A and B share profits in the proportions of 3/4 and 1/4. Their Balance Sheet on March 31, 2016 was as follows:

Numerical Questions · Q30

Liabilities	Amount (₹)	Assets	Amount (₹)
Sundry Creditors	41,500	Cash at Bank	26,500
Reserve Fund	4,000	Bills Receivable	3,000
Capital Accounts:		Debtors	16,000
A	30,000	Stock	20,000
B	16,000	Fixtures	1,000
		Land & Building	25,000
Total	91,500	Total	91,500

On April 1, 2017, C was admitted into partnership on the following terms:

That C pays ₹10,000 as his capital.
That C pays ₹5,000 for goodwill. Half of this sum is to be withdrawn by A and B.
That stock and fixtures be reduced by 10% and a 5% provision for doubtful debts be created on Sundry Debtors and Bills Receivable.
That the value of land and buildings be appreciated by 20%.
There being a claim against the firm for damages, a liability to the extent of ₹1,000 should be created.
An item of ₹650 included in sundry creditors is not likely to be claimed and hence should be written back. Record the above transactions (journal entries) in the books of the firm assuming that the profit sharing ratio between A and B has not changed. Prepare the new Balance Sheet on 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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We will record the journal entries for the revaluation, goodwill, capital, and then prepare the new Balance Sheet. The profit-sharing ratio remains 3:1 between A and B.

Step 1 – Revaluation Account

First, compute the net effect of the revaluation adjustments.

Stock and Fixtures reduced by 10%:

Stock: 10% of ₹20,000 = ₹2,000 (loss)

Fixtures: 10% of ₹1,000 = ₹100 (loss)

Total loss = ₹2,100
Provision for Doubtful Debts at 5% on Debtors and Bills Receivable:

Debtors ₹16,000 + Bills Receivable ₹3,000 = ₹19,000

5% of ₹19,000 = ₹950 (loss)
Land & Building appreciated by 20%:

20% of ₹25,000 = ₹5,000 (gain)
Claim for damages (liability created): ₹1,000 (loss)
Sundry Creditors written back: ₹650 (gain)

Net gain on revaluation:

Gains: ₹5,000 + ₹650 = ₹5,650

Losses: ₹2,100 + ₹950 + ₹1,000 = ₹4,050

Net gain = ₹5,650 – ₹4,050 = ₹1,600

This gain is credited to A and B in 3:1 ratio.

A’s share = 3/4 × ₹1,600 = ₹1,200

B’s share = 1/4 × ₹1,600 = ₹400

Step 2 – Journal Entries

Date	Particulars	Debit (₹)	Credit (₹)
2017 Apr 1	Revaluation A/c Dr.	4,050
	To Stock A/c		2,000
	To Fixtures A/c		100
	To Provision for Doubtful Debts A/c		950
	To Claim for Damages A/c		1,000
	(Being decrease in assets and creation of provision and liability)
2017 Apr 1	Land & Building A/c Dr.	5,000
	Sundry Creditors A/c Dr.	650
	To Revaluation A/c		5,650
	(Being appreciation in land & building and write-back of creditors)
2017 Apr 1	Revaluation A/c Dr.	1,600
	To A’s Capital A/c		1,200
	To B’s Capital A/c		400
	(Being revaluation profit transferred to old partners)
2017 Apr 1	Bank A/c Dr.	15,000
	To C’s Capital A/c		10,000
	To Goodwill A/c		5,000
	(Being capital and goodwill brought in by C)
2017 Apr 1	Goodwill A/c Dr.	5,000
	To A’s Capital A/c		3,750
	To B’s Capital A/c		1,250
	(Being goodwill credited to old partners in 3:1 ratio)
2017 Apr 1	A’s Capital A/c Dr.	1,875
	B’s Capital A/c Dr.	625
	To Bank A/c		2,500
	(Being half of goodwill withdrawn by A and B)

Step 3 – Partners’ Capital Accounts

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

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C is admitted with ₹10,000 capital and ₹5,000 goodwill (half withdrawn by A and B). Revaluation results in a net gain of ₹1,600, credited to A and B in their old ratio (3:1). The new Balance Sheet totals ₹1,05,950.

Concept and Accounting Treatment

When a new partner is admitted, the firm undergoes revaluation of assets and liabilities to reflect their current worth. Any gain or loss on revaluation is transferred to the old partners' capital accounts in their old profit-sharing ratio — because it relates to the period before admission. Here, A and B share profits 3/4 and 1/4, so the ratio is 3:1.

