“ADMISSION OF A PARTNER” ankur roy 9836021833

Admission of partner is one of the Modes of Reconstitution of the firm because with this, an existing agreement
comes to an end and a new agreement among ALL the Partners (including New Partner) comes into existence.

According to Indian Partnership Act, 1932:

New Partner shall not be admitted in the firm unless all the existing partners agree to
the admission of the new partner or it is agreed otherwise by the partners in the Partnership
Deed.

ADJUSTMENTS REQUIRED ON THE ADMISSION OF A NEW PARTNER:

1. Change in Profit Sharing Ratio.

2. Valuation and Adjustment of Goodwill.
3. Adjustment of Profit or Loss arising from Revaluation of Assets and Liabilities.
4. Adjustments of Reserves and Surplus, and Accumulated Profits/Losses.
5. Adjustment of Capital.

1. Change in Profit Sharing Ratio:

New or Incoming partner may acquire his share from Old Partners through any of the
alternative modes:
a. In their Old Ratio.
b. In a Particular Ratio OR In a Surrendered Ratio
c. In a Particular fraction from OLD Partners.

A. New Partner acquires his share from OLD Partners in their OLD Ratio:
(i) PSR of New partner is given BUT Sacrifice made by OLD partners is not
given.

It is assumed that New Partner has acquired his share from OLD Partners in
their OLD Ratio.

Steps:
a. Calculate Remaining Share (1 – Share of New Partner)
b. Distribute such remaining share between Old Partners in Old Ratio

Eg: A and B are partners in a firm sharing Profits and Losses in the ratio 5:3. C
was admitted for 1/9th share. Calculate New Ratio.
Solution:
Remaining Share = 1 – 1/9
= 8/9
A’s New Share = 5/8 * 8/9 = 40/ 72
B’s New Share = 3/8 * 8/9 = 24/72
C’s New Share = 1/9 or 8/72
Therefore,
New Ratio between A, B and C = 40:24:8 OR 5:3:1
 (ii) PSR of New Partner is given AND NEW PSR between Old Partners is
given.
Steps:
a. Calculate Remaining Share (1 – Share of New Partner)
b. Distribute such remaining share between OLD Partners in New Ratio

It will give NEW Ratio between ALL the Partners.

Eg: A and B are partners in a firm sharing Profits and Losses in the ratio 5:3. C
was admitted for 1/9th share. New Ratio between A and B i s 3:2. Calculate New
Ratio between A, B and C.
Solution:
Remaining Share = 1 – 1/9
= 8/9
A’s New Share = 3/5 * 8/9 = 24/ 45
B’s New Share = 2/5 * 8/9 = 16/45
C’s New Share = 1/9 or 5/45
Therefore,
New Ratio between A, B and C = 24:16:5

(iii) New Partner acquired his share from OLD Partners Equally:
Deduct the sacrifice made by Old Partner in favour of New Partner from
Existing Share of Profit

Eg: A and B are partners in a firm sharing Profits and Losses in the ratio 3:2. C
was admitted for 1/4th share. He acquires his share fro m A and B equally.
Calculate New Ratio between A, B and C.
Solution:
A’s New Share = 3/5 – (1/4 *1/2) = 19/40
B’s New Share = 2/5 – (1/4 *1/2) = 11/40
C’s New Share = 1/4 OR 10/40
Therefore,
New Ratio between A, B and C = 19:11:40

B. New Partner acquires his Share from Old or Existing Partners in Particular Ratio:
Existing Partner’s New Share of Profit = OLD Share – Share Sacrificed

Eg: A and B are partners in a firm sharing Profits and Losses in the ratio 3:2.
Case I: C was admitted and he acquired 1/5th share from A and 1/10th share from
B. Case II. C was admitte
d and he acquired 1/5th share of A and 1/10th share of B.
Calculate New Ratio between A, B and C in both the cases.
Solution:
Case I Case II
A’s New Share = 3/5 –1/5= 2/5 or 4/10 A’s New Share = 3/5 –(3/5 * 1/5) = 12/25
B’s New Share = 2/5 –1/10= 3/10 B’s New Share = 2/5 –(2/5 * 1/10)= 9/25
C’s New Share = 1/5+1/10 = 3/10 C’s New Share = 3/25+2/50 = 4/25
Therefore, Therefore,
New Ratio between A, B and C = 4:3:3 New Ratio between A, B and C = 12:9:4
 C. New Partner acquires his share from OLD Partners in Particular Fraction:

