2021

my Accounting Notes
on Admission of a
Partner.
CBSE 12 COMMERCE- Chapter:4
BY: NARAYAN AGRAWAL, M.COM. M.PHIL.,

mYNotes
Page

DAV PUBLIC SCHOOL, SECL,PANDAVPARA,KORIYA,CHHAATTISGARH.

1/1/2021
 CLASS : XII ACCOUNTANCY NOTES/ TIPS FOR SELF-STUDY

PART-1 ( ACCOUNTING PARTNERSHIP FIRMS ) SYLLABUS: 2021-22

[ CHAPTER-4: Reconstitution of Partnership: ADMISSION OF A PARTNER.]

Meaning of Admission of a Partner: When a new member as Partner joins the Firm with the consent
of all the existing Partners, it is known as Admission of a Partner.
❖ It is one of the modes of Reconstitution of Firm. What are the other modes?
❖ Old agreement comes to an end and New Agreement comes into effect.
❖ A new Partner can be admitted with the consent of all the existing Partners. Sec. 31(1).
❖ The New Partner is also known as Incoming Partner. What about old Partners?
NEED of Admission of a Partner: Any guessing?
i) For procuring additional capital for expansion of the business.
ii) For sharing the risk of business.
ii) For acquiring additional managerial skill which is required for the efficient running of business.

EFFECT OF ADMISSION OF A PARTNER:

Rights Acquired by New Partner Consideration Paid

1. Right to Share in Future Profits* 1. Premium for GW (Share of Goodwill)
2. Right to Share in the Assets of the Firm. 2. Capital either in cash or kind*
Accounting Adjustments required at the Admission of a New Partner:

1. Calculation of NPSR & SR. [ Sometimes an old Partner may also gain*]
2. Valuation of Goodwill and its Treatment.
3. Treatment of Accumulated Profits and Losses.
4. Revaluation of Assets and Reassessment of Liabilities.
5. Adjustment of Capitals*
2

Pandav Adjustments*
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 ADJUSTMENT-1- CALCULATION OF NPSR, SR:
1. NPSR: New Profit Sharing Ratio of all the Partners:
▪ Meaning: The RATIO in which All the Partners including the new Partner, share the Future
Profits or Losses of the firm is known as NPSR.
▪ Purpose: When a new partner is admitted, the old Partners SACRIFICE a share of their Profits
in favour of new Partner. So, the Old Profit Sharing Ratio changes and there is the need to
ascertain the New Profit Sharing Ratio.
A has 0,0,0,0,0,0..............................give 0,0 to C, now remain=0,0,0,0
B has 0,0,0,0....................................give 0 to C, now remain=0,0,0
▪ Now, New Shares are: A= 0,0,0,0, B=0,0,0 , C=0,0,0

▪ New Share = Old Share - Share sacrificed, Or, NR=OR+GR, or NR = OR –SR

▪ Share of New Partner = Sum of share acquired from old Partners.[ 00+0=000]
Calculation:
Case (a)
Only New Partner’s share is given:
(When New Partner acquires his share from Old Partners in their Old Ratio)

Suppose A & B are partners with PSR 3:2. C is admitted with 1/4 share in future profits. Find NPSR.
Take Future Profit as.......................................................1. ( 1 means whole)
Deduct share of New Partner(1/4*) from 1 to get Remaining Share, 1-1/4 = 3/4*
Divide the Remaining Share among old Partners in their old share to get their New Share;
A’s New Share= Remaining Share x A’s Old Share, 3/4x 3/5=9/20
B’s New Share= Remaining Share x B’s Old Share, 3/4x 2/5=6/20
Now, make the Denominator of all new ratios Equal* and reduce it to lts
Lowest Form( Why?) to get NPSR:
A.......................................B...............................C
9/20 6/20 1/4
1/4 x 5/5* ? = 5/20
NPSR: 9/20: 6:20:5:20 = 9:6:5, 9+6+5=20, why?
Q. What will be the SR?

Case (b)
Fixed Proportionate Contribution by Old Partners for New Partner:
Situation: When OR and Sacrifice of old partners are given:

Lets understand;
A & B are partners with PSR 3:2. C is admitted as new partner for 3/10 share which he acquired 2/10
th from A and 1/10 th from B.
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 • Write new Partner’s share: C’s share in future profit= 3/10
• Write the shares acquired by new partner from old partners: 2/10 from A, 1/10
from B.
• Find New share of Old Partners by deducting their sacrifice from their old share.
A= 3/5 – 2/10= 4/10, B= 2/5- 1/10= 3/10.
• Make the base Equal to get NPSR: 4/10:3/10:3/10= 4:3:3

Q. What will be the SR?

Case (c)
New Partner’s Share is determined by Old Partners’ Sacrifice:
Situation: When Sacrifices of old partners in favour of new partner are given.( new partner’s
share not given):

Lets understand: A & B are partners with PSR 3:2. C is admitted as new partner, A gives 1/4rth of
his share and B surrenders 1/5th of his share in favour of C.

