Meaning of Reconstitution of a Partnership Firm

When two or more people carry on a business in partnership, the original partnership agreement rarely stays unchanged forever. New partners may need to be admitted for capital or expertise, an existing partner may retire or die, or the partners may simply agree to change how profits are shared among themselves. Whenever such a change occurs, the old partnership agreement comes to an end and a fresh agreement — express or implied — takes its place, while the firm itself continues its business without a break. The Maharashtra HSC (MSBSHSE) Book-Keeping and Accountancy syllabus studies this topic, across several chapters, as the Reconstitution of a Partnership Firm; this chapter deals with the first and most common of its forms — the Admission of a Partner.

A partnership firm may be reconstituted in any of the following ways:

1. Admission of a new partner — a new person is admitted with the consent of all existing partners, acquiring a share in future profits and in the firm's assets.
2. Retirement of a partner — an existing partner withdraws from the firm, and the remaining partners continue the business.
3. Death of a partner — a partner's membership ends on death, and his legal representatives become entitled to his dues from the firm.
4. Change in the profit-sharing ratio of existing partners — no partner joins or leaves, but the continuing partners agree to share future profits and losses in a different proportion than before.

Whichever way a firm is reconstituted, the underlying accounting problem is the same: working out, fairly and accurately, what each partner (old and new) is entitled to at the point of change, before the firm's business carries on under the new arrangement. This chapter works through that problem in full for the case of admission of a partner — the new profit-sharing and sacrificing ratio, treatment of goodwill, revaluation of assets and liabilities, adjustment of accumulated profits and reserves, and adjustment of partners' capital.