Admission of a Partner Test - 8

Employee provident fund is not a free reserve.It is not an accumulated profit.  Partners cannot distribute it among themselves. This is outsiders’ liability which has to be paid to the employees after sometime. It will be shown in the new balance sheet of the firm (if not paid).

At the time of admission of a new partner, all accumulated profits and losses should be distributed among the old partners in their old profit sharing ratio. Accumulated losses given in the assets side of the balance sheet should also be written off to he old partners in the old ratio. Hence the old partners capital accounts are to be debited to write off the accumulated losses in the balance sheet.

Goodwill given in the existing balance sheet (old balance sheet) at the time of admission of a new partner will be debited to the old partners in their old profit sharing ratio. It is also known as goodwill written off.

This profit will be shared by the old partners only in their old profit sharing ratio.
X = 16,000 × 5/8 = 10,000
Y = 16,000 × 3/8 = 6,000

It is always better to distribute all the accumulated profits and reserves at the time of admission of a new partner. All accumulated profits and reserves belong to the old partners only, to avoid the future disputes, it is better to distribute all the profits and reserves (by old partners) otherwise it will be a disadvantage for them.

At the time of admission of a new partner all accumulated profits/reserves and fictitious assets will be transferred to the old partners’ capital/current account in their old profit sharing ratio. Prepaid expenses cannot be distributed among the partners.

Calculation of amount to be transferred to B:
Old Ratio of A and B = 4:3
B’s Share of General Reserve = 70,000 × 3/7 =30,000

Revaluation profit or loss will be shared by the old partners only in their old profit sharing ratio. A new partner is not entitled to the revaluation profit of a partnership firm. The main reason is that he has not played any role in the previous events of the business.

Old partners cannot make a new partner responsible for the revaluation loss. Revaluation loss will be shared by old partners in their old profit sharing ratio. 

All unrecorded liabilities given in the adjustment only (which are not given in the balance sheet or were not recorded earlier) will be treated as increase in the liabilities and will be recorded in the debit side of revaluation account.