• Find share of sacrifices of old partners as:

A’s sacrifice share = Old share x Sacrifice ratio= 3/5 x 1/4 =3/20.....S
B’s sacrifice share = Old share x Sacrifice ratio = 2/5 x 1/5 =2/25......S
• Find New Share of Old Partners as: Old Share – Sacrifice Share [OR-SR]
A’s New Share = 3/5 – 3/20= 9/20, B’s New Share =2/5 – 2/25=8/25
• Find the New Partner’s Share* = Sum of Old Partners’ Sacrifices
C’s Share = 3/20 (A)+2/25(B) =15+8/100=23/100
• Find NPSR by making the bases EQUAL:( Taking the LCM*)
9/20..............8/25......................23/100
= 45/100:32/100:23/100 = 45:32:23 .........? 100 TOTAL*
Q. What is the SR? 3/20: 2/25 = 15:8 ?

Case (d)
When one of the Existing Partner Retains [ OR=NR] his Original Share of Profit:
Lets understand:
X,Y and Z are partners with PSR 2:2:1. W is admitted for 1/6 share and Z will retain his Original
share. Calculate NPSR.
Let the Future Profit.........................1.* [when sacrifice of old partners not given]
Find the Total Share of New Partner and Old Partner who retains his share.
1/6 + 1/5 = 11 / 30
Find Remaining Share as: 1 – 11/30 = 19/30, for x and y;
Divide the Remaining Share among Remaining Partner* in their Remaining Old Ratio* (2:2=1:1)?
X..........................19/30 x 1/2= 19/60
Y...........................19/30 x 1/2 =19/60
• Find NPSR by making the bases EQUAL:( Taking the LCM*)
X-19/60: Y-19/60:Z-1/5:W-1/6 That is 19/60:19/60:1/5:1/6
= 19:19:12:10
Q. What is SR? OR-NR*
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 2. SACRIFICING RATIO:
SR is the ratio in which old partners sacrifice part of their share of profits in favour of the New Partner.
SR=OR-NR.
Purpose of calculating SR:

CALCULATION OF SR:
CASE:1: When OR and NPSR given:
Find the difference between = OR-NR.
If the difference is positive, its Sacrifice and if the difference is negative, its Gain! Think how?
Lets understand:
A & B are Partners with PSR 3:2. C is admitted as new partner. The NPSR is 3:2:1.
Find SR.

Partners OR NR Calculations [OR-NR] +SR/-GR

A 3/5 3/6 3/5 – 3/6 = 18- 15 +3/30 ?
30
B 2/5 2/6 2/5 – 2/6 = 12- 10 +2/30 ?
30
C ----? 1/6 00 – 1/6 = 0- 1 -1/6? Gain
6
Now, SR = 3/30 : 2/30 = 3:2
C’s Gain 1/6 =A’s 3/30 + B’s 2/30 Sacrifice ; 1/6 = 3+2 = 5/30 = 1/6
30

CASE 2: When OPSR and New Partner’s Share are given: ( In This Case OR is SR*)
Lets understand:
Suppose A & B are partners with PSR 3:2. C is admitted with 1/4 share in future profits.

• Take Future Profit as.......................................................1.

• Deduct share of New Partner(1/4*) from 1 to get Remaining Share, 1-1/4=3/4*
• Divide the Remaining Share among old Partners in their old share to get their New
Share; A’s New Share= Remaining Share x A’s Old Share, 3/4x3/5=9/20
B’s New Share= Remaining Share x B’s Old Share, 3/4x2/5=6/20
• Now, make the Denominator of all new ratios Equal* and reduce it to lts Lowest
Form( Why?) to get NPSR:
A.......................................B...............................C
9/20 6/20 1/4
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1/4 x 5/5*
 NPSR: 9/20: 6:20:5:20 = 9:6:5, 9+6+5=20, why?
Now find OR-NR to get SR:( OF Old Partners only?)
3/5 – 9/20:2/5-6/20 = 3:2,,,,,,,,,,,that is same as OR!!

CASE 3: WHEN SACRIFICES OF OLD PARTNERS ARE GIVEN:

Lets understand:
A & B are partners with PSR 3:2. C is admitted as new partner, A gives 1/4rth of his share and B
surrenders 1/5th of his share in favour of C.

• Find share of sacrifices of old partners as:

A’s sacrifice share = old share x sacrifice ratio= 3/5 x 1/4 =3/20
B’s sacrifice share = old share x sacrifice ratio = 2/5 x 1/5 =2/25
• Find New Share of Old Partners as: Old Share – Sacrifice Share
A’s New Share = 3/5 – 3/20= 9/20, B’s New Share =2/5 – 2/25=8/25
• Find the New Partner’s Share* = Sum of Old Partners’ Sacrifices
C’s Share = 3/20+2/25=15+8/100=23/100
• Find NPSR by making the bases EQUAL:( Taking the LCM*)
9/20..............8/25......................23/100
= 45/100:32/100:23/100 = 45:32:23
• Now to find SR we have to find the Ratio of Sacrifices* of Old Partners.
SR = 3/20:2/25 = 15/100:8/100 = 15:8, total 23 shares! Now what is the share of C??
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 ADJUSTMENT-2- ACCOUNTING TREATMENT OF GOODWILL:

Concept: We have already discussed methods of Valuation of Goodwill in the Previous Chapter
and Treatment of GW in Change in PSR. In this topic we will use GW as a way of Compensating
Old Partners for their Sacrifice in favour of New Partner. Recall two rights and two payments by
new Partner*. Here, the Amount (price for share in future profit) to be Paid by the New Partner
(GW) is known as Premium For Goodwill. (PfG)
Incoming Partner’s Share of Premium = Firm’s GW x New Partner’s Share.

