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Accountancy · Class 12 Commerce

Ch 2Reconstitution of a Partnership Firm — Admission of a Partner — Class 12 Accountancy, concept-first.

A partnership is built on an agreement among its partners to share the profits of a business run by all of them, or by any one of them acting on behalf of all. Whenever that existing agreement changes, the partnership firm is said to be reconstituted — the old agreement comes to an end, and a new one takes its place, w…

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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.

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Chapter contents

The NCERT structure, section by section. Open a section to see its questions, then read the concept-first solution.

Introduction

A partnership is built on an agreement among its partners to share the profits of a business run by all of them, or by any one of them acting on behalf of all.

2.1

Modes of Reconstitution of a Partnership

A partnership firm is said to be reconstituted when the existing agreement between partners is replaced by a new one.

2.2

Admission of a New Partner

When a firm needs extra capital, managerial help, or both to expand, it may admit a new partner. Under the Partnership Act, 1932, a new partner can be admitted only with the consent of all existing pa…

2.3

New Profit Sharing Ratio

When a new partner is admitted, they must be given a share of the future profits. That share cannot come from nowhere — it is given up by the existing (old) partners.

+Illustrationsi5 questions
  1. Illustration 1Anil and Vishal are partners sharing profits in the ratio of 3:2. They admitted Sumit as a new partner for 1/5 share in the future profits o…Free
  2. Illustration 2Akshay and Bharati are partners sharing profits in the ratio of 3:2. They admit Dinesh as a new partner for 1/5th share in the future profit…Free
  3. Illustration 3Anshu and Nitu are partners sharing profits in the ratio of 3:2. They admitted Jyoti as a new partner for 3/10 share which she acquired 2/10…Preview
  4. Illustration 4Ram and Shyam are partners in a firm sharing profits in the ratio of 3:2. They admit Ghanshyam as a new partner. Ram sacrificed 1/4 of his s…Preview
  5. Illustration 5Das and Sinha are partners in a firm sharing profits in 4:1 ratio. They admitted Pal as a new partner for 1/4 share in the profits, which he…Preview
2.4

Sacrificing Ratio

6 Q

When a new partner is admitted, the existing partners give up a portion of their future profits in favour of the newcomer.

+Illustrationsi3 questions
  1. Illustration 6Rohit and Mohit are partners in a firm sharing profits in the ratio of 5:3. They admit Bijoy as a new partner for 1/7 share in the profit. T…Free
  2. Illustration 7Amar and Bahadur are partners in a firm sharing profits in the ratio of 3:2. They admitted Mary as a new partner for 1/4 share. The new prof…Preview
  3. Illustration 8Ramesh and Suresh are partners in a firm sharing profits in the ratio of 4:3. They admitted Mohan as a new partner. The profit sharing ratio…Preview
+Test Your Understandingi3 questions
  1. Q1A and B are partners sharing profits in the ratio of 3:1. They admit C for 1/4 share in the future profits. The new profit sharing ratio wil…Free
  2. Q2X and Y share profits in the ratio of 3:2. Z was admitted as a partner who gets 1/5 share. New profit sharing ratio, if Z acquires 3/20 from…Preview
  3. Q3A and B share profits and losses in the ratio of 3 : 1, C is admitted into partnership for 1/4 share. The sacrificing ratio of A and B is: (…Preview
2.5

Goodwill

Goodwill is not a tangible asset you can touch, but it is a very real value that a business carries. It represents the firm's ability to earn super profits — profits that are higher than what is norma…

2.5.1

Meaning of Goodwill

Goodwill is not a physical asset you can touch, but it has real monetary value. Over time, a well-run business builds a good name, a strong reputation, and wide business connections.

2.5.2

Factors Affecting the Value of Goodwill

Goodwill is not a fixed number — it changes with the circumstances of the business. When a new partner is admitted, the existing partners must decide what the firm's goodwill is worth.

