Chapter 24

Partnership Changes
What is a partnership change?
1. Admission of a partner
2. Retirement or death of a partner
3. Change in profit & loss sharing ratio

Accounting treatment in the financial statements of Partnership

When there is any kind of change, a partnership firm will take the following steps;
i. Revaluation of assets
ii. Adjustment of Goodwill

The following accounts will be prepared to account for the above changes
i. Revaluation account
ii. Partners’ capital Accounts (after changes)
iii. Income Statement (before and after changes)
iv. Statement of Financial Position (after changes)

i) Revaluation of assets:
The value of partnership assets may be increased or decreased throughout the life of a
partnership firm. It is necessary to revalue assets before admission of new partner or
retirement of existing partner to reflect true and fair market value assets.
The assets would be revalued and capital accounts of existing partners will be adjusted
accordingly.
At the time of revaluation of assets, a revaluation account will be opened. Increase or
decrease in the value of assets will be recorded in the revaluation account. The
remaining balance on the revaluation account will represent a profit or loss on
revaluation. This will be shared by the existing partners using existing profit sharing
ratio and will be transferred to the partners’ capital accounts.

Journal entries to record revaluation of assets:

1. when the value of asset is increased
Asset account
Revaluation account
2. when the value of asset is decreased
Revaluation account
Asset account
 3. Closing of revaluation account.
a. in case of profit on revaluation of assets
Revaluation account
Partners’ capital accounts
b. in case of loss on revaluation of assets
Partners’ capital accounts
Revaluation account
Note:
The balancing figure will be profit of loss on revaluation of asserts that will be
transferred to the partners’ capital accounts between Old partners using Old profit
sharing ratio.

ii) Adjustment of Goodwill:

Goodwill is an intangible asset. It cannot be seen; cannot be touched. It has no physical
presence.
When a successful and running business is sold the owner will demand a price greater
than the total of the net assets of the business. The amount by which the value of the
business exceeds the value of its net assets is the value of Goodwill.
The factors that determine the value of Goodwill may include good reputation of a
business, quality of product, customer loyalty etc.
No doubt in an existing partnership firm, all contributions are made by the existing
partners for the establishment of business and its goodwill. In the partnership books of
accounts goodwill is recorded to reward the existing partners for their efforts in
building up the business over its life.

There are two methods to account for goodwill in partnership

Method 1: Goodwill account will be opened:

In this method Goodwill account will be recorded as an intangible Non-current asset in
the statement of financial position.

Goodwill account
Partner’ capital accounts
[Credit the Old partners’ capital accounts using Old profit sharing ratio]

Method 2: Goodwill account will not be opened:

In this method Goodwill account will not be recorded as a Non-current asset (Goodwill is
written off immediately).
Sometimes partners do not wish to record goodwill in the books of accounts but capital
accounts balances have to be adjusted before admission of new partner or retirement
of existing partner with the value of goodwill. In this method only capital accounts of
partners will be adjusted/ updated using the following two steps.
Journal entry: 1
Goodwill account
Partner’ capital accounts
[Credit the Old partners’ capital accounts using Old profit sharing ratio]

Journal entry: 2
Partner’ capital accounts
Goodwill account
[Debit the all New partners’ capital accounts using New profit sharing ratio]

Example: 1

Mr. A and Mr. B have been in partnership for many years sharing profits and
losses equally. Their statement of financial position at 31 December 2016 was as
follows:
$
Non-current assets:
Premises 30000
Current assets
Bank 20000
50000
Capital accounts:
Mr. A 25000
Mr. B 25000
50000
On 1 January 2017, they decided to admit Mr. C as a partner.
The premises were revalued $40000 at the end of 31 December 2016.
The partners agree that goodwill be valued at $9000 and account will be
opened.
Mr. C will pay $34500 in the business bank account.
New profit & loss sharing ratio is equal
Required:

a) Prepare the revaluation account

b) Prepare partners’ capital accounts
c) Prepare revised statement of financial position as at 1 January 2017
Answer:

(a) Revaluation Account

$ $
Capital Accounts Premises 10 000
Mr. A 5000
Mr. B 5000 _____
10 000 10 000

Working 1:
Goodwill account $9000
Capital accounts Mr. A $4500
Mr. B $4500

(b) Partner’s Capital Account

A B C A B C
$ $ $ $ $ $
Balance b/d 25 000 25 000
Revaluation a/c 5 000 5 000
Goodwill a/c 4 500 4 500
Balance c/d 34 500_ 34 500 34 500 Bank 34 500
34 500 34 500 34 500 34 500 34 500 34 500

(c) Statement of financial position as at 1 January 2017

$
Non-current assets:
Goodwill 9000
Premises (30000+10000) 40000
Current assets
Bank (20000+34500) 54500
103500
Capital accounts:
Mr. A (25000+5000+4500) 34500
Mr. B (25000+5000+4500) 34500
Mr. C 34500
103500
Example: 2

A,B and C have been in partnership for many years sharing profits and losses
equally. Their statement of financial position at 31 December 2016 was as
follows:
$
Non-current assets:
Premises 40000
Current assets
Bank 30000
70000
Capital accounts:
Mr. A 20000
Mr. B 20000
Mr. C 20000
60000
Non Current Liability 10000
70000
Additional Information:
On 1 January 2017, Mr. C decided to retire from partnership.
The premises were revalued at $55000.
The partners agree that goodwill be valued at $9000 and account would not be
shown in the statement of financial position.
The amount due to Mr.C will be paid from the business bank account.
New profit & loss sharing ratio is equal
Required:

a) Prepare the revaluation account

b) Prepare partners’ capital accounts
c) Prepare revised statement of financial position as at 1 January 2017

Answer:

(a) Revaluation Account

$ $
Capital Accounts Premises 15 000
Mr. A 5000
Mr. B 5000
Mr. C 5000 _____
10 000 10 000
I)
Goodwill account $9000
Capital accounts Mr. A $3000
Mr. B $3000
Mr. C $3000
II)
Capital accounts
Mr. B $4500
Mr.C $4500
Goodwill account $9000

(b) Partner’s Capital Account

A B C A B C
$ $ $ $ $ $
Goodwill a/c 4 500 4 500 - Balance b/d 20 000 20 000 20 000
Bank 28 000 Revaluation a/c 5 000 5 000 5 000
Goodwill a/c 3 000 3 000 3 000
Balance c/d 23 500_ 23 500 _____
28 000 28 000 28 000 28 000 28 000 28 000

(c) Statement of financial position as at 1 January 2017

$
Non-current assets:
Premises (40000+15000) 55000
Current assets
Bank (30000-28000) 2000
57000
Capital accounts:
Mr. A 23500
Mr. B 23500
47000
Non Current Liability 10000
57000
Note:
Journal entry to record the payment made to retiring partner
Capital account
Bank account/any other asset
If amount is not paid to the retiring partner then:
Capital account
Loan account