Goodwill brought in by C is an intangible asset. Half of it (₹2,500) is withdrawn by A and B — this means the firm receives ₹5,000 cash for goodwill, but then pays out ₹2,500 to A and B. The net effect is that the firm retains ₹2,500 as additional capital from the goodwill premium.

The key rule: All adjustments for revaluation, goodwill, and capital are first recorded through journal entries, then posted to ledgers, and finally reflected in the new Balance Sheet.

Solution: Journal Entries

Date	Particulars	Debit (₹)	Credit (₹)
2017 Apr 1	Bank A/c Dr.	10,000
	To C's Capital A/c		10,000
	(Being capital brought in by C)

2017 Apr 1	Bank A/c Dr.	5,000
	To Goodwill A/c		5,000
	(Being goodwill brought in by C)

2017 Apr 1	Goodwill A/c Dr.	5,000
	To A's Capital A/c (3/4)		3,750
	To B's Capital A/c (1/4)		1,250
	(Being goodwill credited to old partners in old ratio)

2017 Apr 1	A's Capital A/c Dr.	1,875
	B's Capital A/c Dr.	625
	To Bank A/c		2,500
	(Being half of goodwill withdrawn by A and B)

2017 Apr 1	Revaluation A/c Dr.	2,000
	To Stock A/c (10% of ₹20,000)		2,000
	To Fixtures A/c (10% of ₹1,000)		100
	(Being reduction in stock and fixtures)

2017 Apr 1	Revaluation A/c Dr.	950
	To Provision for Doubtful Debts A/c		950
	(Being 5% provision on Debtors ₹16,000 + Bills Receivable ₹3,000 = ₹19,000; 5% = ₹950)

2017 Apr 1	Land & Building A/c Dr.	5,000
	To Revaluation A/c (20% of ₹25,000)		5,000
	(Being appreciation in land and building)

2017 Apr 1	Revaluation A/c Dr.	1,000
	To Claim for Damages A/c		1,000
	(Being liability created for damages claim)

2017 Apr 1	Sundry Creditors A/c Dr.	650
	To Revaluation A/c		650
	(Being creditors written back as not likely to be claimed)

2017 Apr 1	Revaluation A/c Dr.	1,600
	To A's Capital A/c (3/4)		1,200
	To B's Capital A/c (1/4)		400
	(Being revaluation gain transferred to old partners' capital accounts)

Watch out

A common mistake is to forget that the provision for doubtful debts is created on both Debtors and Bills Receivable — the question says "on Sundry Debtors and Bills Receivable". Also, the revaluation gain is credited to old partners before C's capital is introduced, because C does not share in pre-admission profits or losses.

Working Notes

Working Note 1: Revaluation Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Stock A/c (10% reduction)	2,000	By Land & Building A/c (20% appreciation)	5,000
To Fixtures A/c (10% reduction)	100	By Sundry Creditors A/c (written back)	650
To Provision for Doubtful Debts A/c (5% on ₹19,000)	950
To Claim for Damages A/c	1,000
To Profit transferred to:
A's Capital A/c (3/4)	1,200
B's Capital A/c (1/4)	400
Total	5,650	Total	5,650

Calculation of Provision for Doubtful Debts:

Debtors: ₹16,000
Bills Receivable: ₹3,000
Total: ₹19,000
5% provision: ₹19,000 × 5% = ₹950

Calculation of Revaluation Gain:

Total credits (gains): ₹5,000 + ₹650 = ₹5,650
Total debits (losses): ₹2,000 + ₹100 + ₹950 + ₹1,000 = ₹4,050
Net gain: ₹5,650 - ₹4,050 = ₹1,600

Working Note 2: Partners' Capital Accounts

Particulars	A (₹)	B (₹)	C (₹)	Particulars	A (₹)	B (₹)	C (₹)
To Bank A/c (withdrawal of goodwill)	1,875	625	—	By Balance b/d	30,000	16,000	—
To Balance c/d	33,075	17,025	10,000	By Goodwill A/c	3,750	1,250	—
				By Revaluation A/c (gain)	1,200	400	—
				By Bank A/c	—	—	10,000
Total	34,950	17,650	10,000	Total	34,950	17,650	10,000

A's Capital:

Opening: ₹30,000 …

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Concept and Accounting Treatment

Solution: Journal Entries

Working Notes

Working Note 1: Revaluation Account

Working Note 2: Partners' Capital Accounts

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