AS-26: i) As per AS-26, Goodwill is recorded in the books only when some consideration
in money or money’s worth has been paid for it.
ii) So, in the case of Change in PSR, Admission, Retirement or Death, Goodwill
Account cannot be Raised as No Consideration is paid for it! That is internally generated
goodwill shall not be recognised as an asset.
iii) In case of Revaluation Method, GW is raised and immediately Written Off!

Key Points:
I Firm’s GW: i) Given—Fine!
ii) Not Given---a) Asked in the question----Find.
b) Hidden in the question----Find.

II New Partner’s Share of GW: i) Given---Fine!

ii) Not Given--- Find. Remembered how?
III New Partner bringing GW:
i)YES.....a) Cash or Kind:
a.a.) Full Premium:
a.a.a) Paid Privately,
a.a.b) Retained in Business.
a.a.c) Withdrawn.....Full or Part.
a.b) Part Premium:
ii) NO....

IV GW appeared in B/S :.....

a) Appeared: a.a) Write Off, a.b) Revalue and adjust.
b) Not Appeared: Fine!
V Treatment of GW requires calculation of SR. (What if any partner gains?*)
VI Effect on B/S:
a) PfG brought in Cash:
a. a) Paid Privately----No effect.
a. b) Paid in Firm-----*Retained.....Add to Cash/Bank/Asset* (Asset side)
**Withdrawn....Add the amount Brought then
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deduct the amount withdrawn.(Asset Side :B/S)

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 VII* .* When any Old Partner also Gains due to change in PSR, the Firm’s GW is
to be found from New Partner’s Share:
Firm’s GW = New Partner’s Share x Reciprocal* of His Share
(ratio)
Now, Gaining Partner’s Share Of GW = Firm’s GW x GR.*
(In this case, the Old Gaining Partner’s Cap./Current A/c will also be
Debited)

Q. What amount of GW would appear in B/S if the Incoming Partner bring only a part of his
share of PfG?

There are various CASES of Treatment of GW on Admission:

A:WHEN GOODWILL DOES NOT APPEAR IN B/S:
_______________________________________________________________________________
CASE:I. WHEN THE NEW PARTNER BRINGS HIS SHARE OF GW IN CASH:

1. Premium Paid Privately:

It means, the New Partner will pay PfG to Old Partners in cash or kind but it will Not Be
Recorded In Books. That is NO Journal Entry! Think the story?

2. Paid through Firm:

i) Premium brought in Cash: Cash/ Bank A/c..........Dr. ( Added to cash/bank in B/S)
To, Premium for GW A/c ( Assumed as Gain)
............................................................................................................
ii) Transferred to Sacrificing Partners: Premium for GW A/c...Dr. ( Closed)
Any old Partner (Gaining) Cap./Current A/c* Dr.
To, Sacrificing Partners Cap./Current A/c (SR)
( Premium brought in cash is retained in the business)
............................................................................................................
iii)* If Premium is Withdrawn*:
Sacrificing Partners Cap./Current A/c....Dr. ( Amount withdrawn)
To, Cash/Bank ( Deduct from cash/bank in B/S)

CASE:IV. WHEN NEW PARTNER BRINGS GW IN KIND: ( in money’s worth i.e, Assets)

Sundry Assets A/c............Dr. ( assets brought)

To, Sacrificing Partners’ Cap./Current A/c [SR]
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Note*: Assets brought to be shown on Asset side of B/S.

CASE:V. WHEN GOODWILL IS HIDDEN*:

HIDDEN GOODWILL:
Goodwill not shown or mentioned in the question but to be inferred from the 1.Share of New
Partner (Ratio) and the 2. Capital contributed by him.

That is when the Capital brought in by New Partner’s is More Than his Proportionate Capital,
(that is Capital as per his Share) we smell Hidden GW!

STEPS:
1 Calculate Actual Net Worth of Firm including New Partner’s Capital (Excluding
GW)
= (Old Partners’ Capital+ Accumulated Profits – Accumulated Losses - Trade
Investment + New Partner’s Capital )

2 Calculate total New Capital of New Firm on the basis of New Partner’s Capital:
New Capital= New Partner’s Capital X Reciprocal of his Share*

3 Hidden GW= (2-1)

4 New Partner’s share of GW= Hidden GW x his Share.

B) If GW appears in the Book:

i) Compare value of Old GW with Value of New GW.
1 If Old GW> New GW, Find the difference Old GW-New GW (Decrease in GW)
Pass J/E to write off the difference to bring it to its current value:
Old Partners Capital/Current A/c...............Dr. (OR)
To, Goodwill A/c (old-new)
2 If Old GW < New GW, Find the difference New GW-Old GW (Increase in GW)

Pass J/E to Raise the difference to bring it to its current value:

