Admission of a Partner Test - 7

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.

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.

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.

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. 

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.

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

Amount to be brought by C as his capital:

Remaining Share = 1 – 1/5 = 4/5

Reciprocal of remaining share = 5/4

C’s Capital = 36,000 × 5/4 × 1/5 = 9,000

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

Amount to be brought by B:

Old Ratio = 6:4

New Ratio = 5:3:2

Total capital of the firm = 70,000 × 5/1 = 3,50,000

Y’s new capital = 3,50,000 × 3/10 = 1,05,000

HIS ADJUSTED CAPITAL IS 120000

CASH TO BE WITHDRAWN IS 120000-105000= 15000

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.

When a new partner is admitted and he brings his share of goodwill (premium for goodwill) in cash, in such a case Cash or Bank account should be debited and Premium for goodwill account should be credited.

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

Revaluation account is also known as profit and loss adjustment account because it is concerned with the profit and loss on the revaluation of assets and re-assessment of liabilities.

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.

Amount of bad debts recovered will not affect the debtors’ accounts because bad debts amount is already adjusted. Any amount recovered from the debtor in connection with bad debts will effect Revaluation account and cash/bank account.

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.

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)

The goodwill already existing in the balance sheet of the old firm should be written off and transferred to the old partners capital account in the old ratio.

THE DIFFERENCE IN THE CAPITALS OF THE PARTNERS will be adjusted through cash or bank account when nothing is mentioned in the question about the adjustment of difference amount.

Amount to be brought by A:

Old Ratio = 3:2

New Ratio = 5:3:2

Total capital of the firm = 35,000 × 5/1 = 1,75,000

A’s new capital = 1,75,000 × 5/10 = 87,500

A will bring = 87,500 – 80,000 = 7,5000

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).

Revaluation account is prepared at the time change in existing profit sharing ratio, admission of a partner, retirement of a partner and death of a partner. But in case of dissolution revaluation account is not prepared.

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.

At the time of preparation of Revaluation Account, increase in the value of asset is to be shown in the debit side of Revaluation Account. Hence, following entry will take place: Asset A/c Dr. To Revaluation Account

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.