2.5.3

Need for Valuation of Goodwill

The need to value goodwill does not arise every day in a partnership. It becomes necessary only when the firm undergoes a change in its constitution — that is, when the existing agreement between part…

2.5.4

Methods of Valuation of Goodwill

Goodwill is an intangible asset, and its exact value is inherently difficult to determine. Because different methods can produce different values, the partners — both existing and incoming — must agre…

2.5.4.1

Average Profits Method

When a new partner buys into an existing firm, they pay for goodwill because the business is already earning profits.

+Illustrationsi3 questions
  1. Illustration 9The profit for the five years of a firm are as follows: | Year | Profit (₹) | |---|---:| | 2013 | 4,00,000 | | 2014 | 3,98,000 | | 2015 | 4,…Free
  2. Illustration 10The profits of firm for the five years are as follows: | Year | Profit (₹) | |------|---:| | 2012–13 | 20,000 | | 2013–14 | 24,000 | | 2014–…Preview
  3. Illustration 11Calculate goodwill of a firm on the basis of three year' purchase of the weighted average profits of the last four years. The profit and the…Preview
2.5.4.2

Super Profits Method

The Super Profits Method is built on a different idea from the Average Profits Method. The Average Profits Method assumes the buyer pays for the total profits the business will earn in the first few y…

+Illustrationsi2 questions
  1. Illustration 12The books of a business showed that the firm's capital employed on December 31, 2015, ₹5,00,000 and the profits for the last five years were…Free
  2. Illustration 13The capital of the firm of Anu and Benu is ₹1,00,000 and the market rate of interest is 15%. Annual salary to partners is ₹6,000 each. The p…Preview
2.5.4.3

Capitalisation Method

The Capitalisation Method determines goodwill by relating a firm’s earnings to the capital that would be needed to generate those earnings at a normal rate of return.

+Illustrationsi2 questions
  1. Illustration 14A business has earned average profits of ₹1,00,000 during the last few years and the normal rate of return in a similar business is 10%. Asc…Free
  2. Illustration 151. The goodwill of a firm is to be worked out at three years' purchase of the average profits of the last five years which are as follows: |…Preview
2.5.5

Treatment of Goodwill

When a new partner is admitted, they receive a share of the future profits of the firm. This share was previously enjoyed by the existing partners.

2.5.5.1

When the new Partner brings goodwill in cash

10 Q

When a new partner brings his share of goodwill in cash, the amount is usually paid through the firm (not privately).

+Illustrationsi5 questions
  1. Illustration 16Sunil and Dalip are partners in a firm sharing profits and losses in the ratio of 5:3. Sachin is admitted in the firm for 1/5th share of pro…Free
  2. Illustration 17Vijay and Sanjay are partners in a firm sharing profits and losses in the ratio of 3:2. They admitted Ajay into partnership with 1/4 share i…Free
  3. Illustration 18Srikant and Raman are partners in a firm sharing profits and losses in the ratio of 3:2. They admit Venkat into partnership with 1/3 share i…Preview
  4. Illustration 19Ahuja and Barua are partners in a firm sharing profits and losses in the ratio of 3:2. They decide to admit Chaudhary into partnership for 1…Preview
  5. Illustration 20Ram and Rahim are partners in a firm sharing profits and losses in the ratio of 3:2. Rahul is admitted into partnership for 1/3 share in pro…Preview
+Test Your Understandingi5 questions
  1. Q1At the time of admission of a new partner, general reserve appearing in the old balance sheet is transferred to: (a) all partner's capital a…Free
  2. Q2Asha and Nisha are partner's sharing profit in the ratio of 2:1. Asha's son Ashish was admitted for 1/4 share of which 1/8 was gifted by Ash…Free
  3. Q3A, B and C are partner's in a firm. If D is admitted as a new partner: (a) old firm is dissolved (b) old firm and old partnership is dissolv…Preview
  4. Q4On the admission of a new partner increase in the value of assets is debited to: (a) Profit and Loss Adjustment account (b) Assets account (…Preview
  5. Q5At the time of admission of a partner, undistributed profits appearing in the balance sheet of the old firm is transferred to the capital ac…Preview
2.5.5.2

Hidden Goodwill

5 Q

When a new partner is admitted, the value of goodwill is sometimes not explicitly stated. In that case, you must infer it from the arrangement of capital and the profit-sharing ratio.

