Notes on Admission of Partner Prepared by : VINEET RAJAN M.No.

9818168085 Reconstitution of Partnership : When a new partner is admitted, following changes takes place :  Change in Profit Sharing Ratio.  Treatment of Goodwill.  Revaluation of Asset and Liabilities.  Capital Adjustments. Change in Profit Sharing Ratio or Calculation of new ratio or sacrificing ratios :
Sacrificing Ratio = Old Ratio – New Ratio Calculation of New Ratios in different circumstances: Case I When old ratio is given and new partners’ share is given. e.g. A and B are partners sharing profits & Losses in the ratio of 3 : 2. C admits for ¼ th share.Then new Profit Sharing Ratio can be calculated as : Let total share of firm be 1 Remaining share of A & B = 1 – ¼ = ¾ A’s New Share = ¾ x 3/5 = 9/20 B’s New Share = ¾ x 2/5 = 6/20 New Ratio = 9/20 : 6/20 : ¼ or 9 : 6 : 5 (When L.C.M. is taken) Case II When old ratio & Future ratio of old partners are given and new partner’s share is given. e.g. A and B are partners sharing profits & Losses in the ratio of 3 : 2. C admits for ¼ th share.Future Ratio of A & B is 2 : 1.Then new Profit Sharing Ratio can be calculated as Let total share be 1, then remaining share of A & B = 1 – ¼ = ¾ A’s New Share = ¾ x 2/3 = 6/12 B’s New Share = ¾ x 1/3 = 3/12 New Ratio = 6/12 : 3/12 : ¼ or 6 : 3 : 3 (when L.C.M. is taken) or 2 : 1 : 1 Sacrificing Ratio = Old – New i.e. A’s Ratio = 3/5 – 2/4 = 2/20 B’s Ratio = 2/5 – ¼ = 3/20 or 2:3. Case III When Old Ratio is given and new partners’ share is given, but new partner acquires or takes his/her share from old partner. e.g. A and B are partners sharing profits & Losses in the ratio of 3 : 2. C admits for 3/7 share, which he acquires 2/7 from A and 1/7 from B.Then new Profit Sharing Ratio can be calculated as A’s New Share = 3/5 – 2/7 = 11/35 B’s New Share = 2/5 – 1/7 = 9/35 New Ratio = 11/35 : 9/35 : 3/7 or 11 : 9 : 15 (when L.C.M. is taken). Case IV When Old Ratio is given and new partners’ share is not given, but old partner surrenders part of his/her share in favour of new partner. e.g. A and B are partners sharing profits & Losses in the ratio of 3 : 2. C admits, A surrenders 2/3 of his share where as B surrender 1/3 of his share in favour of C. Then new Profit Sharing Ratio can be calculated as A surrenders to C = 3/5 x 2/3 = 6/15 B surrenders to C = 2/5 x 1/3 = 2/15 C’s Share = 6/15 + 2/15 = 8/15 A’s new share = 3/5 –6/15 = 3/15 B’s new share = 2/5 – 2/15 = 4/15 Then, New Ratio = 3/15 : 4/15 : 8/15 or 3 : 4 : 8.

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Goodwill Meaning It is the value of reputation of a firm in respect of the profits expected in future over and above the normal profits earned by other similar firms belonging to the same industry. Nature of Goodwill (a) It is regarded as intangible asset not a fictitious asset. (b) It is valueable asset if the firm is earning profits. Factors Affecting Goodwill  Nature of Business.  Size of Business.  Favourable Loacation.  Efficiency of Management.  Market situation.  Technical know how.  Quality of product.  After sales service.  Management attitude towards fulfillment of commitments and many more.
Valuation of Goodwill

Needs : (a) (b) (c) (d) (e)

When there is change in Profit Sharing Ratio. When a new partner is admitted. When a partner retires. When a partner dies. When the firm is sold or amalgamated.

Methods : i) Average Profit Method Goodwill = Actual Average Profit x No. of years’ purchase. Actual Average Profit = Total Actual Profits ÷ No. of years. Actual Profit = Profit for the year – Abnormal Gain (like gain on sale of fixed Assets, Speculative profit like winning of lottery etc.) + Abnormal loss (like loss due to theft, fire, on sale of fixed assets etc.) – Expenses to be paid in future (like Remuneration to partners etc. Weighted Average Profit When the profits are rising, then weighted average method can be used Year Profit Weights Product (Profit x weights) Goodwill = Total weighted average profit x No. of years purchase. Super Profit Method Goodwill = Super Profit x No. of years’ Purchase Super Profit = Actual Average Profits – Normal Profits. Normal Profits = Capital employed x Normal Rate of Return 100 iv) Capitalisation Method According to this method goodwill can be valued in two ways :
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ii)

iii)

a)

By Capitalising the average actual profits Goodwill = Total Capitalised value of business – Net Assets Total Capitalised Value of the firm = Actual Average Profit x 100 Rate of Normal Profit Net Assets = Total Assets – Total Liabilities. By Capitalising the Super Profits Normal Profit = Capital employed (i.e. Total Assets – Liabilities) x Rate of 100 Normal Profit

b)

