Adjustment of Capital and the New Balance Sheet

After goodwill, revaluation, and reserves have all been accounted for, partners sometimes agree that their capital balances should bear a specific, sensible relationship to the New Profit-Sharing Ratio — after all, if profits are now to be shared in a certain ratio, it is common commercial sense that the capital invested by each partner should broadly reflect that same ratio. This is not compulsory in every admission problem, but where the question specifically asks for it, capitals must be adjusted.

Adjustment of capitals in the new profit-sharing ratio

The most common version of this problem uses the new partner's capital as the base, because the new partner's capital (and the share of profit it is meant to represent) is usually fixed independently by negotiation, while the old partners' capitals are the ones that need adjusting.

Step 1 — Compute the total capital of the reconstituted firm, based on the new partner's capital and their share:

Total Capital of the New Firm = New Partner's Capital ÷ New Partner's Share (i.e., New Partner's Capital × reciprocal of their share)

Step 2 — Compute each old partner's required (proportionate) capital, by applying their new profit-sharing ratio to this total:

Each Partner's Required Capital = Total Capital of the New Firm × that Partner's New Share

Step 3 — Compare each old partner's required capital with their existing capital (after all other adjustments — revaluation, reserves, goodwill — have already been posted to their capital account). The difference is either:

• A deficiency (required capital is more than the existing balance) — the partner must bring in additional cash to make up the shortfall, or
• A surplus (existing balance is more than the required capital) — the partner must withdraw cash to bring their balance down to the required figure.

Some problems instead state a total agreed capital for the firm directly (rather than deriving it from the new partner's capital), or ask that only the old partners' capitals be adjusted while the new partner brings in a separately agreed amount — the same three-step logic applies regardless of which figure is given as the starting point; only the source of the "total capital of the firm" figure changes.

Preparing the new Balance Sheet of the reconstituted firm

Once every adjustment — new ratio, goodwill, revaluation, reserves, and (where required) capital adjustment — has been passed through the Revaluation Account, the Partners' Capital Accounts, and the Cash/Bank Account, a fresh Balance Sheet of the reconstituted firm is prepared as at the date of admission. It is built the same way as any partnership balance sheet, with three points to keep in mind:

1. Assets and liabilities appear at their revalued figures, not their old book values. …