing partners.”
At the time of admission of a new partner, following adjustments are required:
1. Calculation of new profit sharing ratio and sacrificing ratio.
2. Accounting treatment of Goodwill.
3. Accounting treatment of accumulated profit.
4. Accounting treatment of revaluation of assets and reassessment of liabilities.
5. Adjustment of capital in new profit sharing ratio.
1. Calculation of new profit sharing ratio.
Following types of problems may arise for the calculation of new profit sharing ratio.
Case (i) When old ratio is given and share of new partner is given.
Illustration 1. (When new partner acquires his share from all partners in their old ratio)
A and B are partners in a firm sharing profits and losses in the ratio 1:2.They admitted C into the partnership and decided to give him 1/3rd share of the future profits. Find the new ratio of the partners. (CBSE 2003) Solution
(i) Calculation of Sacrifice Share:
A’s sacrifice = 1/3 of 1/3 = 1/9
B’s sacrifice = 2/3 of 1/3 = 2/9
Sacrificing Ration = 1/9 : 2/9 = 1:2
which is equal to old ratio
(ii) Calculation of New Profit sharing Ratio:
New share=Old share -Sacrifice share
A’s new share =1/3 -1/9=3 -1/9=2/9
B’s new share =2/3 -2/ =6 -2/9=4/9
C’s new share =1/9+ 2/9 = 3/9
New ratio among A,B and C: 2/9:4/9:3/9=2:4:3 respectively
Note: Unless agreed otherwise, it is presumed that the new partner acquires his share in profits from the old partners in their old profit sharing ratio.
Alternative Method :
Old Ratio = A:B 1:2
Let the profit of the firm = 1
C's share (New Partner) = 1/3
Remaining Profit = 1 -1/3 = 2/3
Now this profit 2/3 will be divided
between the old partners in their old ratio i.e., 1:2
A's new Profit = 1/3 of 2/3 = 1/3 x2/3 = 2/9
B's new Profit = 2/3 of 2/3 = 2/3x2/3 = 4/9
C's profit = 1/3 or 1/3 x 3/3 = 3/9
Hence the new ratio = 2:4:3
Case (ii) When new partner acquires his/her share from all partners in agreed share.
Illustration 2. (When new partner acquires his share from all partners in agreed share) L and M are partners in a firm sharing profits and losses in the ratio of 7: 3. They admitted N for 3/7th share,which he takes 2/7th from L and 1/7 from M. Calculate the new profit sharing ratio.(CBSE 1999 Compt., 2001, 2003) Solution.
(i) As sacrifice share of old partners are given in the question itself, hence there is no need to calculate it.
(ii) Calculation of New profit sharing ratio:
New share=old share -sacrifice share
L’s new share =7/10 -2/ 7=49 -20/ 70=29/70
M’s new share =3/101/ 7=21 -10/70=11/70
N’s new share =2/7+1/7=3/7(given)
New ratio among L,M and N =29/70:11/70:3/7 = 29:11:30/70 =29:11:30
Case (iii) When new partner acquires his/her share from all partners in certain ratio.
X and Y are partners in a firm sharing profit and losses in the ratio of 3:2.Z is admitted as partner in the firm for 1/6th share in profits. Z acquires his share from X and Y in the ratio of 2:1. Calculate new profit sharing ratio of partners.
(i) Calculation of Sacrifice share:
Given sacrificing Ratio = X:Y = 2:1,
X’s sacrifice = 2/3of 1/6=2/18
Y’s sacrifice =1/3of 1/6 =1/18
(ii) Calculation of New Profit Sharing Ratio:
New share = Old shareSacrifice share
X’s new share =3/52/ 8=5410/90=44/90
Y’s new share =2/51/18=365/90=31/90
Z’s new share =2/18+1/18=3/18or 1/6 (Given)
New ratio among X,Y and Z = 44/90:31/90:1/6=44:31:15/90=44:31:15
Case (iv) When new partner acquires his share from all partners as a fraction of their share.
Illustration 4. (When new partner acquires his share from all partners as a fraction of their share)
A and B are partners in a firm sharing profit and losses in the ratio of 5:3. A surrenders 1/5th of his share, whereas B surrenders 1/3 of his share in favour of C, a new partner. Calculate the new profit sharing ratio
(i) Calculation of sacrifice share
A sacrifices 1/5th of his share i.e., 1/5of 5/8 = 5/40 or 1/8
B sacrifices 1/3th of his share i.e.,1/3of3/8= 3/24 or 1/8
(ii) Calculation of New profit shaing Ratio :
New share =Old share – sacrifice share
A’s new share =5/81/8=4/8
B’s new share = 3/8 1/8 = 2/8
C’s new share = 1/8 + 1/8 = 2/8
New ratio among A, B and C = 4/8:2/8:2/8 = 4:2:2/8 = 2:1:1
Case (v) When new partner does not acquire his/her share from all partners
Illustration 5. (when new partner does not acquire his share from all partners)
A, B and C are partners sharing profits in the ratio of 3:2:1. They admit D for 1/6 share. C would retain his old share. Calculate new ratio of all partners.
