Admission of a Partner — Notes

A new partner may be admitted with the consent of all existing partners (unless the deed says otherwise). Admission reconstitutes the firm: the old agreement ends and a new one begins. The new partner acquires two rights: a share in the assets and a share in the future profits of the firm.

Matters to settle on admission

1. New profit-sharing ratio.
2. Sacrificing ratio.
3. Goodwill (premium, or adjustment through capitals).
4. Revaluation of assets and reassessment of liabilities.
5. Reserves and accumulated profits or losses.
6. Capitals (and, if agreed, their adjustment) and the new balance sheet.

Sacrifice of an old partner = old share − new share. The sacrificing ratio is the ratio of these sacrifices.

Always check that the new shares add up to 1, and that the sacrifices add up to the new partner's share.

Premium for goodwill = firm's goodwill × new partner's share. It is credited to the sacrificing partners in the sacrificing ratio. Accounting Standard 26 allows only purchased goodwill to be recorded, so no goodwill account is raised on admission.

• In cash: Bank A/c Dr. To Premium for Goodwill A/c; Premium for Goodwill A/c Dr. To sacrificing partners' Capital A/cs.
• In kind: Asset A/c Dr. To Premium for Goodwill A/c and To new partner's Capital A/c.
• Partly or not brought: New partner's Capital (or Current) A/c Dr. (unpaid part) To sacrificing partners' Capital A/cs.
• Withdrawn by old partners: Old partners' Capital A/cs Dr. To Bank A/c.
• Paid privately: no entry.
• Goodwill already in the books: written off in the old ratio — Old partners' Capital A/cs Dr. To Goodwill A/c.

When no premium is stated but the new partner brings a capital that is high for his share:

1. Implied total capital = new partner's capital ÷ his share.
2. Actual capital = old partners' capitals after all adjustments + new partner's capital.
3. Hidden goodwill = implied − actual.
4. New partner's share = hidden goodwill × his share: New partner's Capital (or Current) A/c Dr. To sacrificing partners' Capital A/cs.

A revaluation account (profit and loss adjustment account) records changes in values at admission.

• Debit: decrease in assets, increase in liabilities, unrecorded liabilities, new provisions.
• Credit: increase in assets, decrease in liabilities, unrecorded assets, provisions no longer needed.
• Balance: profit (credit to old partners) or loss (debit to old partners) in the old ratio.

Typical entries: Revaluation A/c Dr. To Stock A/c (fall); Building A/c Dr. To Revaluation A/c (rise); Revaluation A/c Dr. To Old partners' Capital A/cs (profit).

Reserves and accumulated profits belong to the old partners and are shared in the old ratio:

• General reserve / credit balance of profit and loss: Reserve A/c Dr. To Old partners' Capital A/cs.
• Debit balance of profit and loss, deferred revenue expenditure (e.g. advertisement suspense): Old partners' Capital A/cs Dr. To the account.
• Workmen compensation reserve: meets the claim first; the balance is credited to old partners; an excess claim is debited to revaluation.
• Investment fluctuation reserve: meets the fall in investments first; the balance is credited to old partners; an excess fall is debited to revaluation.

Capital accounts are prepared in columnar form for all partners; closing balances go to the new balance sheet.

Old partners' capitals on the basis of the new partner's capital

• Total capital = new partner's capital ÷ his share.
• Required capital of each old partner = total capital × his new share.
• Surplus → withdrawn (Capital A/c Dr. To Bank A/c) or credited to his current account; deficit → brought in (Bank A/c Dr. To Capital A/c) or debited to his current account.

New partner's capital on the basis of the old partners' capitals

• Total capital = old partners' adjusted capitals ÷ their combined new share; new partner's capital = total capital × his share.

New balance sheet: assets and liabilities at revised values, unrecorded items added, reserves removed, closing capitals (and any current accounts) shown.