Adjustment of Capital Accounts on Admission

Once the new partner's capital contribution, his premium for goodwill, and each partner's share of revaluation profit or loss have all been settled, a firm will often want the partners' CAPITAL BALANCES themselves brought into line with the NEW profit-sharing ratio — a natural expectation, since capital broadly represents each partner's stake in the business, and that stake should now correspond to each partner's revised share of future profits.

A common examination pattern proceeds as follows: the new partner's own capital contribution is given, along with his share in the new firm, and this is used to compute what the TOTAL capital of the reconstituted firm ought to be:

Total Capital of the New Firm = New Partner's Capital ÷ New Partner's Share (expressed as a fraction of 1)

Once the total is known, each partner's Required (New) Capital is that total capital multiplied by that partner's own share in the NEW profit-sharing ratio:

Required Capital of a Partner = Total Capital of the New Firm × That Partner's New Share

Each old partner's ADJUSTED capital — his opening capital, plus his share of revaluation profit (or minus his share of a revaluation loss), plus the goodwill premium credited to him — is then compared against his newly Required Capital: if the adjusted capital EXCEEDS the required capital, the excess is either withdrawn in cash by that partner or transferred to a Current Account, as the question specifies; if the adjusted capital falls SHORT of the required capital, that partner must bring in the shortfall as additional capital in cash, or the shortfall is instead shown as a deficit balance in a Current Account. …