Given below is the Balance Sheet of A and B, who are carrying on partnership business on 31.12.2016. A and B share profits and losses in the ratio of 2:1. Balance Sheet of A and B as at March 31, 2016: | Liabilities | Amount (₹) | Assets | Amount (₹) | |---|---:|---|---:| | Bills Payable | 10,000 | Cash in Hand | 10,000 | | Creditors | 58,000 | Cash at Bank | 40,000 | | Outstanding Expenses | 2,000 | Sundry Debtors | 60,000 | | Capital Accounts: | | Stock | 40,000 | | A | 1,80,000 | Plant | 1,00,000 | | B | 1,50,000 | Buildings | 1,50,000 | | **Total** | **4,00,000** | **Total** | **4,00,000** | C is admitted as a partner on the date of the balance sheet on the following terms: (i) C will bring in ₹1,00,000 as his capital and ₹60,000 as his share of goodwill for 1/4 share in the profits. (ii) Plant is to be appreciated to ₹1,20,000 and the value of buildings is to be appreciated by 10%. (iii) Stock is found overvalued by ₹4,000. (iv) A provision for bad and doubtful debts is to be created at 5% of debtors. (v) Creditors were unrecorded to the extent of ₹1,000. Pass the necessary journal entries, prepare the revaluation account and partners' capital accounts, and show the Balance Sheet after the admission of C.

> [!TLDR] > C is admitted for 1/4 share, bringing ₹1,00,000 capital and ₹60,000 goodwill. Revaluation results in a net gain of ₹27,000, shared by A and B in 2:1 ratio. The new Balance Sheet totals ₹5,88,000. ## Concept and Accounting Treatment When a new partner is admitted, the existing partnership is reconstituted. The key adjustments are: 1. **Revaluation of Assets and Liabilities**: Any change in the value of assets or liabilities affects the old partners' capital accounts because they share past profits/losses. A Revaluation Account is opened — it is a nominal account. All increases in asset values and decreases in liabilities are credited to Revaluation Account (gain). All decreases in asset values and increases in liabilities are debited (loss). The net balance is transferred to the old partners' capital accounts in their profit-sharing ratio. 2. **Goodwill**: The new partner brings his share of goodwill in cash. Since the old partners have built the reputation, they are entitled to this amount. The goodwill brought in is credited to the old partners' capital accounts in their sacrificing ratio (which is the same as old ratio when no new ratio is given). 3. **Capital Adjustment**: The new partner brings his agreed capital. The existing partners may also adjust their capitals if required, but here no such instruction is given. 4. **New Balance Sheet**: After all adjustments, a new Balance Sheet is prepared showing the updated position. --- ## Solution ### Journal Entries | Date | Particulars | L.F. | Debit (₹) | Credit (₹) | |------|-------------|------|-----------|------------| | 2016 Mar 31 | Plant A/c Dr. | | 20,000 | | | | To Revaluation A/c | | | 20,000 | | | *(Plant appreciated from ₹1,00,000 to ₹1,20,000)* | | | | | | Buildings A/c Dr. | | 15,000 | | | | To Revaluation A/c | | | 15,000 | | | *(Buildings appreciated by 10% of ₹1,50,000)* | | | | | | Revaluation A/c Dr. | | 4,000 | | | | To Stock A/c | | | 4,000 | | | *(Stock overvalued by ₹4

Given below is the Balance Sheet of A and B, who are carrying on partnership business on 31.12.2016. A and B s

Numerical Questions · Q27

Given below is the Balance Sheet of A and B, who are carrying on partnership business on 31.12.2016. A and B share profits and losses in the ratio of 2:1. Balance Sheet of A and B as at March 31, 2016:

Liabilities	Amount (₹)	Assets	Amount (₹)
Bills Payable	10,000	Cash in Hand	10,000
Creditors	58,000	Cash at Bank	40,000
Outstanding Expenses	2,000	Sundry Debtors	60,000
Capital Accounts:		Stock	40,000
A	1,80,000	Plant	1,00,000
B	1,50,000	Buildings	1,50,000
Total	4,00,000	Total	4,00,000