+Illustrationsi1 question
  1. Illustration 21Hem and Nem are partners in a firm sharing profits in the ratio of 3:2. Their capitals were ₹80,000 and ₹50,000 respectively. They admitted…Preview
+Do It Yourselfi4 questions
  1. Q1A firm's profits for the last three years are ₹5,00,000; ₹4,00,000 and ₹6,00,000. Calculate value of firm's goodwill on the basis of four ye…Free
  2. Q2A firm's profits during 2013, 2014, 2015 and 2016 were ₹16,000; ₹20,000; ₹24,000 and ₹32,000 respectively. The firm has capital investment o…Free
  3. Q3Based on the data given in the above question, calculate goodwill by capitalisation of super profits method. Will the amount of goodwill be…Preview
  4. Q4Giri and Shanta are partners in a firm sharing profits equally. They admit Kachroo into partnership who, in addition to capital, brings ₹20,…Preview
2.6

Adjustment for Accumulated Profits and Losses

When a new partner is admitted, the firm's balance sheet may show accumulated profits or losses that were earned before the partner joined.

+Illustrationsi1 question
  1. Illustration 22Rajinder and Surinder are partners in a firm sharing profits in the ratio of 4:1. On April 15, 2017 they admit Narender as a new partner. On…Preview
2.7

Revaluation of Assets and Reassessment of Liabilities

5 Q

When a new partner is admitted, the existing partners must ensure that the firm’s assets and liabilities are recorded at their current, realisable values.

+Illustrationsi2 questions
  1. Illustration 23Following is the Balance Sheet of A and B who share profits in the ratio of 3:2. Balance Sheet of A and B as on April 1, 2015 | Liabilities…Free
  2. Illustration 24Given below is the Balance Sheet of A and B, who are carrying on partnership business as on March 31, 2017. A and B share profits in the rat…Preview
+Do It Yourselfi3 questions
  1. Q1Aslam, Jackab, Hari are equal partners with capitals of ₹1,500, ₹1,750 and ₹2,000 respectively. They agree to admit Satnam into equal partne…Free
  2. Q2Benu and Sunil are partners sharing profits in the ratio of 3:2 on April 1, 2017. Ina was admitted for 1/4 share who paid ₹2,00,000 as capit…Preview
  3. Q3Ashoo and Rahul are partners sharing profits in the ratio of 5:3. Gaurav was admitted for 1/5 share and was asked to contribute proportionat…Preview
2.8

Adjustment of Capitals

When a new partner is admitted, the existing partners may agree that the capitals of all partners should be in proportion to their new profit-sharing ratio.

+Illustrationsi4 questions
  1. Illustration 25A and B are partners sharing profits in the ratio of 2:1. C is admitted into the firm for 1/4 share of profits. C brings in ₹20,000 in respe…Free
  2. Illustration 26A, B and C are partners in a firm sharing profits in the ratio of 3:2:1. D is admitted into the firm for 1/4 share in profits, which he gets…Free
  3. Illustration 27A and B are partners in a firm sharing profits in the ratio 2:1. C is admitted into the firm with 1/4 share in profits. He will bring in ₹30…Preview
  4. Illustration 28The Balance Sheet of W and R who shared profits in the ratio of 3:2 was as follows on January 01, 2015. **Balance Sheet of W and R as on Jan…Preview
2.9

Change in Profit Sharing Ratio among the Existing Partners

A change in profit sharing ratio can happen even when no partner is admitted or retires. The partners simply agree to a new ratio for sharing future profits and losses.

+Illustrationsi1 question
  1. Illustration 29Dinesh, Ramesh and Suresh are partners in a firm sharing profits and losses in the ratio of 3:3:2. They decided to share the profits equally…Preview

Terms Introduced in the Chapter

The key terms introduced in this chapter, with a short meaning for each.

Summary

- New Profit-Sharing Ratio: When a new partner is admitted, the old partners sacrifice a portion of their share. The new ratio is calculated as: Old Share − Sacrificed Share.

