Admission of a partner

PPT

1. ADMISSION OF A PARTNER

2. ADMISSION OF A PARTNER- MEANING Inclusion of a new person as a partner to an existing firm is called admission of a partner. The new partner who joins the business is called the incoming partner or new partner.

3. Rights of incoming partners For acquisition of the right to share the asset, the new partner has to bring an agreed amount of the capital. For the right to share profit of the partnership firm, the new partner is required to bring some amount which is known as premium or his share of goodwill.

4. Admission of a partner necessitates the following accounting adjustment in the books of the firm Ascertainment of new profit sharing ratio Calculation of sacrificing ratio Revaluation of asset and reassessment of liability Distribution of reserve and accumulated profit or loss Treatment of goodwill Adjustment of capital

5. New profit sharing ratio New profit sharing ratio is the ratio in which all partners(including new partner) share the future profit and losses

6. Sacrificing Ratio The ratio in which the old partners sacrifices or surrender their share of profit in favour of incoming partner is called sacrificing ratio.

7. Sacrificing Ratio = Old Ratio - New Ratio

8. Revaluation Account A revaluation account is a nominal account prepared to bring the asset and liabilities of the firm to their true values and to find out the profit or loss arising there from.

9. Journal Entries For increase in the value of assets Asset a/c Dr Revaluation a/c For decrease in the value of assets Revaluation a/c Dr Asset a/c For increase in the value of liability Revaluation a/c Dr Liability a/c

10. For decrease in the value of liability Liability a/c Dr Revaluation a/c For recording unrecorded assets Asset a/c Dr Revaluation a/c For recording unrecorded liability Revaluation a/c Dr Liability a/c For transferring profit on revaluation Revaluation a/c Dr Old partners capital a/c For transferring loss on revaluation Old partners capital a/c Dr Revaluation

11. Proforma of Revaluation Account Date Particulars Amount Date Particulars Amount Decrease in value of Assets Increase on reassessment of liabilities Capital account (Gain on revaluation) xxx xxx xxx Increase in the value of assets Decrease on reassessment of liabilities Capital accounts (Loss on revaluation) xxx xxx xxx xxx xxx

12. Adjustment for reserve and other accumulated profit or loss The incoming partner is not entitled to any share in the accumulated profit or loss of the business appearing in the balance sheet as on the date of admission. The balance appearing in the form of reserves or profit or loss account balance should be transferred to the capital account of old partners in their old profit sharing ratio.

13. Methods of treatment of Goodwill Premium method Revaluation method Memorandum Revaluation Method

14. Premium method Under this method the new partner brings in his share of goodwill in cash. The amount of premium brought in by the new partner is shared amongst the old partner in their sacrificing ratio. Journal entry For bringing the premium (share of goodwill) Cash/ Bank a/c Dr Goodwill

15. For transferring goodwill to the capital account of old partners in sacrificing ratio Goodwill a/c Dr Old partners capital a/c By combining the above two entries, one entry may be passed as follows Cash/Bank a/c Dr Old partners capital a/c

16. If the partnership agreement so permits, the old partners can withdrawn either fully or partially, the amount brought in by the new partners for goodwill. In such case two entries are given in firm books For the amount brought in for goodwill Cash a/c Dr Old partners capital account On withdrawing the amount by old partners Old partners capital a/c Dr Cash Goodwill brought in cash is withdrawn by old partners

17. When only a portion of goodwill brought in cash by new partner In such a situation, the actual amount of goodwill brought in cash is credited to premium account. The unpaid amount of goodwill is debited to new partners capital account. Journal entry Goodwill premium brought by new partner transferred to the capital account of old partners Cash a/c Dr Old partners capital A/C

18. Unpaid amount of goodwill premium credited to the capita account of old partners in sacrificing ratio New Partners Capital a/c Dr Old Partners Capital a/c

19. Revaluation Method of Treatment of Goodwill Under this method, the new partner does not bring in his share of goodwill in cash instead, a goodwill account is raised in the firms book. Goodwill account is created in its full value by crediting the amount in the old partners capital account in their old ratio. The goodwill account should be shown on the asset side of the balance sheet. The journal entry for raising the goodwill is Goodwill a/c Dr Old partners capital a/c

20. Memorandum Revaluation Method Under this method .goodwill is raised in the books at its full value and written off immediately after admission. On raising the goodwill, the value is credited to the old partners capital account in their old ratio. And on writing it off all partners (including new partners) capital account are debited with the value of goodwill in their new profit sharing ratio. Journal entries Goodwill a/c Dr Old partners capital Account (Full value of goodwill shared in old ratio)

21. All partners capital a/c Dr Goodwill (The full value of goodwill written off by debiting all partners including the new partners in their new profit sharing ratio)

22. Share of Goodwill brought in kind The incoming partners may contribute his share of goodwill in the form of assets instead of bringing cash. The asset brought in by the new partners will be debited and goodwill account will be credited. Later the share of goodwill will be transferred to the capital account will be credited. Later the share of goodwill will be transferred to the capital account of old pa rtners in their sacrificing ratio . Jo

23. Journal entry for recording the transactions For asset brought by the new partner Asset a/c Dr New Partners Capital a/c Premium(Goodwill ) a/c For transferring the amount to the capital accounts of the sacrificing partners in their sacrificing ratio Premium (Goodwill) a/c Dr Sacrificing Partners Capital a/c

24. Adjustment of Capital At the time of admission, the partner may agree that their capital account should be adjusted as to make it in proportion to the new profit sharing ratio. This can be done either On the basis of new partner capital a/c On the basis of old partners capital

25. Adjustment of capital on the basis of new partners capital Under this method, the total capital of the firm is calculated on the basis of the share of new partner and the amount of capital brought by him. Capital required for each partner is ascertained on the basis of the total capital of the firm and new profit sharing ratio. The required amount of capital will now be compared with actual amount of capital of each partner after all adjustment are made. If the balance is more than the required amount, the excess will be withdrawn by partner from the firm or will transferred to their current account.

26. Similarly if the balance is less than the required amount of capital, the deficiency will brought by the partners in cash or will be transferred to their current account.

27. New partners bring his capital on the basis of old partners capital Under this method, the amount of capital to be contributed by the new partner is ascertained on the basis of the combined capital of old partners. In such a case ,first of all ,balance of old partners capital account after making all adjustments should be calculated. The combined capital of old partners is found out and on the basis the old capital of the new firm is ascertained. From the total capital, the share of new partners capital is calculated by applying the new profit sharing ratio.