GW A/c..................................................Dr.(new-old)
To, old Partners Capital/Current A/c.
3 OR, If Old GW= New GW, No treatment is required:

In All of the above 3 Cases, GW will be shown in the new B/S at its New Value.*

ii) Alternatively,
a) Write Off Old GW:
All Partners Capital/Current A/c....Dr. (OR)
To, Old Goodwill A/c
b) Find the value of New GW as per the method given.
c) Raise the New GW in the books:
GW A/c...........................................Dr.( full value)
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To, Old Partners Capital/Current A/c. (OR)

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d) Write off New GW from the books:

 All Partners Capital/Current A/c....Dr. (NR*) [ AS-26]
To, Goodwill A/c
Or*, in place of c) & d): Incoming Partner/Gaining Partners Capital A/c.....Dr. (GR)
To, Sacrificing Partners Capital A/c (SR
*. In this ii) case, NO GW will appear in New B/S.

ADJUSTMENT-3:

REVALUATION OF ASSETS AND REASSESSMENT OF LIABILITIES

1. Revaluation of Assets: It refers to Comparing the Realisable or Market Value of Assets with their
Book Value ( BV) to find Profit or loss due to changes ( increase or decrease) in the value of assets if
any!

a) If the Realisable or Market Value is more than Book Value, it means Increase in Assets, Gain!
( The assets are said to be understated so need to be increased)
b) And if Realisable or Market Value is less than the Book Value, it means Decrease in Assets, Loss!
( The assets are said to be overstated so need to be decreased )
* Book Value: The value at which assets and liabilities are shown in the books of accounts
* Realisable Value: The net value at which an asset if sold would realised. (SP-Exp on sale)
* Market Value: The value at which an asset can be sold in the market.

CHANGES in ASSETS
Dr. Increase in Assets (GAIN) Cr. Decrease in Assets (LOSS)
If, RV/MV > BV If, RV/MV < BV
Gain = RV/MV -BV Loss = BV-RV/MV

2. Reassessment of Liabilities: It refers to Comparing the actual liabilities Payable with their Book
Value to find profit or loss due to Changes ( increase or decrease) in the value of liabilities if any!

a) If the Actual Liabilities are more than Book Value, it means Increase in Liability, Loss!
( The liabilities are said to be understated so need to be increased)
b) If the Actual Liabilities are Less Than Book Value, it means Decrease in Liability, Gain!
( The liabilities are said to be overstated so need to be decreased)

CHANGES in LIABILITIES
Dr. Decrease in Liabilities ( GAIN) Cr. Increase in Liabilities (LOSS)
Actual Liability Payable < BV Actual Liability > BV
Gain = BV –Liability Payable Loss = Liability Payable - BV
Thus, the revaluation of assets and reassessment of liabilities are done whenever there is Change in the
Constitution of Firm to know the Net Gain or Loss on account of changes in the book value of assets and
liabilities.
10

The Concept behind this calculation is that the realisable value of assets and liabilities may be different
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from those shown in the balance sheet. It is possible that with the passage of time, value of some
assets/liabilities might have increased while the value of certain other assets/liabilities might have
decreased. Possible or not? So, the effect ( Gain or Loss) of these changes need to be recorded in the
books being different item than previous 3 adjustments. Isn’t it?

That is, the Gain or Loss on revaluation of assets and liabilities belong to the period before Admission
of a Partner and hence must be shared by the Old/Existing Partners in their OPSR.

So that no partner should unnecessarily stand to gain or lose because of changes in value of assets and
liabilities in future.

Q. If this adjustment is not made then what would be the accounting problem?*

There are Two Methods of Treatment of Profit or Loss on Revaluation Of Assets and Liabilities:

1) When Revised Values are to be recorded in the Books: [ A & L will appear in B/S at new value]

In this Method, a Revaluation Account is prepared to find Profit or Loss on revaluation of assets and
Liabilities and after that the assets and liabilities would appeared in B/S at their Revised Value.

Revaluation Account: Revaluation Account is a nominal account prepared at the time of reconstitution
of a firm to find gain or loss on revaluation of assets and reassessment of liabilities.

Transactions Journal Entries: Follow rules of Dr. & Cr.?

1. For increase in Assets: ....Asset A/c.............................Dr. ( for increase)

To, Revaluation A/c ( gain)

2. For unrecorded Asset if any! ....Asset A/c.............................Dr. ( full value*)

To, Revaluation A/c ( gain)

3. For decrease in Assets: Revaluation A/c ......................Dr. (Loss)

To,......Asset A/c ( Decrease)

4. For increase in Liability; Revaluation A/c.......................Dr. (Loss)

To, Liability A/c ( increase)

5. For Unrecorded Liability; Revaluation A/c........................Dr. (Loss)

To, Liability A/c ( full value*)

6. For decrease in Liability; Liability A/c..............................Dr. ( for decrease)

To, Revaluation A/c ( gain)

7. Balance Revaluation Account: Revaluation Account..................Dr. ( Profit transferred)

For Gain on Revaluation: To, All Partners Capital A/c ( Gain )
In OPSR
8.* For Loss on Revaluation: All Partners Capital A/c.............Dr. (decrease in capital)
In OPSR To, Revaluation Account ( transfer of loss)
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Dr. REVALUATION ACCOUNT Cr.