Questions for Practice

49 Q
+Short Answer Questions6 questions
  1. Q1Identify various matters that need adjustments at the time of admission of a new partner.Free
  2. Q2Why it is necessary to ascertain new profit sharing ratio even for old partners when a new partner is admitted?Free
  3. Q3What is sacrificing ratio? Why is it calculated?Preview
  4. Q4On what occasions sacrificing ratio is used?Preview
  5. Q5If some goodwill already exists in the books and the new partner brings in his share of goodwill in cash, how will you deal with existing am…Preview
  6. Q6Why there is need for the revaluation of assets and liabilities on the admission of a partner?Preview
+Long Answer Questions8 questions
  1. Q1Do you advise that assets and liabilities must be revalued at the time of admission of a partner? If so, why? Also describe how is this trea…Free
  2. Q2What is goodwill? What factors affect goodwill?Free
  3. Q3Explain various methods of valuation of goodwill.Free
  4. Q4If it is agreed that the capital of all the partners should be proportionate to the new profit sharing ratio, how will you work out the new…Preview
  5. Q5Explain how will you deal with goodwill when new partner is not in a position to bring his share of goodwill in cash.Preview
  6. Q6Explain various methods for the treatment of goodwill on the admission of a new partner?Preview
  7. Q7How will you deal with the accumulated profits and losses and reserves on the admission of a new partner?Preview
  8. Q8At what figures the value of assets and liabilities appear in the books of the firm after revaluation has been due? Show with the help of an…Preview
+Numerical Questions35 questions
  1. Q1A and B were partners in a firm sharing profits and losses in the ratio of 3:2. They admit C into the partnership with 1/6 share in the prof…Free
  2. Q2A, B, C were partners in a firm sharing profits in 3:2:1 ratio. They admitted D for 10% profits. Calculate the new profit sharing ratio?Free
  3. Q3X and Y are partners sharing profits in 5:3 ratio admitted Z for 1/10 share which he acquired equally from X and Y. Calculate new profit sha…Free
  4. Q4A, B and C are partners sharing profits in 2:2:1 ratio admitted D for 1/8 share which he acquired entirely from A. Calculate new profit shar…Preview
  5. Q5P and Q are partners sharing profits in 2:1 ratio. They admitted R into partnership giving him 1/5 share which he acquired from P and Q in 1…Preview
  6. Q6A, B and C are partners sharing profits in 3:2:2 ratio. They admitted D as a new partner for 1/5 share which he acquired from A, B and C in…Preview
  7. Q7A and B were partners in a firm sharing profits in 3:2 ratio. They admitted C for 3/7 share which he took 2/7 from A and 1/7 from B. Calcula…Preview
  8. Q8A, B and C were partners in a firm sharing profits in 3:3:2 ratio. They admitted D as a new partner for 4/7 profit. D acquired his share 2/7…Preview
  9. Q9Radha and Rukmani are partners in a firm sharing profits in 3:2 ratio. They admitted Gopi as a new partner. Radha surrendered 1/3 of her sha…Preview
  10. Q10Singh, Gupta and Khan are partners in a firm sharing profits in 3:2:3 ratio. They admitted Jain as a new partner. Singh surrendered 1/3 of h…Preview
  11. Q11Sandeep and Navdeep are partners in a firm sharing profits in 5:3 ratio. They admit C into the firm and the new profit sharing ratio was agr…Preview
  12. Q12Rao and Swami are partners in a firm sharing profits and losses in 3:2 ratio. They admit Ravi as a new partner for 1/8 share in the profits.…Preview
  13. Q13Compute the value of goodwill on the basis of four years' purchase of the average profits based on the last five years. The profits for the…Preview
  14. Q14Firm's Capital in a business is ₹2,00,000. The normal rate of return on firm's capital is 15%. During the year 2015 the firm earned a profit…Preview