Existing Partner’s New Share of Profit = OLD Share – Share Sacrificed

D. When an Old Partner retains his share:

Steps:
a. Calculate Remaining Share (1 – Share of New Partner- Share retained by Old
Partner)
b. Distribute such remaining share between Remaining OLD Partners in OLD
Ratio

ankur roy 9836021833

 Sacrificing Ratio:
Calculation of Sacrificed Share = Old Share – New Share

 Situation 1: PSR of New Partner is Given without the details of Sacrifice made
by OLD Partners

In such a situation: Sacrificing Ratio = Old Ratio

 Situation 2: When New Partner acquires the share by surrender of a
particular fraction by Old Partners

In such a Situation: Sacrificing Ratio = Share Surrendered by OLD Partners

2. Treatment of Goodwill:
(i) Existing Goodwill:
Write off among Old Partners in Old Ratio.

Old Partners’ Capital A/c. Dr. (in OR)

To Goodwill A/c.

(ii) Valued Goodwill:

1. If Goodwill is Paid Privately by a New Partner:

NO-ENTRY

2. When Premium for Goodwill is brought by the New Partner in Cash and it is
retained in the business:
Cash A/c. Dr.
To New Partner’s Capital A/c. (Capital Brought In)
To Premium for Goodwill A/c. (Share of G/w)

Premium for Goodwill A/c. Dr. (Share of Goodwill)

To Sacrificing Partners’ Capital A/c. (in SR)
 NOTE: if any Old Partner gains, then his Capital/Current A/c should be debited with the
amount of share gained.

In that case, the above Journal entry will be:

Premium for Goodwill A/c. Dr. (Share of Goodwill)
Gaining Part. Cap./Curr. A/c. Dr. (Firm’s G/w * Share Gained)
To Sacrificing Partners’ Capital A/c. (in SR)

3. When Premium for Goodwill is brought by New Partner in Cash and it is

withdrawn by the sacrificing partner fully or partly:

Cash A/c. _ Dr.

To New Partner’s Capital A/c. (Capital Brought In)
To Premium for Goodwill A/c. (Share of G/w)

Premium for Goodwill A/c. Dr. (Share of Goodwill)

To Sacrificing Partners’ Capital A/c. (in SR)

Sacrificing Partner’s Cap/Current A/c._Dr (Amount withdrawn)

To Cash/ Bank A/c.

4. When Premium for Goodwill is brought in Kind (Assets):

Assets A/c._ Dr.

To Premium for Goodwill A/c. (Share of G/w)

Premium for Goodwill A/c.) Dr

To Sacrificing Partners’ Cap A/c. (In SR)

When Premium for Goodwill is Not Brought in Full or Part in cash by a New or Incoming Partner :

Cash/Bank A/c. Dr.

To New Partner’s Cap A/c. (Amount of Cap.)
To Premium for Goodwill A/c. (G/w brought in cash)

Premium for Goodwill A/c. Dr. (G/w. brought in Cash)

New Partner’s Cap/Current A/c._Dr. (Unpaid share of G/w)
To Sacrificing Partner’s Capital A/c. (In SR)
 Hidden Goodwill
If in the question, no information is given about share of Goodwill brought by New Partner or about Firm’s
Goodwill,
In such a case: Calculate HIDDEN GOODWILL of the Firm:

Net worth of the firm on the basis of Capital brought by New Partner XXX
[Cap. Brought by New Partner * Reciprocal of His share]
(-) Actual Net worth of the Firm (XXX)
[After taking into account capital brought in by New
Partner] = XXX
= Firm’s Hidden Goodwill
Pass the following
Now, Calculate New Partner’s share in such Hidden Goodwill an d
Journal Entry:
Cash/ Bank A/c. Dr. (Cap Brought in)
To New Partner’s Cap. A/c.
(Share of G/w.)
New Partner’s Cap/Current A/c. Dr. (In SR)
To Sacrificing Partner’s Cap A/c.
Outside Liabilities-
Net Worth = Total Assets – Fictitious Assets – Accumulated Losses –
Non Trade Investments + New Partner’s Capital + Revaluation Profit – Revaluation Loss
OR
Net Worth = Capital of ALL partners + Reserves and Surplus + Accumulated Profits –
Fictitious Assets – Non Trade Inv. + Revaluation Profit – Revaluation Loss

