Admission of a partner leads to many changes in the partnership business. Here are the admission of a partner class 12 notes.
Topics Discussed
Calculation of New Profit Sharing Ratio
New Ratio = Old Ratio – Sacrificing Ratio
Sacrificing Ratio = Old Ratio – New Ratio
Gaining Ratio = New Ratio – Old Ratio
Accounting Treatment of Goodwill
- When the amount of premium of goodwill is paid privately: No Entry
- When the amount of premium for goodwill is brought by the new partner in cash:
Cash A/c Dr.
To Premium for Goodwill A/c
Premium for Goodwill A/c Dr.
To Sacrificing Partner’s Capital A/c
If the premium of goodwill is withdrawn:
Partner’s Capital A/c Dr.
To Cash A/c - When a new partner is not able to bring a premium in cash:
C’s Current A/c Dr.
To A’s Capital A/c
To B’s Capital A/c
Note: If there is any already existing goodwill it is to be written off immediately.
Old Partner’s Capital A/c Dr.
To Goodwill A/c
Reserves and Accumulated Profit/Loss
| It should be distributed among all partners in their old ratio (unless otherwise specified). The entry will be: Accumulated Profit/Reserve A/c Dr. To Old Partners Capital/Current A/c (in old ratio) | If partners do not want to distribute then the entry will be: Gaining Partner’s Capital/Current A/c Dr. To Sacrificing Partner’s Capital A/c |
| In case of loss reverse entry is passed. | In case of loss reverse entry will be passed. |
Note: The profits that have been accumulated over the years and have not been credited to the partner’s capital/current A/c are called accumulated profits.
The losses that have not been debited to the partner’s capital/current A/c are called accumulated losses.
Revaluation A/c
Revaluation A/c is prepared to ascertain the profit or loss on revaluation of assets and liabilities at the time of reconstitution of the firm.
Nature of Revaluation A/c: Nominal A/c
| Revaluation A/c Debited with | Revaluation A/c Credited with |
| Decrease in Value of Assets Increase in Value of Liabilities Recording Unrecorded Liabilities Payment of Unrecorded Liabilities | Increase in Value of Assets Decrease in Value of Liabilities Recording Unrecorded Assets Sale of Unrecorded Assets |
| Revaluation A/c Dr. To Decrease the value of assets To Increase the value of liabilities To Unrecorded Liabilities To Cash/Bank A/c | Increase in the value of assets Dr. Decrease in the value of liabilities Dr. Unrecorded Assets Dr. Cash/Bank A/c Dr. To Revaluation A/c |
Distribute the profit/loss between old partners in their old profit-sharing ratio.
In case of Profit:
Revaluation A/c Dr.
To Old Partner’s Capital/Current A/c (Old Ratio)
In case of Loss:
Old Partner’s Capital/Current A/c Dr.
To Revaluation A/c (Old Ratio)
Fundamentals of a Partnership Class 12 Notes
Adjustment of Capitals
Method 1: Calculation of new or incoming partner’s capital based on the old partner’s capital
Step 1: Calculate the total capital of the new firm as follows:
Combined adjusted capitals of old partners * Reciprocal of remaining profit share of old partners
Step 2: Calculate the proportionate capital of the new partner as follows:
Total Capital of the new firm * New partner’s proportion of share of profit
Method 2: Adjustment of the old partner’s capital based on the new partner’s capital
Step 1: Calculate the total capital of the new firm as follows:
New Partner’s Capital * Reciprocal of the proportion of the share of profit of a new partner
Step 2: Calculate the new capital of old partners by dividing the total capital by their new profit-sharing ratio.
Step 3: Calculate the surplus/deficiency in each of the old partners’ capital accounts by comparing the new capital with their adjusted old capital, which is adjusted through cash A/c or is transferred to their current A/c.
Hidden Goodwill
Hidden goodwill is the excess of the desired capital of the firm based on a new partner over the actual combined capital of partners including new partners.
Hidden Goodwill = Desired total capital of the new firm – Capital of all partners
Desired total capital of the new firm = New partner’s capital * Reciprocal of his share
Capital of all partners = Adjusted capital of old partners + Capital of a new partner
Adjusted capital means capital of old partners after adjustments like accumulated profit/loss & reserves, fictitious assets, revaluation effects, etc.
Important Notes
- The amount of general reserve and accumulated profits are transferred to the capital or current accounts of existing partners in their old ratio.
- The accumulated losses are written off from the capital or current A/c of existing partners in their old ratio.
- Specific funds like workmen compensation fund, investment fluctuation fund, etc. more than actual obligation, the surplus amount is transferred to the capital A/c of existing partners in their old ratio, and the deficit, if any, is debited to revaluation A/c.
- Some reserves are never distributed between partners like employees’ provident fund, employees saving A/c, provision for taxation reserve and provision for depreciation, etc.