Q.A new partner acquires two main rights in the partnership firm which he joins. State one of these rights.
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- Revaluation of Assets and Liabilities – because the balance sheet values may be outdated.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.
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)
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:
Calculate the total capital of the new firm based on the new partner’s capital contribution. Then determine each partner’s required capital. The difference is adjusted by bringing in or withdrawing cash.
Journal entry for excess capital withdrawn:
Partner’s Capital A/c Dr.
To Cash/Bank A/c
For deficiency (partner brings in more):
Cash/Bank A/c Dr.
To Partner’s Capital A/c
Putting it all together: A proforma Capital Account
Here’s how a Partner’s Capital Account looks after admission adjustments (NCERT format):
| Particulars | A (₹) | B (₹) | C (₹) | Particulars | A (₹) | B (₹) | C (₹) |
|---|---|---|---|---|---|---|---|
| To Revaluation Loss (if any) | By Balance b/d | 50,000 | 40,000 | — | |||
| To Goodwill (if written off) | By Cash (capital brought) | — | — | 30,000 | |||
| To Drawings | By Revaluation Profit | 7,800 | 5,200 | — | |||
| To Balance c/d | 65,800 | 49,200 | 30,000 | By Goodwill (premium) | 8,000 | 4,000 | — |
| By General Reserve | 10,000 | 6,000 | — | ||||
| Total | 65,800 | 49,200 | 30,000 | Total | 65,800 | 49,200 | 30,000 |
The final balances in capital accounts (Balance c/d) should be in the new profit-sharing ratio after all adjustments. If not, partners bring in or withdraw cash.
Why does this matter for your exam?
NCERT Class 12 Accountancy (Part II, Chapter 3 – Admission of a Partner) treats this as a step-by-step process. You will be asked to:
- Prepare Revaluation Account
- Prepare Partners’ Capital Accounts
- Calculate sacrificing ratio
- Pass journal entries for goodwill
The key is to never skip a step. Always start with revaluation, then goodwill, then reserves, then capital adjustment. Each step feeds into the next.
In numerical problems, first write down the old ratio, new ratio, and sacrificing ratio. Then proceed stepwise. Most mistakes happen when students jump to capital accounts without revaluing assets first.
Final takeaway: Admission of a partner is not just about bringing in cash. It’s about fairly resetting the score so that the new partner starts on equal footing with the old ones, without taking away what the old partners earned before she arrived. Every adjustment — revaluation, goodwill, reserves, capital — serves that single idea.
Part (a): A new partner acquires the right to share in the future profits and in the assets of the firm. Part (b): The nature of the business decides the stability of its earnings, so a stable, low-risk, essential-goods firm has higher goodwill than a risky, competitive one.
When a person is admitted into an existing firm, the admission is a fresh agreement among all partners. Two rights are regarded as the main rights the incoming partner acquires:
- Right to share in the future profits of the firm — the new partner becomes entitled to an agreed share of the profits earned after admission. Because the old partners give up a part of their share, the new partner compensates them by bringing in premium for goodwill.
- Right to share in the assets of the firm — the new partner obtains a proportionate ownership interest in the firm's assets. For this, he/she brings in the agreed capital.
(Other subsidiary rights — to take part in management, to inspect the books, to be consulted — also arise, but the two above are the principal rights taught for admission.)
One main right a new partner acquires is the right to share in the future profits of the firm (the other being the right to share in the firm's assets).
Concept understanding — Goodwill Definition Factors
Goodwill: The Invisible Asset of a Business
Start with an Everyday Intuition
Think of two identical chai stalls next to each other. Same menu, same prices, same location size. Yet one stall has a long queue of loyal customers every morning, while the other struggles. Why? Because the first stall has built something over years — trust, a reputation for the best cutting chai, regular customers who know the owner by name. That "something" is goodwill.
In business, goodwill is the extra value a firm has earned beyond its physical assets (cash, furniture, machinery) and recorded liabilities. It's the reason a buyer is willing to pay more for a business than the sum of its individual parts.
The Precise Meaning (NCERT Definition)
Goodwill is the value of the reputation of a firm in respect of the profits expected in the future over and above the normal profits earned by other firms in the same industry.
In simpler terms: Goodwill = the present value of a firm's future super profits — the extra profit it earns compared to a normal business of similar size.
Why Does Goodwill Matter?
Goodwill is not recorded in the books unless it is actually paid for. It arises in specific situations:
- When a new partner is admitted — the existing partners have built the reputation; the new partner must compensate them for it.
- When a partner retires or dies — the continuing partners must pay the outgoing partner for their share of the firm's reputation.
- When the firm is sold — the buyer pays for goodwill as part of the purchase price.
Without valuing goodwill, the incoming partner would get a free ride on the hard work of the existing partners. That's unfair — and accounting fixes this.
