Why it is necessary to ascertain new profit sharing ratio even for old partners when a new partner is admitted

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Q. Why it is necessary to ascertain new profit sharing ratio even for old partners when a new partner is admitted?

Yanam CbseNCERTSubjective· 3mImportance★★★★★

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Concept understanding — 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. But the business has grown — you have a reputation, some regular customers, and maybe a little cash saved. She can’t just walk in and claim equal share of everything you built before she arrived. That wouldn’t be fair to you and your original partner.

So you sit down and decide: what is the business worth today? How much should the new partner bring in as her share of that past effort? And once she comes in, how do we rewrite the partnership deed so everyone’s rights are clear from Day 1?

That’s the heart of Admission of a Partner — and the adjustments that follow.

What does “Admission Partner Adjustments” mean?

When a new partner is admitted into an existing partnership, the old partnership is dissolved in the eyes of accounting, and a new one begins. The new partner brings in capital (cash or assets) and also buys a share of the goodwill — the value of the business’s reputation and past efforts. But that’s not all. Several things need to be revalued or adjusted so that the new partner doesn’t unfairly gain or lose from past decisions.

These adjustments are:

Revaluation of Assets and Liabilities – because the balance sheet values may be outdated.
Treatment of Goodwill – the new partner compensates old partners for their past efforts.
Adjustment of Reserves and Accumulated Profits/Losses – these belong to old partners only.
Adjustment of Capital Accounts – to bring all partners’ capitals in proportion to the new profit-sharing ratio.

Each of these has a clear accounting treatment. Let’s go through them one by one.

1. Revaluation of Assets and Liabilities

Why? The balance sheet shows assets at book value (historical cost minus depreciation). But the new partner should not benefit from an undervalued asset (like land that has appreciated) nor suffer from an overvalued one. Similarly, liabilities may be understated or overstated.

Accounting treatment:

We open a Revaluation Account (also called Profit & Loss Adjustment Account).

Increase in asset value → debit Asset, credit Revaluation A/c
Decrease in asset value → credit Asset, debit Revaluation A/c
Increase in liability → credit Liability, debit Revaluation A/c
Decrease in liability → debit Liability, credit Revaluation A/c

The net profit or loss on revaluation is transferred to the old partners’ capital accounts in their old profit-sharing ratio.

Note

The new partner does not share in revaluation profit/loss — it belongs entirely to the old partners.

Example format (Revaluation Account):

Particulars	₹	Particulars	₹
To Building (decrease)	10,000	By Land (increase)	20,000
To Provision for Doubtful Debts (increase)	5,000	By Creditors (decrease)	8,000
To Profit transferred to:
A’s Capital A/c (3/5)	7,800
B’s Capital A/c (2/5)	5,200
Total	28,000	Total	28,000

2. Treatment of Goodwill

Why? The new partner is buying a share of the business’s earning power built by old partners. She must compensate them for this.

Accounting treatment (as per NCERT):

The new partner brings her share of goodwill in cash. That cash is then withdrawn by the old partners (or left in the business). The journal entry:

When new partner brings goodwill in cash:

Cash/Bank A/c Dr.

To Goodwill A/c (or Premium for Goodwill A/c)
Then, distribute that amount to old partners in their sacrificing ratio:

Goodwill A/c Dr.

To Old Partners’ Capital A/cs (individually)

Watch out

The sacrificing ratio is the ratio in which old partners give up their share in favour of the new partner. It is not the same as the old ratio unless the new partner’s share is taken equally from all.

Sacrificing Ratio = Old Ratio – New Ratio

If the new partner does not bring cash for goodwill, we adjust through capital accounts (debit the new partner, credit the old partners).

3. Adjustment of Reserves and Accumulated Profits/Losses

Why? Any accumulated profits (like General Reserve, Profit & Loss A/c credit balance) belong to the old partners. The new partner should not get a share of past profits.

Accounting treatment:

Transfer the entire reserve/accumulated profit to old partners’ capital accounts in their old profit-sharing ratio.

Journal entry:

General Reserve A/c Dr.

To Old Partners’ Capital A/cs

Similarly, accumulated losses (debit balance of P&L A/c) are debited to old partners’ capital accounts.

4. Adjustment of Capital Accounts

Why? After all adjustments, the partners’ capitals may not be in the new profit-sharing ratio. The partnership deed may require capitals to be proportionate to profit shares.

Accounting treatment:

Calculate the total capital of the new firm based on the new partner’s capital contribution. Then determine each partner’s required capital. The difference is adjusted by bringing in or withdrawing cash.

Journal entry for excess capital withdrawn:

Partner’s Capital A/c Dr.

To Cash/Bank A/c

For deficiency (partner brings in more):

Cash/Bank A/c Dr.