Super Profit = Actual Average Profit – Normal Profit Goodwill = Super Profit x 100 Rate of Return v) Annuity Method According to this method Goodwill is Calculated as follows: Goodwill = Super Profit x value of Annuity. Accounting treatment for goodwill Methods of treatment of goodwill: Premium Method When a new partner is admitted, he is to introduce a certain sum of money as his capital. In addition to this, the new partner brings in cash the amount of premium equal to his share of goodwill. There are three alternatives. a) When new partner brings his share of goodwill in cash and the same is paid to old partners privately. – No entry is to be made in the books. b) Then new partner brings goodwill in cash and retained in business. Journal entries : Cash A/c Dr. To New Partners’ Capital A/c (Being amount actually brought in for goodwill and Capital) (with the total amount of Capital & goodwill brought into business)

On distribution on amount of goodwill among old partners : Premium a/c Dr. (with only amount of goodwill to be distributed To Old Partners’ Capital a/c in Sacrificing Ratio) (Being the amount of goodwill brought in by new partner transferred to old partners) c) When amount of goodwill is withdrawn form the firm by the old partners. First two entries will be same as passed in case (b), the following additional entry is also passed : Old Partners’ Capital A/c Dr. (with the amount of goodwill withdrawn by old To Cash A/c partners in sacrificing ratio). (Being amount of goodwill withdrawn by old partners) Revaluation Method If goodwill already appears in the Balance Sheet/ Books, then following entry will be passed : Old Partners’ Capital A/c Dr. (With the difference amount between goodwill To Goodwill A/c already appears less goodwill calculated as per
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(Being amount of goodwill written back)

New terms in old ratio)

The following entry will be passed to record goodwill : New Partners’ Capital A/c Dr. To Old Partners’ Capital A/c (Being the amount of goodwill not brought by new partner) (with the amount of new partners’ share of goodwill to be distributed in sacrificing ratio)

When goodwill brought by new partner is less than his share e.g. If new partner brings only part of his share i.e. Rs.5,000 for ¼ th share, but his share of goodwill calculated as Rs.8,000. Then, in addition to entries passed in Case (b) of Premium method of treatment of goodwill, following additional entry will be passed: New Partner Capital A/c Dr (8000 – 5000) = 3,000 To Old Partners’ Capital A/c 3,000 (Being deficiency of goodwill not brought by new partner in sacrificing ratio). In case of hidden goodwill i.e. when no amount of goodwill is given but it is necessary to record goodwill then amount of goodwill will be calculated in following manner ‘*’ marked item has been calculated with the help of following formula = (New Partners’ Share of capital) x Reciprocal of new partners’ share – (Capital of all partners including new partner). Following entry will be passed to record goodwill in above case: New Partners’ Capital A/c Dr. (with the amount of new partners’ share of To Old Partners’ Capital A/c goodwill to be distributed in sacrificing ratio) (Being the amount of goodwill not brought by new partner) Proforma of Revaluation A/c or Profit & Loss Adjustment A/c Revaluation A/c Particulars Amount To Assets (name, if there *** Decrease in value) To Liabilities (name, if *** There increase in value) To Unrecorded liabilities *** To Profit transferred to old Partners’ Capital A/c *** (in old Ratio, Balancing figure) *** Proforma of Partners’ Capital Account Partners’ Capital A/c Particulars old old New Particulars To Old Partners’ Capital A/c *** By balance b/d To Old Partners’ Capital A/c *** (Opening balance of Capital) (Goodwill not brought by new By Cash (Amount of Capital Partners in sacrificing ratio) & Goodwill brought in cash) To Revaluation A/c (Loss) *** *** By Revaluation A/c (Profit) To Cash A/c (Goodwill withBy Premium A/c Drawn by old partners) *** *** (Goodwill brought in cash t/fd.
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Particulars Amount By Assets (name, if there is *** increase in value) By Liabilities (name if, there is decrease in value) *** By unrecorded Asset *** By Loss transferred to old partners’ Capital A/c *** (in old Ratio, Balancing figure) ***

old old New *** *** *** *** *** *** ***

To P&L, Deferred Expenditure *** (given on Asset side in old ratio) (Goodwill written off after being raised) To Goodwill A/c *** (Goodwill already appears, written off) To Balance C/d *** (Balancing figure) ***

*** to old partners in S. Ratio) By New Partner capital a/c *** *** (Goodwill not brought by new By Joint Life Policy *** *** *** (Surrender Value) By General Reserve,W.C.F. *** *** By P & L (Liabilities side) *** *** *** *** *** *** *** *** ***

Capital Adjustments : Case I Step I Step II Step III Step IV Case II When new Partner’s Capital is not given. He has to Contribute proportionate capital. Prepare Revaluation & Capital A/c in same manner and take out the closing Capital balances of old partners. Let total capital be X Equation is prepared for finding out total capital in this manner: Add Capital balances (closing) of old partners + (New Partners’ share × X) = X Find out the value of X i.e. The total capital of the firm and calculate the new partners’ share by multiplying his share with total capital. When new partners’ capital is given and old partners capital has been adjusted on the basis of the proportion of new partners’ capital and the difference i.e. deficiency or surplus should be transferred to Cash/ Current A/cs. Calculate total Capital = (New Partners’ Capital) x Reciprocal of New partners’ share. Total Capital calculated in step I will be divided in new profit sharing ratio and should be written in Capital A/c as closing balance i.e. To Balance C/d. Difference has to be calculated in Capital A/c and this difference should be transferred to cash/current A/c. If difference has been transferred to current A/c, It should directly be taken into Balance Sheet.

Step I Step II Step III

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