Admission of a Partner
Learning objectives:After studying this lesson, the students will be able to: Identify and deal effectively with the situation of reconstitution of partnership. Identify the problem arising due to admission of a partner in the firm. Calculate new and sacrifice ratio in different cases. Understand, calculate and make treatment of goodwill in different cases. Make accounting treatment of the revaluation of assets and liabilities and distribute the profit and loss on revaluation among the old partners. Make accounting treatment of unrecorded assets and liabilities Prepare capital Accounts, Cash A/c and Balance Sheet of the New firm 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. 22
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. Ql. At the time of change in profit sharing ratio among the existing partners, where will you record an unrecorded liability? Ans. Q2. Revaluation Account-Debit side Anand, Bhutan and Chadha are partners sharing profits in ratio of 3:2:1. On 1st April 2007, they decided to share profits equally.Name the partners who is gaining on consequence of such change. Ans. Q3. Ans. Chadha. Give two characteristics of goodwill. (i) it is an intangible asset having a definite value. (ii) It helps in earning more profit. Q4. Ans. Q5. Name any two factors affecting goodwill of a partnership firm. (i) Favorable location (ii) Time period
In a partnership firm assets are Rs.5, 00,000 and liabilities are Rs. 2, 00,000. The normal profit rate is 15%. State the amount of normal profits.
Rs.45,000 State the amount of goodwill, if goodwill is to be valued on the basis of 2 years‘ purchase of last year‘s profit. Profit of the last year was Rs.20, 000.
Ans. Q7. Ans.
Rs.40,000 Where will you record ‗increase in machinery‘ in case of change in profit sharing ratio among the existing partners? Revaluation Account- Credit Side. 23
Q8. Ans. Q9 Ans. Q 10.
Name two methods for valuation of goodwill in case of partnership firm. (i) Average Profit Method (ii) Super Profit Method Give formula for calculating goodwill under ‗super profit method‘. Goodwill = Super Profit x Number of Years‘ Purchase. Pass the journal entry for increase in the value of assets or decrease in the value of liabilities in the Revaluation A/c?
Assets A/c Liabilities A/c
(with the amount of increase)
Dr. (with the amount of decrease) (with the total amount of gain)
To Revaluation A/c
(Being revaluation of assets and liabilities) Qll. P,Q and R are partners in a firm sharing profits in the ratio of 2:2:1 on 1.4.2007 the partners decided to share future profits in the ratio of 3:2:1 on that day balance sheet of the firm shows General Reserve of Rs reserve. Ans. General Reserve To P‘s Capital A/c To Q‘s Capital A/c To R‘s Capital A/c (Being Reserve distributed) gain.‖ Journalise this statement. Ans. Gaining Partner‘s Capital A/c To Sacrificing Partner‘s Capital A/c Dr A/c Dr....