To Partner’s Capital A/c

Putting it all together: A proforma Capital Account

Here’s how a Partner’s Capital Account looks after admission adjustments (NCERT format):

Particulars	A (₹)	B (₹)	C (₹)	Particulars	A (₹)	B (₹)	C (₹)
To Revaluation Loss (if any)				By Balance b/d	50,000	40,000	—
To Goodwill (if written off)				By Cash (capital brought)	—	—	30,000
To Drawings				By Revaluation Profit	7,800	5,200	—
To Balance c/d	65,800	49,200	30,000	By Goodwill (premium)	8,000	4,000	—
				By General Reserve	10,000	6,000	—
Total	65,800	49,200	30,000	Total	65,800	49,200	30,000

Important

The final balances in capital accounts (Balance c/d) should be in the new profit-sharing ratio after all adjustments. If not, partners bring in or withdraw cash.

Why does this matter for your exam?

NCERT Class 12 Accountancy (Part II, Chapter 3 – Admission of a Partner) treats this as a step-by-step process. You will be asked to:

Prepare Revaluation Account
Prepare Partners’ Capital Accounts
Calculate sacrificing ratio
Pass journal entries for goodwill

The key is to never skip a step. Always start with revaluation, then goodwill, then reserves, then capital adjustment. Each step feeds into the next.

Tip

In numerical problems, first write down the old ratio, new ratio, and sacrificing ratio. Then proceed stepwise. Most mistakes happen when students jump to capital accounts without revaluing assets first.

Final takeaway: Admission of a partner is not just about bringing in cash. It’s about fairly resetting the score so that the new partner starts on equal footing with the old ones, without taking away what the old partners earned before she arrived. Every adjustment — revaluation, goodwill, reserves, capital — serves that single idea.

Ascertaining the new profit sharing ratio for old partners is necessary because the existing ratio among them changes automatically when a new partner is admitted — the old partners must sacrifice a portion of their share in favour of the new partner, and the new ratio becomes the basis for all future profit/loss distribution, goodwill adjustments, and revaluation entries.

When a new partner is admitted into a partnership, the fundamental agreement among all partners — the profit sharing ratio — must be redefined. The old partners had been sharing profits in a certain proportion. The moment a new partner enters, that proportion cannot remain the same because the new partner now has a claim on future profits. The old partners must give up a part of their share to accommodate the newcomer. This sacrifice is not optional; it is the very essence of admission.

The new profit sharing ratio is the ratio in which all partners (including the new one) will share profits and losses from the date of admission. It is not enough to simply know the new partner's share. You must also know what each old partner's share becomes after the sacrifice. Without this, you cannot:

Distribute future profits correctly.
Calculate the amount of goodwill to be adjusted (the new partner compensates the old partners for the share they sacrifice).
Determine the sacrificing ratio, which is used to credit the old partners' capital accounts for goodwill brought in by the new partner.
Prepare the revaluation account and adjust accumulated reserves or losses.

Consider a simple example. A and B share profits in the ratio of 3:2. They admit C for a 1/5th share. If you only know C's share, you cannot tell how much A and B will now get. You must first subtract C's share from the total (1 - 1/5 = 4/5), then divide this remaining 4/5 between A and B in their old ratio of 3:2. So A gets 3/5 of 4/5 = 12/25, B gets 2/5 of 4/5 = 8/25, and C gets 1/5 = 5/25. The new ratio is 12:8:5. Without this calculation, you would not know how to credit A and B for the share they have given up.

Watch out

A common mistake is to assume that the old partners continue to share profits in their old ratio after admission. This is incorrect. The old ratio applies only to the share remaining after the new partner's portion is deducted. Always compute the new ratio explicitly.

The new profit sharing ratio also determines the sacrificing ratio — the ratio in which the old partners have given up their share. This is found by subtracting the new share from the old share for each old partner. The sacrificing ratio is used to adjust goodwill. If the new partner brings in his share of goodwill in cash, it is distributed among the old partners in the sacrificing ratio, not the old ratio. Again, you need the new ratio to find the sacrifice.

Tip

A shortcut: If the new partner's share is given as a fraction, and the old partners continue in their old ratio for the remaining share, the new ratio is simply (Old ratio × Remaining share) for each old partner, and the new partner's share as given. Always check that the sum of all new shares equals 1.

In summary, the new profit sharing ratio is the foundation upon which all admission adjustments are built. Without it, you cannot correctly account for goodwill, revaluation, reserves, or future profit distribution. It is not a formality — it is the mathematical expression of the new partnership agreement.

✓Final answer

The new profit sharing ratio is necessary because it determines each partner's future claim on profits, forms the basis for calculating the sacrificing ratio (used for goodwill adjustment), and ensures all admission-related entries (revaluation, reserves, capital adjustments) are correctly apportioned among the old partners. Without it, the entire accounting treatment for admission would be incomplete and inaccurate.

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Q.Why it is necessary to ascertain new profit sharing ratio even for old partners when a new partner is admitted?

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