Reconstitution of a Partnership Firm:
Admission of a Partner
* How can a New Partner be Admitted:-
According to section 31(1) of Indian Partnership Act 1932, a person can be admitted as a new partner only with the consent of all exiting partners.
* A new partner is needed into the business due to the following reasons:-
1. When more capital is needed for the expansion of the business.
2. When a competent and experienced person is needed for the efficient running of the business.
3. To increase the goodwill and reputation of the business by taking a reputed and renowned
Person into the partnership.
4. To encourage a capable employee by taking him into the partnership.
* Following Adjustments are needed at the time of the admission of a new partner :-
1. Calculation of new profit sharing ratio.
2. Accounting treatment of goodwill.
3. Accounting treatment for revaluation of Assets and Liabilities.
4. Accounting treatment of reserves and accumulated profits.
5. Adjustment of capitals on the basis of new profit sharing ratio.
* Calculation of New Profit Sharing Ratio:
1. When only the ratio of new partner is given in the question, then in the absence of any instructions. It is presumed that the old partner will continue to share the remaining profits in the same ratio in which they were sharing before the admission of a new partner.
2. The new partner “purchases” his share of profit from the old partners equally. In such cases the new profit sharing ratios of the old partners will be as certained by deducting the sacrifice made by them from their existing share of profits.
New Profit Ratio = Old Ratio - Sacrifice
3. The new partner “purchases” his share of profit from the old partners in particular ratio. In such cases the new profit sharing ratio of the old partners will be calculated after deducting the sacrifice made by a partner from his existing share of profit.
New Profit Ratio = Old Ratio - Sacrifice
4. When the old partners surrender a particular fraction of their share in favour of the new
Partner then.,
Surrendering Share = Surrendered Share X Old Ratio.
New Ratio = Old Ratio - Surrendering Share.
Sacrifice Ratio = Old Ratio - New Ratio.
*Accounting Treatment of Goodwill on the Admission of a Partner :
1. When the amount of goodwill (premium) is paid privately.
:- No Entry
2. When the new partner brings his share of goodwill (premium) in cash:
a.) When the amount of goodwill/ premium brought in by the new partner is retained in
the business:-
i.) Cash/ Bank A/c Dr.
To goodwill A/c
ii.) Goodwill A/c Dr ( in sacrifice ratio)
To Old partners’ capital A/c
b.) When goodwill/premium brought in by the new partner is withdrawn by the old partners:-
i.) Old Partners’ capital A/c Dr.
To Cash / Bank A/c
* When goodwill already appears in the books and new partners brings his share of goodwill/premium in cash:-
First of all the existing goodwill account will have to be written off. For this purpose old partners’ capital accounts are debited in old ratio and goodwill account is credited.
Old partners’ capital A/c Dr.
To goodwill A/c ( in old ratio)
Remaining entries remains same for bring goodwill in cash.
* When the new partner does not bring his share of goodwill/premium in cash:-
New partner’s current A/c Dr. (from his share of goodwill)
To old partners’ capital A/c (in sacrifice ratio)
* When goodwill already appears in the books and new partner does not bring his share of goodwill/premium in cash:-
i.) Old partners’ capital A/c Dr.
To goodwill A/c (in old ratio)
ii.) New partner’s current A/c Dr.
To old partner’s capital A/c (in sacrifice ratio )
* When new partner brings in only a part of his share of goodwill:-
i.) Cash/bank A/c Dr.
To goodwill A/c
ii.) Goodwill A/c Dr.
New partner’s current A/c Dr.