Particulars (Loss) Rs. Particulars (Gain) Rs.

To, Decrease in value of Assets By, Increase in value of Assets X
To, Increase in value of Liabilities By, Decrease in value of Liabilities X
To, Unrecorded Liabilities* By, Decrease in Prov. for DD X
To, Increase in Prov. for DD* By, Unrecorded Assets*
To, Investment (loss>IFR)* By, Investment(Gain=MV>BV)*
To, Gain*transferred to By, Loss transferred to Capital/Current
Capital/Current A/c in OPSR: A/c in OPSR:
A-x A-x
B-x B-x xx
------------ -----

xx xx

Features of Revaluation Account:

1. Its a Nominal Account prepared only on reconstitution of firm.
2. It is debited for Loss.
3. It is credited for Gain.
4. Unrecorded Assets=full value=Gain=Cr.
5. Unrecorded Liabilities=full value=Loss=Dr.

For Preparing Revaluation Account:

1. Revaluation Account is prepared by taking the Amount of Change or Difference/ Increase/Decrease
in the Book Value of Assets and Liabilities. Many students do the mistake by taking the full value
instead of change, mind it*.
2. Compare the Realizable/ Market Value of assets with their Book Value to find the Change, that is
increase or decrease. Increase=MV-BV, Decrease = BV-MV.
3. Compare the Actual Liability Payable with Book Value to find the Change.
4. Increase in Assets and Decrease in Liabilities are Gain so credited to Revaluation A/c.
5. Decrease in Assets and Increase in Liabilities are Loss so debited to Revaluation A/c.
6. ‘Increase to’ means increase by the difference amount. (MV – BV)
7. ‘Decrease to’ means decrease by the amount of difference. ( BV- MV)
8. ‘Increase by’ means increase by the Given Amount.
9. ‘Decrease by’ means decrease by the Given Amount.
10. ‘Depreciated by’ means decrease by the Given Amount.
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11. ‘Appreciated by’ means increase by the Given Amount.

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12. ‘Re-valued at’ means finding the difference between Re-valued Amount given and Book Value to
find increase or decrease. Increase = RV-BV, Decrease = BV- RV.
13. ‘Re-valued at 105%’ means 5% increase.
14. ‘ Re-valued at 95%’ means 5% decrease.
15. Re-valued nil or Valueless means decrease by full value, full loss.
16. “An Asset is undervalued at Rs.5000” means that asset is already written at Rs.5000 Less so, now it
has to be Increased by that amount to bring it to its present value. It is profit.?
17. “An Asset is overvalued by Rs.5,000” means that asset is already recorded at Rs.5,000 More so, now
it is to be Decreased by that amount to bring it to its present value. It is Loss.?
18. . “An Asset is undervalued By 10%” means that asset is already written at 10% Less(90%) so, now
it has to be Increased by that amount. Increase = Given Value x 10/90.* It is profit.? What is actual
Value?
19.“An Asset is overvalued By 10%” means that asset is already recorded at 10% More(110%) so, now
it is to be Decreased by that amount. Decrease = Given Value x 10/110*. What is actual Value? Is it
Loss.?
20.“Provision no longer required”* means decrease in liability or loss, that is increase in that Asset.
21.“Provision for Doubtful debt” is calculated on Gross Value of Debtors.
22. If New Provision on Debtors is more than Old Provision, find the difference and debit it to
Revaluation A/c. It is Loss.
23. If New Provision on Debtors is Less than Old Provision, find the difference and credit it to
Revaluation A/c. It is Profit. Solve a numerical to learn.*
24. Any un-recorded Asset means increase in asset= Profit.
25. Any unrecorded Liability means increase in Liability= Loss.
26. Write off/ Written off means Decrease in asset=LOSS.
27. Liability written back means Decrease in liability=Gain.
28. Any asset NOT likely to arise/realise means Decrease in Asset by the given amount.
29. Any asset Likely to arise means Increase by the given amount.
30. ‘Liability Not likely arise’/ ‘Liability Not to be claimed’ means Decrease in liability.
31.
After the revaluation of Assets and Reassessment of Liabilities, they will appear in Opening B/S at Their
Revised Value, that is New Value. (BV+ Increase or – Decrease)

2. When Assets and Liabilities are NOT to be shown at their Revised Values:
(Gain or Loss on Revaluation to be adjusted through Capital Accounts, Gayatri Entry?)
In this case, we have to methods to deal with this situation:
I) Net Effect Method.
Steps: 1. Find GR/SR.
2. Find Net Gain/Loss.
3. Pass Single J/E?
According Method, the Net Gain or Loss is Found by a Statement form as,
₹
ADD: Increase in Assets & Decrease in Liabilities................x
Unrecorded Assets.......................................................x
----------
X
LESS: Decrease in Assets & Increase in Liabilities.................x
Unrecorded Liability.....................................................x
----------
NET GAIN/LOSS..........X
Then, the Net Gain Or Loss is adjusted through Partners Capital Account by a J/E:
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Gaining Partners Capital/ Current A/c......Dr. (Gain x GR)

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To, Sacrificing Partners Capital/ Current A/c ( Gain x SR)

Q. What will be J/E for Loss?
(Here, you see where and in which condition an Adjustment is made through Capital Accounts.*)
------------------------------------------------------------------------------------------------------------------------------
II) Memorandum Revaluation Account Method. To be discussed if given in syllabus**

ADJUSTMENT-4: TREATMENT OF ACCUMULATED PROFITS & LOSSES:

Meaning: Accumulated Profits refer to the un-appropriated profits of last many years remained
invested in the business under different heads.
They are also known as Undistributed Profits because they were not distributed among partners. They are
also known as Past Profits as they belong to past years.
Q. What are accumulated or undistributed or past losses?