C is admitted as a partner on the date of the balance sheet on the following terms:

C will bring in ₹1,00,000 as his capital and ₹60,000 as his share of goodwill for 1/4 share in the profits.
Plant is to be appreciated to ₹1,20,000 and the value of buildings is to be appreciated by 10%.
Stock is found overvalued by ₹4,000.
A provision for bad and doubtful debts is to be created at 5% of debtors.
Creditors were unrecorded to the extent of ₹1,000. Pass the necessary journal entries, prepare the revaluation account and partners' capital accounts, and show the Balance Sheet after the admission of C.

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Concept understanding — Admission Partner Adjustments

Let’s start with something you already know from daily life. Suppose you and a friend run a small tiffin service together. After a year, a third friend wants to join. You both agree to let her in. But the business has grown — you have a reputation, some regular customers, and maybe a little cash saved. She can’t just walk in and claim equal share of everything you built before she arrived. That wouldn’t be fair to you and your original partner.

So you sit down and decide: what is the business worth today? How much should the new partner bring in as her share of that past effort? And once she comes in, how do we rewrite the partnership deed so everyone’s rights are clear from Day 1?

That’s the heart of Admission of a Partner — and the adjustments that follow.

What does “Admission Partner Adjustments” mean?

When a new partner is admitted into an existing partnership, the old partnership is dissolved in the eyes of accounting, and a new one begins. The new partner brings in capital (cash or assets) and also buys a share of the goodwill — the value of the business’s reputation and past efforts. But that’s not all. Several things need to be revalued or adjusted so that the new partner doesn’t unfairly gain or lose from past decisions.

These adjustments are:

Revaluation of Assets and Liabilities – because the balance sheet values may be outdated.
Treatment of Goodwill – the new partner compensates old partners for their past efforts.
Adjustment of Reserves and Accumulated Profits/Losses – these belong to old partners only.
Adjustment of Capital Accounts – to bring all partners’ capitals in proportion to the new profit-sharing ratio.

Each of these has a clear accounting treatment. Let’s go through them one by one.

1. Revaluation of Assets and Liabilities

Why? The balance sheet shows assets at book value (historical cost minus depreciation). But the new partner should not benefit from an undervalued asset (like land that has appreciated) nor suffer from an overvalued one. Similarly, liabilities may be understated or overstated.

Accounting treatment:

We open a Revaluation Account (also called Profit & Loss Adjustment Account).

Increase in asset value → debit Asset, credit Revaluation A/c
Decrease in asset value → credit Asset, debit Revaluation A/c
Increase in liability → credit Liability, debit Revaluation A/c
Decrease in liability → debit Liability, credit Revaluation A/c

The net profit or loss on revaluation is transferred to the old partners’ capital accounts in their old profit-sharing ratio.

Note

The new partner does not share in revaluation profit/loss — it belongs entirely to the old partners.

Example format (Revaluation Account):

Particulars	₹	Particulars	₹
To Building (decrease)	10,000	By Land (increase)	20,000
To Provision for Doubtful Debts (increase)	5,000	By Creditors (decrease)	8,000
To Profit transferred to:
A’s Capital A/c (3/5)	7,800
B’s Capital A/c (2/5)	5,200
Total	28,000	Total	28,000

2. Treatment of Goodwill

Why? The new partner is buying a share of the business’s earning power built by old partners. She must compensate them for this.

Accounting treatment (as per NCERT):

The new partner brings her share of goodwill in cash. That cash is then withdrawn by the old partners (or left in the business). The journal entry:

When new partner brings goodwill in cash:

Cash/Bank A/c Dr.

To Goodwill A/c (or Premium for Goodwill A/c)
Then, distribute that amount to old partners in their sacrificing ratio:

Goodwill A/c Dr.