Factors Affecting the Value of Goodwill
The NCERT textbook lists these key factors that determine how much goodwill a firm has:
| Factor | What It Means |
|---|---|
| Location | A shop in a busy market has higher goodwill than one in a remote area. |
| Quality of products/services | Consistent quality builds customer loyalty. |
| Efficiency of management | Good managers keep costs low and profits high. |
| Nature of business | A business with stable demand (e.g., essential goods) has more reliable goodwill. |
| Favourable contracts | Long-term supply or sales agreements add value. |
| Customer loyalty | Repeat customers reduce marketing costs. |
| Market conditions | Monopoly or limited competition increases goodwill. |
Goodwill is not a fixed number. It changes with time, competition, and the firm's performance. It is valued only when a change in partnership occurs.
Accounting Treatment: The Journal Entry
When a new partner brings in their share of goodwill (in cash), the entry is:
Journal Entry:
| Date | Particulars | L.F. | Dr. (₹) | Cr. (₹) |
|---|---|---|---|---|
| Premium for Goodwill A/c Dr. | xxx | |||
| To Existing Partners' Capital A/cs (in sacrificing ratio) | xxx |
Explanation:
- Debit the asset account "Premium for Goodwill" (or simply "Goodwill A/c") — because the firm has received cash for an intangible asset.
- Credit the existing partners' capital accounts in their sacrificing ratio — because they have given up a portion of their future profits to the new partner.
The sacrificing ratio = Old ratio − New ratio. This is the ratio in which the old partners have given up their share of profits. Goodwill is always distributed in this ratio, not the old profit-sharing ratio.
Proforma: Partners' Capital Account (When Goodwill is Brought in Cash)
Here is the format as per NCERT for the Partners' Capital Account when a new partner brings goodwill in cash:
Partners' Capital Account
| Particulars | A (₹) | B (₹) | C (₹) | Particulars | A (₹) | B (₹) | C (₹) | |
|---|---|---|---|---|---|---|---|---|
| To Balance c/d | xxx | xxx | xxx | By Balance b/d | xxx | xxx | — | |
| By Cash A/c (Goodwill) | — | — | xxx | |||||
| By Premium for Goodwill A/c | xxx | xxx | — | |||||
| Total | xxx | xxx | xxx | Total | xxx | xxx | xxx |
Note: The new partner (C) brings cash for goodwill, which is then transferred to the old partners (A and B) in their sacrificing ratio. The old partners' capital accounts are credited with their share of goodwill.
The Formula (When Goodwill is Valued)
If goodwill is valued using the super profit method, the formula is:
Goodwill = Super Profit × Number of Years' Purchase
Where:
- Super Profit = Average Actual Profit − Normal Profit
- Normal Profit = (Capital Employed × Normal Rate of Return) / 100
Example (no invented data): If a firm's average profit is ₹1,00,000, capital employed is ₹5,00,000, and normal rate of return is 10%, then:
- Normal profit = (5,00,000 × 10) / 100 = ₹50,000
- Super profit = 1,00,000 − 50,000 = ₹50,000
- If goodwill is valued at 3 years' purchase, Goodwill = 50,000 × 3 = ₹1,50,000
One Final Point
Goodwill is not amortised (depreciated) in the books under Indian accounting standards for partnerships. It stays in the books unless the firm decides to write it off. When a partner retires or dies, the continuing partners may need to bring in cash to pay the outgoing partner's share of goodwill — and that cash entry follows the same logic: debit Goodwill A/c, credit the retiring partner's capital A/c.
Remember: Goodwill exists only because of future earning power. If a firm cannot earn above-normal profits in the future, it has no goodwill — no matter how famous it was in the past.
Part (a): A new partner acquires the right to share in the future profits and in the assets of the firm. Part (b): The nature of the business decides the stability of its earnings, so a stable, low-risk, essential-goods firm has higher goodwill than a risky, competitive one.
Goodwill is the value of a firm's ability to earn super profits — profits above the normal return. The nature of business is one of the key factors affecting it:
- Stability of demand — a firm producing essential goods/services (food, medicines, utilities) has steady demand and stable profits, giving higher goodwill; a firm in luxury or fashion goods faces volatile demand and lower goodwill.
- Risk involved — a low-risk business with secure future earnings earns higher goodwill; a high-risk business (rapid technological change, heavy competition) earns lower goodwill.
- Market position / entry barriers — a firm enjoying a near-monopoly or protected position (licences, heavy capital needs) earns higher goodwill than one in an easily entered, crowded market.
The nature of business affects goodwill through the stability of demand, the degree of risk and the firm's market position — a firm selling essential goods with stable, low-risk earnings has higher goodwill, while a risky, highly competitive firm has lower goodwill.
Unlock everything free for 14 days
- Full step-by-step solutions
- Concept-first explanations
- Methods, shortcuts & mistakes
- PYQ mapping + timed mock tests
Full access for 14 days. No credit card required.