Class 12 Accountancy Chapter 2: Reconstitution of a Partnership Firm – Admission of a Partner

When a new partner joins a firm, how do you calculate the revised profit-sharing ratio, compensate existing partners for their sacrifice and adjust the firm’s assets and liabilities? These adjustments must be recorded correctly so that the incoming partner receives the agreed share of future profits without being unfairly affected by gains or losses arising before admission.

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Profit-Sharing Ratio and Sacrificing Ratio

New profit-sharing ratio: the ratio in which all partners, including the new one, share future profits and losses.

New Share of an old partner = Old Share − Share Sacrificed

Sacrificing ratio: the ratio in which old partners give up part of their share to the new partner.

Sacrificing Share = Old Share − New Share

The new partner may get their share from the old partners in the old ratio, in a specified ratio, or in some other agreed way. The sacrificing ratio matters because it decides how goodwill compensation is divided.

Example: Anil and Vishal share profits 3:2. They admit Sumit for a 1/5 share, taken from them in their old ratio.

• Remaining share = 1 − 1/5 = 4/5

• Anil’s new share = 4/5 × 3/5 = 12/25

• Vishal’s new share = 4/5 × 2/5 = 8/25

• Sumit’s share = 1/5 = 5/25

New ratio: Anil : Vishal : Sumit = 12 : 8 : 5

If the share is taken in a different ratio, first work out each old partner’s sacrifice from the agreement, then find the new ratio.

Goodwill on Admission

Goodwill is an intangible asset. It reflects the firm’s reputation and advantages such as a good location, efficient management and a loyal customer base. The incoming partner pays for a share in this value, called the premium for goodwill.

1. Premium brought in cash through the firm

Bank A/c ... Dr.
To Premium for Goodwill A/c
(Premium received from the incoming partner)

Premium for Goodwill A/c ... Dr.
To Sacrificing Partners’ Capital A/cs
(Premium shared in the sacrificing ratio)

2. Goodwill paid privately: The new partner pays the old partners directly, outside the firm. No entry is made in the firm’s books.

3. Premium not brought in cash: The amount due is adjusted through the new partner’s capital or current account and credited to the sacrificing partners in their sacrificing ratio.

4. Existing goodwill in the Balance Sheet: It is written off among the old partners in their old ratio, as per the agreed treatment.

Methods of Valuing Goodwill

Average Profit Method
Average Profit = Total Profits ÷ Number of Years
Goodwill = Average Profit × Years’ Purchase

Super Profit Method
Normal Profit = Capital Employed × (Normal Rate of Return ÷ 100)
Super Profit = Average Profit − Normal Profit
Goodwill = Super Profit × Years’ Purchase

Take the number of years’ purchase and all other figures from the question.

Hidden Goodwill

Hidden goodwill is the goodwill implied by the new partner’s capital and share when goodwill is not stated separately.

1. Implied Total Capital = New Partner’s Capital ÷ New Partner’s Share

2. Find the combined capital of all partners after the relevant adjustments.

3. Hidden Goodwill = Implied Total Capital − Adjusted Combined Capital

Revaluation of Assets and Liabilities

At admission, assets and liabilities are restated at their agreed values through a Revaluation Account. Any profit or loss belongs to the old partners, because it arose before the new partner joined.

Rules for the Revaluation Account:

• Increase in an asset: credit

• Decrease in an asset: debit

• Increase in a liability: debit

• Decrease in a liability: credit

• Unrecorded asset: generally credit

• Unrecorded liability: generally debit

Journal entries:

Increase in asset: Asset A/c Dr. To Revaluation A/c
Decrease in asset: Revaluation A/c Dr. To Asset A/c
Increase in liability: Revaluation A/c Dr. To Liability A/c
Decrease in liability: Liability A/c Dr. To Revaluation A/c

Transferring the result:

Profit: Revaluation A/c Dr. To Old Partners’ Capital A/cs
Loss: Old Partners’ Capital A/cs Dr. To Revaluation A/c

Always distribute the result in the old ratio, never the new one.

Reserves and Accumulated Profits or Losses

Reserves and accumulated profits or losses relate to the period before admission. They are transferred to the old partners’ capital accounts in the old ratio.

General Reserve example: Rajinder and Surinder share profits 4:1. General Reserve is Rs.20,000 when Narender is admitted.

• Rajinder’s share = 20,000 × 4/5 = Rs.16,000

• Surinder’s share = 20,000 × 1/5 = Rs.4,000

General Reserve A/c ... Dr. Rs.20,000
To Rajinder’s Capital A/c Rs.16,000
To Surinder’s Capital A/c Rs.4,000

Debit balance of Profit and Loss A/c example: The balance is Rs.10,000 and losses are shared 4:1.

• Rajinder’s share = 10,000 × 4/5 = Rs.8,000

• Surinder’s share = 10,000 × 1/5 = Rs.2,000

Rajinder’s Capital A/c ... Dr. Rs.8,000
Surinder’s Capital A/c ... Dr. Rs.2,000
To Profit and Loss A/c Rs.10,000

If the question names a specific purpose for a reserve (for example, a particular liability), treat it according to that purpose.

Adjustment of Capital Accounts

After goodwill, revaluation and reserves are dealt with, capital balances may need adjusting to match the new arrangement. This can involve:

• Bringing old partners’ capitals in line with the new ratio

• Introducing extra cash where capital falls short

• Withdrawing excess capital, if the agreement allows

• Recording the new partner’s agreed capital

When the new partner’s capital is the basis:

1. Total Capital = New Partner’s Capital ÷ New Partner’s Share

2. Required Capital of a partner = Total Capital × Partner’s New Share

3. Find each old partner’s adjusted capital after all earlier adjustments.

4. Compare: if adjusted capital is less than required, the partner brings in cash. If it is more, the partner may withdraw the excess.

The final capital accounts then feed into the revised Balance Sheet.

Admission of a Partner requires you to calculate the new profit-sharing ratio, adjust goodwill and revalue assets and liabilities correctly. PW provides Class 12 Accountancy notes to strengthen your understanding of these concepts, and practise the Admission of a Partner NCERT Solutions to apply the formulas and journal entries to numerical questions. Regular practice will help you avoid common accounting errors and prepare more confidently for your Class 12 Accountancy board examinations.