(i) Calculation of sacrifice share : (Only A and B will sacrifice in ratio of 3:2)
A’s sacrifice = 3/5 of 1/6 = 3/30 or 1/10
B’s sacrifice = 2/5 of 1/6 = 2/30 or 1/15
C’s sacrifice = 0
(ii) Calculation of new profit sharing ratio :
New share = Old share – Sacrifice share
A’s new share = 3/6 – 1/10 = 306/60 = 24/60
B’s new share = 2/6 – 1/15 = 306/90 = 24/90
C’s new share = 1/6 – 0 = 1/6
D’s new share = 1/10 + 1/15 = 3+2/30 = 5/30 = 1/6
New ratio among A, B, C and D
24/60:24/90:1/6:1/6 = 72:48:30:30/180 = 12:8:5:5
Case (vi) When more than one partner is admitted.
Illustration 6. (when more than one partner is admitted simultaneously)
X and Y are partners sharing profits in the ratio of 3:2. They admit P and Q as new partners. X surrendered 1/3 of his share in favour of P and Y surrendered ¼ of his share in favour of Q. Calculate the new profit sharing ratio of X, Y, P and Q.
(i) Calculation of sacrifice share : (only A and B will sacrifice in the ratio 3:2)
X surrenders 1/3 of his share in favour of P = 1/3 of 5/3 = 3/15 or 1/5
Y surrenders 1/4 of his share in favour of Q = 1/4 of 2/5 = 2/20 or 1/10
2. Accounting Treatment of Goodwill.
At the time of admission of a partner, treatment of Goodwill is necessary to compensate the old partners for their sacrifice. The incoming partner must compensate the existing partners because he is going to acquire the right to share future profits and this share is sacrificed by old partners. If goodwill (Premium) is paid to old partners privately or outside the business by the new partner then no entry is required in the books of the firm.
There may be different situations about the treatment of goodwill at the time of the admission of the new partner :
(i) Goodwill (premium) brought in by the new partner in cash and retained in the business
Illustration 7. (All partners sacrifice)
A and B are partners sharing profits and losses in the ratio of 3:2. They admit C into partnership for ¼ share in profits. C brings ‘ 3,00,000 as capital and ‘ 1,00,000 as goodwill. New profit sharing ratio of the partners shall be 3:3:2. Pass necessary Journal entries.
Note : Sacrificing ratio = Old ration New
A= 3/53/8 = 2415/40 = 9/40
B = 2/53/8 = 1615/40 = 1/40
This sacrificing ratio between A and B i.e., 9:1.
Illustration 8. (Sacrificing ratio is to be calculated)
A and B are partners in a firm sharing profits and losses in the ratio of 3:2 A new partner C is admitted. A surrenders 1/5 of his share and B 2/5 of his share in favour of C. For purpose of C’s admission, goodwill of the firm is valued at ‘ 75,000 and C brings his share ofgoodwill in cash which is retained in the firm’s books. Journalise the above transactions.
Note :(i) Calculation of sacrificing ratio :
A’s sacrifice, 1/5 of his share = 1/5 of 3/5 = 3/25
B’s sacrifice, 2/5 of his share = 2/5 of 2/5 = 4/25
Sacrificing ratio between A and B i.e., 3/25:4/25 = 3:4
(ii) Calculation of C’s share of profit :C’s share of profit = 3/25+4/25 = 7/25
(iii) Calculation of C’s share of goodwill :75,000 x 7/25 = 21,000
Treatment of Existing Goodwill shown in the books
If goodwill already shown in the balance sheet, it should be written off by debiting old partners in their old profit sharing ratio. Illustration 9. (Existing goodwill to be written off)
A and B are partners in a firm sharing profits and losses in the ratio of 3:2. They admit C into partnership for 1/5 share. C brings `30,000 as capital and `10,000 as goodwill. At the time of admission of C, goodwill appears in the balance sheet of A and B at ` 3,000. New profit sharing ratio of partners shall be 5:3:2. Pass necessary entries.
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