Accumulated Profits (Appeared on Liability Accumulated Losses ( Appeared on Assets

Side) Side)
1. P/L A/c (Cr.) 1. P/L A/c (Dr.)??
2. General Reserve 2. Advertisement Suspense A/c
3.Contingency Reserve 3. Deferred Revenue Expenditure
4. Workmen Compensation Reserve/Fund
(Balance*= WCF-Claim accepted)
5. Investment Fluctuation Reserve (IFR)
(Balance*= IFR- Loss on revaluation of
investment)

There are two methods of treatment of AP&L:

1. Closing the Accumulated Profits and Losses Accounts by transfer to Capital/ Current Accounts
in OPSR: ( Not to Appear in New B/S)

This method is used when there is no information as to the method of their treatment.
a) Journal Entry (closing entry?) For closing Accumulated Profits:
1. P/L A/c (Cr.)...................................................Dr.
2. General Reserve A/c.......................................Dr.
3.Contingency Reserve A/c.................................Dr.
4. Workmen Compensation Reserve/Fund A/c...Dr.
(Balance*= WCF-Claim accepted)
5. Investment Fluctuation Reserve A/c...............Dr.
(Balance*= IFR- Loss on revaluation of investment)
To, Old Partners Capital/ Current Accounts (OR?) Why?
Note:
1. Employee Provident Fund is a Liability, not to be transferred Capital Accounts. ??
2. After their closing, these accounts will not appear in opening B/S*.
(except the amount of claim on WCF)
3. OR is used as they belong to past years, earned before reconstitution.
4. WCF means a reserve created out of firm’s profit to meet likely liability
for payment of compensation to employees in case of accidents etc.

4.1) If there is no claims on WCF, full value would be transferred to capital accounts.
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4.2) In case of any claim by workers due to injury etc. the claim payable
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is a Liability* hence will appear on the Liability side of B/S.

 4.3) Journal entry: WCF A/c......................................Dr.
To, Claims Payable* [ L- Side of New B/S]
To, Old Partners Capital A/c [ OR]
5. Investment Fluctuation Reserve (IFR) means a reserve created out of profit
to meet the difference (loss due to Fall in Market Price) between Book Value
and Market Value of Investments.
There are 5 situations:

5.1 When BV and MV of Investment is same: [BV=MV]

IFR A/c.............................................Dr. (with value given in B/S)
To, Old Partners Capital/Current Accounts
5.2 When MV is More Than BV: [MV>BV]
i) IFR A/c appeared in B/S is closed:
IFR A/c...........................................Dr. (with value given in B/S)
To, Old Partners Capital/Current Accounts
ii) For profit on revaluation of Investment.
Investment A/c................................Dr. (MV-BV)
To, Revaluation A/c [ Gain]
iii) For Gain on revaluation of Investment transferred to Capital A/cs:
Revaluation A/c...............................Dr.
To, Old Partners Capital/Current Accounts
5.3 When Fall in Market Value (Loss) of Investment is Less Than IFR: (IFR>Loss)
IFR A/c............................................Dr.
To, Investment A/c ( for loss adjusted against IFR)
To, Old Partners Capital/ Current A/cs ( Balance in IFR)*
5.4 When Fall in Market Value (Loss) of Investment is Equal to IFR: (IFR=Loss)
IFR A/c............................................Dr.
To, Investment A/c ( Balance in IFR)
5.5 When Fall in Market Value (Loss) of Investment is More Than IFR: (IFR<Loss)
i) IFR A/c......................................Dr.
Revaluation A/c...........................Dr. ( Loss – IFR)
To, Investment A/c ( Loss= BV-MV)
ii) Partners Capital/ Current A/c.....Dr.
Revaluation A/c...........................?

b) Journal Entries For Closing Accumulated Losses:

Partners Capital/ Current A/c.....Dr. ( Dr. decrease capital)
To, P&L A/c
To, Deferred Revenue Expenditure A/c ( Cr. Closing of expenses)
To, Advertisement Suspense A/c
Q. Now, after these entries, where will the above AP&L accounts appear?*

2. Not To Close AP&L Accounts/ Not To Be Transferred To Capital A/c / Remain

Unaltered/Adjusted Through Capital Accounts:
This method is followed only when the question uses the above phrases.*
The significance of this method is that the all accumulated profits and losses accounts would not be
closed, they would remain appeared in new B/S at their BV.*
What is to be done then?
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Because they are not to be closed so, no J/E are required to be passed for that.
In this case, the net of Profits and Losses is found and to be adjusted through Capital Accounts without
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altering the BV of these accounts.

