Accountancy · Ch 2 — Reconstitution of a Partnership Firm — Admission of a Partner
Summary
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. The sacrificing ratio is Old Ratio − New Ratio.
- Sacrificing Ratio: This ratio is used to compensate the old partners for their loss of share. It is computed as: Sacrificing Ratio = Old Ratio − New Ratio. If the new ratio is not given, it is assumed the old partners sacrifice in their old ratio.
- Goodwill: Goodwill is the value of the firm’s reputation and future earning capacity. On admission, the new partner brings in their share of goodwill in cash (or as agreed). The amount is credited to the old partners in their sacrificing ratio.
- Treatment of Goodwill: If the new partner brings goodwill in cash, it is recorded as: Premium for Goodwill A/c Dr. (with amount brought), then distributed to old partners’ capital accounts in sacrificing ratio. If goodwill is not brought in cash, the new partner’s capital account is debited and old partners’ capital accounts credited.
- Revaluation of Assets and Liabilities: All assets and liabilities are revalued to their current market values. The Revaluation Account (or Profit & Loss Adjustment Account) records the net gain or loss, which is transferred to old partners’ capital accounts in their old ratio.
- Accumulated Reserves and Losses: Any existing reserves (e.g., General Reserve) or accumulated profits/losses (e.g., Profit & Loss A/c balance) are transferred to the old partners’ capital accounts in their old ratio. The new partner does not share these past items. …