3. Revaluation of Assets and Reassessment of Liabilities:

a) When Assets or Liabilities are to be shown at the Revised Values:

Case Situation Treatment (Journal Entry)
1. Increase in Value of Asset Asset A/c. Dr
To Revaluation A/c.
2. Decrease in Value of Asset Revaluation A/c. Dr.
To Assets A/c.
3. Increase in Value of Liability Revaluation A/c. Dr.
To Liability A/c.
4. Decrease in Value of Liability Liability A/c. Dr
To Revaluation A/c.
5. Recording an Unrecorded Asset A/c. Dr
Asset To Revaluation A/c.
6. Recording an Unrecorded Revaluation A/c. Dr.
Liability To Liability A/c.
7. Revaluation Expenses:
Paid By Borne By
Firm Firm Revaluation A/c. Dr.
To Cash A/c.
Firm Partner Partners’ Cap/Current A/c. Dr.
To Cash A/c.
 Partner Firm Revaluation A/c. Dr.
To Partners’ Cap/Current A/c.
Partner Partner No Entry
8. When Remuneration is Paid Revaluation A/c. Dr.
to partner for Revaluation To Partners’ Cap/Current A/c.
9. Transfer of Balance in
Revaluation Account:
Profit on Revaluation Revaluation A/c. Dr.
To OLD Partners’ Cap/Current A/c. (In OR)
Loss on Revaluation OLD Partners’ Cap/Current A/c. Dr (In
OR)
To Revaluation A/c.

Format of Revaluation Account

Revaluation A/c
Particulars ₹ Particulars ₹
To Assets A/c. (Dec in Assets) By Assets A/c. (Inc in Assets)
To Liabilities A/c. (Inc in Liabilities) By Liabilities A/c. (Dec in Liab.)
To Unrecorded Liabilities By Unrecorded Assets A/c.
To Cash/Bank (Expenses of Reval.)
To Partner’s Capital A/c. (Expense)
To Partners’ Capital/Current A/c. (B.f) By Partners’ Capital/Current A/c. (B.f)
(In Old Ratio) (In Old Ratio)
Total Total

b) When Assets or Liabilities are to appear in the Books at the Old Values:
In this Case, we will record the Increase or Decrease of Assets and Liabilities in
Memorandum Revaluation Account. This Account is divided into 2 parts:
First Part is similar to Revaluation Account. The Profit/Loss on Revaluation is
transferred to OLD Partners’ Cap Account in their OLD RATIO.
Second Part, In this Part, entries passed in the first part are to be reversed. The
Balance of this Ac ount
c of this second part is transferred to ALL Partners’ Cap
Account(Including New Partner) in NEW RATIO.

Journal Entries:
Case Situation Treatment (Journal Entry)
1) Increase in Value of Asset Asset A/c. Dr
To Memorandum Revaluation A/c.
2) Decrease in Value of Asset Memorandum Revaluation A/c. Dr.
To Assets A/c.
3) Increase in Value of Liability Memorandum Revaluation A/c. Dr.
To Liability A/c.
4) Decrease in Value of Liability Liability A/c. Dr
To Memorandum Revaluation A/c.
5) Transfer of Balance in M.
Revaluation Account:
Profit on Revaluation Memorandum Revaluation A/c. Dr.
To OLD Partners’ Cap/Current A/c. (In OR)
 Loss on Revaluation OLD Partners’ Cap/Current A/c. Dr (In
OR)
To Memorandum Revaluation A/c.
6) For Reversing the Entry 1 Memorandum Revaluation A/c. Dr.
To Assets A/c.
7) For Reversing the Entry 2 Asset A/c. Dr
To Memorandum Revaluation A/c.
8) For Reversing the Entry 3 Liability A/c. Dr
To Memorandum Revaluation A/c.
9) For Reversing the Entry 4 Memorandum Revaluation A/c. Dr.
To Liability A/c.
10) Transfer of Balance in M.
RevaluationAccount:
Dr. side Balance Memorandum Revaluation A/c. Dr.
To ALL Partners’ Cap/Current A/c. (In NR)
Cr. Side Balance ALL Partners’ Cap/Curr ent A/c. Dr (In
NR)
To Memorandum Revaluation A/c.