Steps: 1. Find GR/SR. 2. Find Net Effect. 3. Find each Partner’s share as NE x GR or SR
4. Pass Gayatri Entry
The Net Effect ( Accumulated Profits – Accumulated Losses ) is found and adjusted through Capital
Accounts through Gayatri Entry?? !!.......try to understand the logic!

Accumulated profits & Losses ₹

ADD: 1. P/L A/c (Cr.)...................................................... x

2. General Reserve A/c.............................................. x
3.Contingency Reserve A/c..................................... x
4. Workmen Compensation Reserve/Fund A/c......... x
(Balance*= WCF-Claim accepted)
5. Investment Fluctuation Reserve A/c.................. x
6. Sometimes**
Goodwill?...................................
(Balance*= IFR- Loss on revaluation of investment)
Total accumulated Profits.................................. XX
LESS: 1.P&L A/c (Dr.).................................................- x
2. Deferred Revenue Expenditure.....................- x
3. Advertisement Suspense A/c.........................- x
= NET EFFECT [Profits –Losses] XX
Gayatri Entry for adjusting the Net Effect through Capital Accounts:
Gaining Partners Capital/ Current A/c......................Dr. OR Vice-Versa For?
To, Sacrificing Partners’ Capital/Current A/c

Common Mistake*. Students forget to show these itmes in B/S.

ADJUSTMENT-5: ADJUSTMENT OF CAPITAL

Whenever there is Reconstitution there arise changes in the relations among partners as well as changes
required in the Books of Accounts. PSR changes, Value of assets liabilities change, balance in capitals
change etc. isn’t it? So, when a partner is admitted, the incoming partner brings in Capital in proportion
to his share. This necessitates (sometimes*) all partners capital should be in proportion to share of profit,
that is NPSR! Think why?
There are TWO CASES of adjustment in capital:

CASE.1. CALCULATION OF NEW PARTNER’S CAPITAL ON THE BASIS OF OLD

PARTNERS CAPITALS. (When New Partner’s Capital is NOT given*)

Steps: 1. Calculate Adjusted Closing Capital of EACH Old Partner (After all adjustments*).
It can be calculated through Capital Accounts or through working notes;
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( Opening Bal+ Accumulated Profit- Accumulated Loss+ Share of GW-Old GW w/off*

+/- Gain/Loss on Revaluation)
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Steps: 2. Calculate Total Adjusted Capitals of New Firm( Of All Old Partners).
i) Add Adjusted Capital of all Old Partners to get Combined Adjusted Capital.
ii) Find Total Capital of New Firm = Combined Adjusted Capitals x Reciprocal of Old
Partners Share in NPSR.
Step:3. Calculate Proportionate capital of New Partner as under:
New Partner’s Capital = Total Capital of New Firm x New Partner’s Share
Solve few problems to understand its working. What is the J/E for new partner’s capital?

Example: A and B are partners with PSR 3:2. Their capitals are Rs.3,00,000 and Rs.2,00,000. P&L A/c
balance Rs.50,000. C is admitted for 1/6 share of future profits. How much C should bring as capital?
Solution: In this case, NPSR= 3:2:1 check!
Step.1: Calculation adjusted closing capitals of A & B:
A: 3,00,000+30,000= Rs.3,30,000
B:2,00,000+20,000= Rs.2,20,000
Step.2: Calculation of Total adjusted capital of New Firm:
i) 3,30,000+2,20,000= Rs.5,50,000
ii) Rs.5,50,000 x 6/5 =Rs.6,60,000. ( total shares 6 out of which 5 shares belong to old
partners)
Step.3: Calculation of C’s share of capital:
Rs.6,60,000 x 1/6 = Rs.1,10,000
Alternatively, 5,50,000 x 6/5 x 1/6 = Rs.1,10,000*

CASE.2. Adjustment Of Old Partners’ Capitals On The Basis Of New Partner’s Capital:
( When New Partner’s Capital is given)

Step: 1. Calculate Total Capital of New Firm:

New Partner’s Capital x Reciprocal of his Share.
Step: 2. Calculate New Capitals of Old Partners:
Total Capital of New Firm x Old Partners Share (individually)
Step: 3. Calculate Adjusted Closing Capitals Of Old Partners Individually:
It can be calculated through Capital Accounts or through working notes;
( Opening Bal+ Accumulated Profit- Accumulated Loss+ Share of GW-Old GW w/off*
+/- Gain/Loss on Revaluation)
Step: 4. Calculate Surplus or Deficit for each of Old Partners:
Adjusted Closing Capital (Step-3) – New Capital (Step-2)
Journal Entry For Adjusting Surplus/Deficit:
i) In case of Deficit (New Capital > Old Capital):
Cash/ Bank or Current A/c*........Dr. (Asset Side*)
To, Partners Capital
ii) In case of Surplus ( New Capital< Old Capital)
Partners Capital..........................Dr. ( Withdrawal)
To, Cash/Bank or Current ( Cash/ Bank to be reduced, Current A/c: L-Side)
(Remember: Current Account is opened if adjustment is not to be made through Cash/Bank, that is if
nothing is mentioned surplus or deficiency should be adjusted through cash and not current account*)

