Admission of a Partner - Important Factors, FAQs

Admission of a Partner: When a company seeks extra capital or managerial support, or both, to expand its operations, it may opt to bring in a new partner to supplement its existing resources. According to the Partnership Act 1932, the admission of a partner will be with the consent of all existing partners unless otherwise. On admission of a partner, the partnership is reconstituted and a new contract for business becomes formulated.

Important Factors in the Admission of a Partner

1. New profit sharing ratio;
2. Sacrificing ratio;
3. Valuation and adjustment of goodwill;
4. Revaluation of assets and Reassessment of liabilities;
5. Distribution of accumulated profits (reserves); and
6. Adjustment of partners’ capitals

Need for Admission of a Partner

• The need for bringing in a new partner in an established partnership or company can be credited to several factors:
• Primary Requirement for Expansion Funding: The primary reason is the demand for extra funds to enable business growth.
• Need for Expertise: If there is a need for a skilled and well-trained person to improve the productivity of the business processes.
• Enhancing kindness: When there is a desire to boost the company's kindness by connecting with a reliable and well-known business figure.

New Profit Sharing Ratio in Admission of a Partner

• Upon the admission of a partner, he secures a portion of profits previously belonging to the old partners.
• The entry of a new partner implies a relinquishment of profit share by the old partners in favor of the newcomer.

• The specifics of the new partner's share and the method of acquisition from existing partners are mutually agreed upon by both old and new partners.
• If no explicit agreement is in place, it is presumed that the new partner obtains his share based on the existing profit sharing ratio of the old partners.

• Regardless of the method chosen for the new partner's profit share acquisition, the admission of a partner results in a modification of the profit sharing ratio among the old partners.
• The adjustment considers the respective contributions of the old partners to the profit sharing ratio of the incoming partner.

• It becomes essential to establish a new profit sharing ratio among all partners to reflect the changes resulting from the admission of the new partner.
• The determination of the new ratio depends on the agreed-upon method through which the new partner acquires his share from the existing partners, allowing for various possibilities.

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Sacrificing Ratio in Admission of a Partner

Revaluation of assets and Reassessment of liabilities in Admission of a Partner

• It is advisable to assess the accuracy of the assets' values recorded in the books during the admission of a partner.
• If assets are found to be either overstated or understated, a revaluation is conducted.
• Similarly, a reassessment of liabilities is undertaken to ensure their accurate representation in the books.
• Unrecorded assets and liabilities, if identified, need to be incorporated into the firm's books.
• To facilitate these adjustments, the firm creates a Revaluation Account.
• The gains or losses resulting from the revaluation of each asset and liability are recorded in the Revaluation Account.
• Subsequently, the balance of the Revaluation Account is transferred to the capital accounts of the old partners based on their original profit sharing ratio.

Adjustment of Partner’s Capital in Admission of a Partner

• Partners, during admission, may decide to align their capitals in accordance with their profit sharing ratios.
• In such cases, if the new partner's capital is provided, it serves as the foundation for determining the adjusted capitals of the existing partners.
• The ascertained capitals are compared with the partners' old capitals after considering adjustments for factors like goodwill, reserves, and revaluation of assets and liabilities.
• Should a partner's capital fall short in comparison, that partner is responsible for injecting the necessary funds to address the deficit.
• Conversely, if a partner has a surplus in their capital, they are entitled to withdraw the excess amount, contributing to a balanced capital structure among the partners.