4. Treatment of Reserves and Accumulated Profits/Losses:

At the time of admission of New Partner, if any balance appears in he General Reserve
t
/ Accumulated Profits or Losses A/c., then the same needs to be transferred to OLD
Partners’ Capital Account in their OLD Ratio

Accounting Entries:
(i) For transfer of Reserves and Accumulated Profits:

Reserves A/c. Dr.

Profit and Loss A/c. Dr.
Workmen Compensation Reserve A/c. Dr
Investment Fluctuation Reserve A/c. Dr
To ALL Partners’ Capital/Current A/c. (In OLD RATIO)

(ii) For transfer of Accumulated Losses:

ALL Partners’ Capital/Current A/c. Dr. (In OLD RATIO)

To Profit and Loss A/c.
To Advertisement Suspense A/c.
(Deferred Revenue Expenditure)

 WORKMEN COMPENSATION RESERVE:

It is a reserve set aside out of profits to meet possible liability to pay compensation
to employees, if any arises. A claim may or may not arise or Claim amount may be
higher than the amount of Reserve at the time of change in PSR.

Accounting Treatment under different situations:

Case Situation
i Treatment (Journal Entry)
A. When Claim does not Exist Workmen Comp. Reserve (WCR) A/c. Dr.
To OLD Partners’ Capital A/c. (in OR)
 B. When Claim Exist:
a. Claim < WCR WCR A/c. Dr (Reserve Amt)
To Prov. for WCC A/c. (Amt. of Claim)
To OLD Partners’ Capital (Bal. fig. in OR)

b. Claim = WCR WCR A/c. Dr (Reserve Amt)

To Prov. for WCC A/c. (Amt. of Claim)
c. Claim > WCR WCR A/c. Dr (Reserve Amt)
Revaluation A/c. Dr (Bal. Fig)
To Prov. for WCC A/c. (Amt. of Claim)

OLD Partners’ Capital A/c. Dr (In OR)

To Revaluation A/c.

 INVESTMENT FLUCTUATION RESERVE (IFR):

It is a Reserve set aside out of profits to meet fall in Market Value of Investments. At
the time of change in PSR; it is treated as follows:

Case Situation Treatment (Journal Entry)

1. Book Value = Market Value IFR A/c. Dr
To OLD Partners’ Capital A /c. (in OR)
2. Market Value < Book Value
(Calculate Fall in Value)
1. Fall in Value < IFR IFR A/c. Dr.
To Investments A/c. (Amount of FALL)
To OLD Partners’ Capital A /c. (B/f in OR)

2. Fall in Value = IFR IFR A/c. Dr.

To Investments A/c. (Amount of FALL)
3. Fall in Value > IFR IFR A/c. Dr.
Revaluation A/c. Dr.
To Investments A/c. (Amount of FALL)

OLD Partners’ Capital A/c. Dr (In OR)

To Revaluation A/c
3. Market Value > Book Value Investments A/c. Dr. (Amt of Inc.)
To Revaluation A/c.

Revaluation A/c. Dr.

To OLD Partners’ Capital A/c . (In OR)

IFR A/c. Dr. (Reserve Amt)

To OLD Partners’ Capital A/c. (In OR)
 Adjustments of Accumulated Profits/Losses or Reserves THROUGH CAPITAL
ACCOUNTS ONLY
OR
When Reserves or Accumulated Profits/Losses are to be retained in the Books of
Accounts:

When the Reserves or Accumulated Profits/Losses are to be retained in the books of

accounts, then, a Journal Entry for the Net Effect of Accumulated Profits/Losses is to be
passed (since they were earned in past) and the Reserves and Accumulated
Profits/Losses will continue to appear in the books at the same amount.

For passing the adjustment entry, following steps are to be followed:

(i) Calculate Net Effect of Reserves, Accumulated Profits/Losses.
Reserves and Surplus XXX
Profit and Loss A/c. (Cr. Bal) XXX
WCR Balance XXX
IFR Balance XXX
(-) Profit and Loss A/c. (Dr. Bal) (XXX)
(-) Accumulated Losses (XXX)
= NET EFFECT XXX

(ii) Calculate Sacrificed Share or Gained Share (Sacrificing Ratio/ Gaining Ratio)

(iii) Calculate share of Gaining Partner/Sacrificing Partner in the above

calculated Net Effect of Reserves and Accumulated Profit s/Losses.
For Gaining Partner = Net Effect*Share Gained
For Sacrificing Partner = Net Effect*Share Sacrificed

(iv) Pass the Adjustment Entry;

a. If Net Effect is Positive:
Gaining Partners’ Capital/Current A/c. Dr.
To Sacrificing Partners’ Capital/Current A/c.

b. If Net Effect is Negative:

Sacrificing Partners’ Capital A/c. Dr.
To Gaining Partners’ Capital A/c.