To Old partner’s capital A/c (in sacrifice ratio)
* Revaluation of assets & liabilities :-
Revaluation account :-
Account which is prepared to record changes in the value of assets & liabilities at time of admission, retirement, death and change in profit ratio of existing partners. Proforma of Revaluation Account is given below :-
Revaluation Account
Particulars
|
Amount
|
Particulars
|
Amount
|
To Decrease in value of assets
To Increase in value of liabilities
To Unrecorded liabilities
To Profit on revaluation transferred to partner’s capital accounts (in old ratio)
|
By Increase in value of assets
By Decrease in value of liabilities
By unrecorded assets
By loss on revaluation transferred to partners’ capital accounts (in old ratio)
|
Partners’ Capital Account
Particulars
|
A
|
B
|
C
|
Particulars
|
A
|
B
|
C
|
To drawings
To interest on drawings
To profit & loss (Share of loss)
To revaluation A/c (share of loss)
To balance c/d
|
By balance b/d
By cash/bank A/c
By interest on capital
By salary
By commission
By P&L appropriation A/c (share of profit)
By revaluation A/c (share of profit)
|
i.) For decrease in the value of assets & increase in the value of Assets / unrecorded Assets:-
1. Revaluation A/c Dr.
To assets A/c (decrease )
2. Assets A/c Dr.
To revaluation A/c (increase)
3. Unrecorded assets A/c Dr.
To revaluation A/c
ii.) For increase / decrease of liabilities or unrecorded liabilities :- 1. Revaluation A/c. Dr.
To liabilities A/c (increase )
2. Liabilities A/c Dr.
To Revaluation A/c (decrease)
3. Revaluation A/c Dr
To unrecorded liabilities A/c
iii.) Revaluation A/c shows profit or loss :-
1. Revaluation A/c. Dr. (in profit)
To Old partners’ capital A/c (in old ratio)
2. Old partners’ capital A/c. Dr. (in loss)
To revaluation A/c (in old ratio)
* Accounting treatment of reserves and accumulated profits or losses :-
i.) For distributing reserves and accumulated profits among old partners in old ratio -
General reserve A/c Dr.
Reserve A/c Dr.
P&L A/c {cr. Balance} Dr.
To old partners’ capital a/c / current a/c.
ii.) For distributing accumulated losses among old partners in old ratio-
Old partner’s capital A/c Dr.
To P&L A/c { Dr. balance}
iii.) For distributing surplus of specific funds:-
Workmen’s compensation fund A/c Dr.
Investment fluctuation fund A/c Dr.
To Old Partner’s Capital a/c. / Current a/c.
* Adjustment of old partner’s capital accounts on the basis of new partner’s capital:-
i.) If the existing capital of any partner is less then his newly calculated capital:-
Bank A/c / Partner’s Current a/c. Dr.
To Old Partner’s Capital A/c.
ii) If the existing capital of any partner is more than his newly calculated capital :
Old Partner’s Capital A/c. Dr.
To Bank A/c. / Partner’s Current A/c.
Learning objectives:-
After studying this lesson, the students will be able to:
i. Identify and deal effectively with the situation of reconstitution of partnership.
ii. Identify the problem arising due to admission of a partner in the firm.
iii. Calculate new and sacrifice ratio in different cases.
iv. Understand, calculate and make treatment of goodwill in different cases.
v. Make accounting treatment of the revaluation of assets and liabilities and distribute the profit and loss on revaluation among the old partners.
vi. Make accounting treatment of unrecorded assets and liabilities
vii. Prepare capital Accounts, Cash A/c and Balance Sheet of the New firm
viii. 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.
4. The Balance Sheet of Ramakant and Shyamkant who shared the profits in the ratio of 2:1 is as under:
15. The following is the Balance Sheet of Shubha and Leena of Aurangabad who share profits in the ration 3:2 respectively as on 31.03.2012. [Ans.]
16. Madhu and Amar are partners in a firm sharing profits and losses in the proportion of 3/5 and 2/5 respectively. Their Balance Sheet as on 31st March, 2012 was as follows: [Ans. ]
17. Manish and Nitin are partners in a firm sharing Profits and Losses in the ratio of 3:1. Their Balance Sheet as on 31st March, 2012 was as follows: [Ans]