  15. Q15The books of Ram and Bharat showed that the firm's capital on 31.12.2016 was ₹5,00,000 and the profits for the last 5 years were: | Year | P…Preview
  16. Q16Rajan and Rajani are partners in a firm. Their capitals were Rajan ₹3,00,000; Rajani ₹2,00,000. During the year 2015 the firm earned a profi…Preview
  17. Q17A business has earned average profits of ₹1,00,000 during the last few years. Find out the value of goodwill by capitalisation method, given…Preview
  18. Q18Verma and Sharma are partners in a firm sharing profits and losses in the ratio of 5:3. They admitted Ghosh as a new partner for 1/5 share o…Preview
  19. Q19A and B are partners in a firm sharing profits and losses in the ratio of 3:2. They decide to admit C into partnership with 1/4 share in pro…Preview
  20. Q20Arti and Bharti are partners in a firm sharing profits in 3:2 ratio. They admitted Sarthi for 1/4 share in the profits of the firm. Sarthi b…Preview
  21. Q21X and Y are partners in a firm sharing profits and losses in 4:3 ratio. They admitted Z for 1/8 share. Z brought ₹20,000 for his capital and…Preview
  22. Q22Aditya and Balan are partners sharing profits and losses in 3:2 ratio. They admitted Christopher for 1/4 share in the profits. The new profi…Preview
  23. Q23Amar and Samar were partners in a firm sharing profits and losses in 3:1 ratio. They admitted Kanwar for 1/4 share of profits. Kanwar could…Preview
  24. Q24Mohan Lal and Sohan Lal were partners in a firm sharing profits and losses in 3:2 ratio. They admitted Ram Lal for 1/4 share on 1.1.2013. It…Preview
  25. Q25Rajesh and Mukesh are equal partners in a firm. They admit Hari into partnership and the new profit sharing ratio between Rajesh, Mukesh and…Preview
  26. Q26Amar and Akbar are equal partners in a firm. They admitted Anthony as a new partner and the new profit sharing ratio is 4:3:2. Anthony could…Preview
  27. Q27Given 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…Preview
  28. Q28Leela and Meeta were partners in a firm sharing profits and losses in the ratio of 5:3. In April 2017 they admitted Om as a new partner. On…Preview
  29. Q29Amit and Viney are partners in a firm sharing profits and losses in 3:1 ratio. On 1.1.2017 they admitted Ranjan as a partner. On Ranjan's ad…Preview
  30. Q30A and B share profits in the proportions of 3/4 and 1/4. Their Balance Sheet on March 31, 2016 was as follows: | Liabilities | Amount (₹) |…Preview
  31. Q31A and B are partners sharing profits and losses in the ratio of 3:1. On 1st April 2017 they admitted C as a new partner for 1/4 share in the…Preview
  32. Q32Pinky, Qumar and Roopa are partners in a firm sharing profits and losses in the ratio of 3:2:1. Seema is admitted as a new partner for 1/4 s…Preview
  33. Q33The following was the Balance Sheet of Arun, Bablu and Chetan sharing profits and losses in the ratio of 6/14 : 5/14 : 3/14 respectively. Ba…Preview
  34. Q34Azad and Babli are partners in a firm sharing profits and losses in the ratio of 2:1. Chintan is admitted into the firm with 1/4 share in pr…Preview
  35. Q35Ashish and Dutta were partners in a firm sharing profits in 3:2 ratio. On Jan. 01, 2015 they admitted Vimal for 1/5 share in the profits. Th…Preview

CBSE Sample Papers

Questions from official CBSE sample papers.

+Show 4 questions4 questions
  1. Q1Assertion (A) : Goodwill is a intangible asset. Reason (R) : Goodwill is the value of the reputation of a firm in respect of profits expecte…Preview
  2. Q2Assertion (A) : In a partnership firm, at the time of admission, the new partner brings in an agreed amount of capital either in cash or in…Preview
  3. Q3Assertion (A) : Goodwill is an intangible asset. Reason (R) : Goodwill is the value of the reputation of a firm in respect of profits expect…Preview
  4. Q4There are two statements Assertion (A) and Reason (R) : Assertion (A) : At the time of admission of a new partner in a partnership firm, the…Preview