Accountancy · Ch 6 — Admission of a Partner
Meaning of Admission of a Partner and the New Profit-Sharing Ratio
Meaning of Admission of a Partner and the New Profit-Sharing Ratio
When an existing partnership firm takes in an additional person as a partner, this event is called Admission of a Partner. Under the Indian Partnership Act, 1932, a new partner can be admitted only with the consent of ALL existing partners, unless the partnership deed itself provides otherwise — admission is, in effect, a fresh agreement among the partners about how the business will be shared going forward. From the date of admission, the new partner acquires two rights that did not exist before: (a) the right to share the firm's future profits, and (b) the right to share the firm's assets, including whatever goodwill and reserves it has built up. Because the new partner is now entitled to a share of profits that earlier belonged wholly to the existing partners, admission of a partner in AP Intermediate Accountancy questions and answers is always taught as a package of four connected adjustments, each covered in a section of this chapter: (1) working out the New Profit-Sharing Ratio; (2) working out the Sacrificing Ratio; (3) valuing and accounting for Goodwill; and (4) revaluing assets and liabilities, followed, where the question requires it, by adjusting partners' capitals.
The New Profit-Sharing Ratio (NPSR) is the ratio in which ALL partners — the old partners as well as the newly admitted partner — will share the firm's profits and losses from the date of admission onward. A question can describe the new partner's share, and the basis on which the old partners adjust, in several distinct ways, each needing a slightly different computation:
| Case | How the new partner's share is described | How to find the new ratio |
|---|---|---|
| (a) New partner's share given; nothing said about how old partners adjust | The new partner is given a fraction (say 1/5); old partners are assumed to continue sharing the remaining share in their own OLD ratio | Multiply each old partner's old share by (1 − new partner's share) |
| (b) New partner acquires his share from old partners in a stated ratio | The question states the new partner "acquires his share from A and B in the ratio 3:1" (or similar) | Deduct the stated fraction from each old partner individually, as specified |
| (c) Old partners surrender specific fractions of their own shares | Each old partner is said to give up a stated fraction of his own share | Subtract the stated fraction directly from each old partner's old share; the new partner's share is the SUM of what is surrendered |
| (d) The new ratio is directly given by agreement | The question simply states the agreed new ratio | No computation of the new ratio is needed — only the sacrificing ratio (Section 2) still has to be derived |
Whichever case applies, the final check is always the same: the new shares of all the partners, added together, must equal exactly 1 (or, written as a ratio, the parts of the new ratio must sum to the same total the ratio is written out of) — a mismatch means an arithmetic slip has crept in somewhere, and the whole computation needs to be reworked from the fractions down, not patched at the final figure.
The act of adding a new person to an existing partnership firm, with the consent of all existing partners (unless the partnership deed states otherwise), giving the incoming partner a right to share future profits and the firm's assets.
The ratio in which all partners of the reconstituted firm — the old partners together with the newly admitted partner — agree to share profits and losses from the date of admission onward.