To Old Partners’ Capital A/cs (individually)

Watch out

The sacrificing ratio is the ratio in which old partners give up their share in favour of the new partner. It is not the same as the old ratio unless the new partner’s share is taken equally from all.

Sacrificing Ratio = Old Ratio – New Ratio

If the new partner does not bring cash for goodwill, we adjust through capital accounts (debit the new partner, credit the old partners).

3. Adjustment of Reserves and Accumulated Profits/Losses

Why? Any accumulated profits (like General Reserve, Profit & Loss A/c credit balance) belong to the old partners. The new partner should not get a share of past profits.

Accounting treatment:

Transfer the entire reserve/accumulated profit to old partners’ capital accounts in their old profit-sharing ratio.

Journal entry:

General Reserve A/c Dr.

To Old Partners’ Capital A/cs

Similarly, accumulated losses (debit balance of P&L A/c) are debited to old partners’ capital accounts.

4. Adjustment of Capital Accounts

Why? After all adjustments, the partners’ capitals may not be in the new profit-sharing ratio. The partnership deed may require capitals to be proportionate to profit shares.

Accounting treatment: …

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Step 1 – Journal Entries

1. For revaluation of assets and liabilities

Date	Particulars	Debit (₹)	Credit (₹)
2016 Mar 31	Plant A/c Dr	20,000
	To Revaluation A/c		20,000
	(Plant appreciated from ₹1,00,000 to ₹1,20,000)
	Buildings A/c Dr	15,000
	To Revaluation A/c		15,000
	(Building appreciated by 10% of ₹1,50,000)
	Revaluation A/c Dr	4,000
	To Stock A/c		4,000
	(Stock overvalued by ₹4,000)
	Revaluation A/c Dr	3,000
	To Provision for Doubtful Debts A/c		3,000
	(5% of ₹60,000 = ₹3,000)
	Revaluation A/c Dr	1,000
	To Creditors A/c		1,000
	(Unrecorded creditors)

2. For goodwill brought in by C

Date	Particulars	Debit (₹)	Credit (₹)
2016 Mar 31	Bank A/c Dr	1,60,000
	To C’s Capital A/c		1,00,000
	To Premium for Goodwill A/c		60,000
	(C brings ₹1,00,000 capital and ₹60,000 goodwill)

3. For distribution of goodwill premium to old partners in sacrificing ratio (2:1)

Date	Particulars	Debit (₹)	Credit (₹)
2016 Mar 31	Premium for Goodwill A/c Dr	60,000
	To A’s Capital A/c		40,000
	To B’s Capital A/c		20,000
	(Goodwill shared in old ratio 2:1)

4. For transfer of revaluation profit to partners’ capital accounts

Date	Particulars	Debit (₹)	Credit (₹)
2016 Mar 31	Revaluation A/c Dr	27,000
	To A’s Capital A/c		18,000
	To B’s Capital A/c		9,000
	(Revaluation profit ₹27,000 shared 2:1)

Step 2 – Revaluation Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Stock A/c	4,000	By Plant A/c	20,000
To Provision for Doubtful Debts A/c	3,000	By Buildings A/c	15,000
To Creditors A/c	1,000
To Profit transferred to:
A’s Capital A/c	18,000
B’s Capital A/c	9,000
Total	35,000	Total	35,000

Step 3 – Partners’ Capital Accounts

| Particulars | A (₹) | B (₹) | C (₹) | Particulars | A (₹) | B (₹) | C (₹) |

|-------------|-------|-------|-------|-------------|-------|-------|-------| …

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C is admitted for 1/4 share, bringing ₹1,00,000 capital and ₹60,000 goodwill. Revaluation results in a net gain of ₹27,000, shared by A and B in 2:1 ratio. The new Balance Sheet totals ₹5,88,000.