5. Adjustment of Capital:
We shall discuss adjustment of Capital as under:

a. Adjustment of OLD PARTNERS’ Capital on the basis of NEW Partner’s Capital.

b. Calculating the Capital of INCOMING Partner on the basis of OLD Partners’
Capital.
A. Adjustment of OLD PARTNERS’ Capital on the basis of NEW Partner’s Capital.
Steps:
1) Calculate Total Capital of the Firm =
[New Partner’s Capital * Reciprocal of his share]
2) Determine NEW PSR, if Not Given.
3) Determine New Capital of ALL the Partners on the basis of New PSR
[Total Capital in NEW Ratio]
4) Ascertain Present Capital Balances of OLD Partners (after all
adjustments)
5) Find Surplus/Deficit & Pass the Journal Entry.
Journal Entry:
a. If Present Capital < New Capital
Cash/Bank/Partner’s Current A/c. Dr. (Deficit)
To Partner’s Capital A/c.

b. If Present Capital > New Capital

Partner’s Capital A/c. Dr.
To Cash/Bank/Partner’s Current A/c. (Surplus)

B. Calculation of Capital of New Partner on the Basis of Capitals of OLD Partners:

If it is given in Question that New Partner will bring proportionate/his share
of Capital, then ascertain his share of Capital as follows:

Steps:
1) Calculate Total Adjusted Capital Balances of OLD Partners.
2) Calculate Total PSR of OLD Partners = [1 – New Partner’s Share]
3) Calculate Firm’s Capital =
Total Adjusted Capital of OLD Partners * Reciprocal of their share.
4) Calculate New Partner’s share in Firm’s Capital =
Firm’s Capital * New Partner’s Share.
Journal Entry:
Cash/Bank A/c. Dr. (Cap. Ascertained)
To New Partner’s Cap. A/c.

 Admission of New Partner DURING the year

Till Now, we have seen admission of a partner at the beginning of the year or at the end
of the year. Now, what should be the accounting treatment when a partner is admitted
during the year.
i. Divide the profits of the year of the business between Pre-Admission Period and
Post-Admissionn Period on a agreed Basis (Generally on Time Basis)
ii. Profits of Pre-Admission should be appropriated between OLD Partners in
OLD Ratio.
iii. Profits of Post-Admission should be appropriated between ALL Partners in
NEW Ratio.

1
 MIND MAPS
Revaluation Account is also known as Profit and Loss Adjustment Account.
If nothing is mentioned in question about share sacrificed/given by old
partners, then, SR = OR.
If New Ratio between Old Partners is given and share of new partner is given –
distribute remain g share (1-new partner’s new ratio of old
in share) in that
partners to find New PSR
If the new Partner bring the Goodwill Amount then “Premium for Goodwill A/c”
If the New Partner is unable to bring the
-
Goodwill amount then
Current A/c. Dr. र
If Existing Goodwill is given – write off among Old Partners in the
O old Ratio.
If Existing Reserves or Losses are given – distribute among Old Partners in Old
Ratio.
Employees’ Provident Fund – It is a part of Current b sheet.
liability and not RESERVE. Therefore, it is not distributed
among the 0ld partners. And posted in the new Balance
If Debtors and PBD both are given in question and If Bad Debts are there: Then,
o the amount of Bad Debt is deducted from debtors and
o Bad-debts will be deducted from PBD – but if Bad debts are more than
PBD, then balance Bad-Debts will be transferred to Profit and Loss A/c
(Revaluation A/c).
Capital Adjustment:
(i) Determination of Other Partners’ Capital on the basis of New Partner’s
Capital:

1
 Firm’s Capital =N New Partner’s Capital * Reciprocal of his share.

(ii) Determination of New Partner’s Capital on the basis of Old

Partner’s Capital: Firm’s Capital = (Adjusted Capital of Old
Partners) * Reciprocal of their share.
Ankur Roy 9836021833/6290942346