Admission of a Partner Test - 9

When capital of new partner is given in the question and total capital calculation is required. In such a case reciprocal of new partners share on his capital should be done to find out the total capital of the firm. For example, capital of a new partner Z is Rs.50,000 and his share is 1/5 in the future profits. Hence, total capital will be Rs.2,50,000 (50,000 × 5/1).

At the time of admission of a new partner, sometimes it is decided by the partners, not to change the value of existing assets, in such a case Memorandum Revaluation Account is prepared to nullify the effect of change in the value of assets.

Net worth is the net amount engaged in the business. To find out the net worth of a business following formula should be used:
Capital + Reserves and profits – losses (accumulated losses & fictitious assets)

At the time of admission or retirement of a partner the existing assets and liabilites in the balance sheet have to be revalued and the profit or loss arising out of it have to be transferred to the old partners in the old ratio. So revaluation account is prepared which shows the revaluation of assets and reassessment of liabilities. 

As per the Accounting Standard 26, goodwill will be recorded in the books of accounts only when some money or money’s worth is paid for it. In simple words only purchased goodwill is recorded in the books of accounts.

Nature of revaluation is Nominal Account. Any account which is prepared to calculate the profit or loss is considered as a Nominal Account.

When a new partner pays his premium for goodwill amount privately to the sacrificing partners, it will not be recorded in the books of accounts.

Calculation of new partner’s capital should be done as follows:
1.Calculated the combined or adjusted capitals of all the existing partners (after all adjustments)
2.Find out the reciprocal of remaining share
3.Now, combined capitals x reciprocal of remaining share x new partner’s share

When a new partner is admitted during the year (in between) in such a case profit for that year should be divided into two parts i.e. Pre-admission and post –admission profit. Pre – admission profit belongs to the old partners only and post-admission profit will be shared by all the partners (including new partner) in new profit sharing ratio.

At the time of admission of a new partner, all assets will be revalued and liabilities will be re-assessed. For this purpose Revaluation Account is prepared and profit or loss calculated on this account will be shared by the old partners in their old profit sharing ratio. Realisation account, Goodwill account are not prepared at the time of admission of a partner.