Example: A and B are partners with PSR 3:2. Their capitals are Rs.3,00,000 and Rs.2,00,000. P&L A/c
balance Rs.50,000. C is admitted for 1/6 share of future profits for which he brings Rs.1,20,000. The
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partners decided to maintain capital in proportion to NPSR. The surplus or deficit to be transferred to
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Current A/c.
Solution: NPSR = 3:2:1?
Step.1: Calculation of Total Capital of New Firm:
Rs.1,20,000 x 6/1 = Rs.7,20,000.
Step.2: Calculation of New Capital of Old Partners:
A----Rs.7,20,000 x 3/6 = Rs.3,60,000
B----Rs.7,20,000 x 2/6 = Rs. 2,40,000
Step.3: Calculation of Adjusted Capital of Old Partners:
A--- Rs.3,00,000 + 30,000 = 3,30,000
B----Rs.2,00,000 + 20,000 = 2,20,000
Step.4: Comparing Old and New Capitals of Old Partners to find Surplus/ Deficit:
A: Rs.3,60,000 – 3,30,000 = Rs. 30,000 -----Deficit.
B: Rs.2,40,000 – 2,20,000 = Rs.20,000-------Deficit.
Journal Entry: A’s Current A/c.*...............Dr.30,000
B’s Current A/c*------------ Dr.20,000
To, A’s Capital 30,000
To, B’s Capital 20,000

Note: This an important adjustment of Admission. So practice well as it may come in Long Questions.

JOURNAL ENTRIES # ADMISSION OF A PARTNER

SN Transactions
1 Capital brought in by New
Partner
2 Old G/W if any written off
3 Premium Paid Privately
4 For Premium:
1. Full Premium brought in cash
or kind by New Partner.
Entry Dr. Cr.
Cash/Bank/Assets* Account............Dr.
To, New Partner’s Capital A/c
Old Partners Capital A/c..................Dr.
To, Goodwill Account.
No Entry
1.Cash/Bank/Assets Account...........Dr.
To, Premium For Goodwill A/c

2. If Premium is not brought. 2.New Partner’s Current Account....Dr.

3. If Premium is partly brought
5 Premium transferred to
Sacrificing Partner’s Capital
6 Goodwill Raised and then
To, Premium For Goodwill A/c
3. Cash/ Bank Account ..................Dr.*
New Partner’s Current Account Dr.*
To, Premium For Goodwill A/c
Premium for Goodwill Account....Dr.
To, Sacrificing Partners Capital A/c
Goodwill Account (full value).......Dr.
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written off. To, Old Partners Capital A/c(OR)

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OR, All Partners Capital Account(NR) Dr.


Premium for GW adjusted
Through Capital Accounts
7 Premium for GW withdrawn by
sacrificing Partners*
8 Increase in Assets/
Unrecorded assets
9 Decrease in Assets
10 Increase in Liabilities/
Unrecorded Liability
11 Decrease in Liability
12 Gain on Revaluation
13 Loss on Revaluation
OR,
Memorandum Revaluation
Account/ Without altering book
values*
14 Sharing undistributed profits
15 For undistributed losses
OR, Without closing
accumulated Profits/Losses
Account*
16 To adjust (Deficit) in Capital of
Remaining Partners to make their
Capital in NPSR
17 To adjust (Surplus) in capitals of
Remaining Partners to make their
Capital in NPSR
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NARAYAN AGRAWAL,PGT
KORIYA
E&OE.
To, Goodwill Account
New Partner’s Current Account...Dr.
Gaining Partners Capital Account Dr.*
To, Sacrificing Partners Capital A/c
Sacrificing Partners Capital A/c ....Dr.
To, Cash/ bank Account
..................Assets Account.............Dr.
To, Revaluation Account
Revaluation Account........................Dr.
To,..............Assets Account
Revaluation Account........................Dr.
To,..............Liability Account
..............Liability Account.............Dr.
To, Revaluation Account
Revaluation Account........................Dr.
To, Old Partners Capital Account
Old Partners Capital A/c..................Dr.
To, Revaluation Account
OR, Net of Gain and Loss adjusted
Through Capital Accounts:
New Partner’s Capital Account....Dr.
Gaining Partners Capital A/c........Dr.*
To, Sacrificing Partner’s Capital A/c
P/L Account.................................... Dr.
General Reserve Account................Dr.
WCF*............................................ ..Dr.
IFR*.................................................Dr.
To, Old Partners Capital Account
Old Partners Capital Account..........Dr.
To, Deferred Revenue Expenditure
To, Advertisement Suspense A/c
To, P/L Account
OR, Net of Gain and Loss adjusted
Through Capital Accounts:
Gaining Partners Capital A/c............Dr.
To, Retiring Partner’s Capital A/c
To, Sacrificing Partner’s Capital A/c*
Cash /Bank /Current Account..........Dr.
To, Remaining Partners Capital A/c
Remaining Partners* Capital A/c....Dr.
To, Cash/ bank/Current A/c
DAV PANDAVPARA 9827943131
CHHATTISGARH
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NARAYAN AGRAWAL

PGT COMMERCE

DAV PANDAVPARA,KORIYA, CG August 01,2020.

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