Concept and Accounting Treatment

When a new partner is admitted, the existing partnership is reconstituted. The key adjustments are:

Revaluation of Assets and Liabilities: Any change in the value of assets or liabilities affects the old partners' capital accounts because they share past profits/losses. A Revaluation Account is opened — it is a nominal account. All increases in asset values and decreases in liabilities are credited to Revaluation Account (gain). All decreases in asset values and increases in liabilities are debited (loss). The net balance is transferred to the old partners' capital accounts in their profit-sharing ratio.
Goodwill: The new partner brings his share of goodwill in cash. Since the old partners have built the reputation, they are entitled to this amount. The goodwill brought in is credited to the old partners' capital accounts in their sacrificing ratio (which is the same as old ratio when no new ratio is given).
Capital Adjustment: The new partner brings his agreed capital. The existing partners may also adjust their capitals if required, but here no such instruction is given.
New Balance Sheet: After all adjustments, a new Balance Sheet is prepared showing the updated position.

Solution

Journal Entries

Date	Particulars	Debit (₹)	Credit (₹)
2016 Mar 31	Plant A/c Dr.	20,000
	To Revaluation A/c		20,000
	(Plant appreciated from ₹1,00,000 to ₹1,20,000)
	Buildings A/c Dr.	15,000
	To Revaluation A/c		15,000
	(Buildings appreciated by 10% of ₹1,50,000)
	Revaluation A/c Dr.	4,000
	To Stock A/c		4,000
	(Stock overvalued by ₹4,000, hence reduced)
	Revaluation A/c Dr.	3,000
	To Provision for Doubtful Debts A/c		3,000
	(5% provision on debtors ₹60,000 = ₹3,000)
	Revaluation A/c Dr.	1,000
	To Creditors A/c		1,000
	(Unrecorded creditors)
	Revaluation A/c Dr.	27,000
	To A's Capital A/c		18,000
	To B's Capital A/c		9,000
	(Gain on revaluation transferred to old partners in 2:1 ratio)
	Bank A/c Dr.	1,60,000
	To C's Capital A/c		1,00,000
	To Premium for Goodwill A/c		60,000
	(C brings capital and his share of goodwill)
	Premium for Goodwill A/c Dr.	60,000
	To A's Capital A/c		40,000
	To B's Capital A/c		20,000
	(Goodwill credited to old partners in sacrificing ratio 2:1)

Watch out

A common mistake is to debit the goodwill amount to the new partner's capital account. Remember: the new partner brings goodwill in cash, so Bank is debited and Premium for Goodwill is credited. Then the premium is distributed to old partners.

Revaluation Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Stock A/c	4,000	By Plant A/c	20,000
To Provision for Doubtful Debts A/c	3,000	By Buildings A/c	15,000
To Creditors A/c	1,000
To A's Capital A/c (2/3 of 27,000)	18,000
To B's Capital A/c (1/3 of 27,000)	9,000
Total	35,000	Total	35,000

Partners' Capital Accounts

Particulars	A (₹)	B (₹)	C (₹)	Particulars	A (₹)	B (₹)	C (₹)
To Balance c/d	2,38,000	1,79,000	1,00,000	By Balance b/d	1,80,000	1,50,000	—
				By Revaluation A/c	18,000	9,000	—
				By Premium for Goodwill A/c	40,000	20,000	—
				By Bank A/c	—	—	1,00,000
Total	2,38,000	1,79,000	1,00,000	Total	2,38,000	1,79,000	1,00,000

Balance Sheet of A, B and C as at March 31, 2016 (after admission)

Liabilities	Amount (₹)	Assets	Amount (₹)
Creditors (58,000 + 1,000)	59,000	Cash in Hand	10,000
Bills Payable	10,000	Cash at Bank (40,000 + 1,60,000)	2,00,000

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Concept and Accounting Treatment

Solution

Journal Entries

Revaluation Account

Partners' Capital Accounts

Balance Sheet of A, B and C as at March 31, 2016 (after admission)

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