Isc Accounts Partnership Accounts Admission Of Partner

Rohit Agarwal 9883248954

Chapter 8 : Admission of Partner Section 1: New Profit Sharing Ratio The ratio in which all partners (including the incoming partner) share the future profits and losses is known as the new profit sharing ratio. The ratio in which the old partners have agreed to sacrifice their shares in profit in favour of a new partner is called the sacrificing ratio. This ratio is calculated by taking out the difference between old profit share and new profit share. Unless agreed otherwise it is presumed that the new partner acquires his share in profits from the old partners in their old profit sharing ratio and the old partners continue to share the remaining profit in the old ratio. Example 1: A and B are partner sharing profits in the ratio of 3:2. They admit C as a new Partner. Calculate sacrificing ratio and new profit sharing ratio in the following cases: 1. If C is admitted for 3/10th share. 2. If C is admitted for 3/10th share, which he acquires from A. 3. If C is admitted for 3/10th share, which he acquires from B. 4. If C is admitted for 3/10th share, which he acquires from A & B in the ratio 2:1. 5. If C acquires his share1/5th from A and 1/10th from B 6. If A surrenders 1/3rdof his share and B surrenders 1/10th from his share. 7. If they decide to share future profits in the ratio 4:3:3. 8. If C is admitted for 3/10th share, and A and B decide to share the future profits in the ratio 4:3. 9. If C is admitted for 3/10th share, and C acquires3/10th of his share from A. 10. If they decide to share future profits in the ratio 2:5:3. Section 2: Adjustment of Goodwill When the existing partners of a firm decide to admit a new partner, the new partner will gain in future profits while others will lose. The new partner who gains by acquiring a right to share future profits must compensate the partners who have made the sacrifice. The amount of compensation should be equal to the proportionate amount of firm’s goodwill. Recommendation of AS10 (Para 36) Only purchased goodwill should be recorded in the books. Thus, in case of reconstitution of firm, goodwill cannot be raised in the books of the firm. Apart from this even if goodwill is raised for some purpose, it should be immediately written off. Accounting Treatment: There can be basically two way of dealing with this step. The first method is of making the adjustment through Premium for Goodwill Account: 1. For capital brought in cash by new partner: Bank Account Dr. To New Partner’s Capital Account 2.For Premium to be brought by the new partner: Bank Account Dr. [Premium brought in Cash] New Partner’s Capital Account Dr. [Premium not brought] New Partner’s Capital Account Dr. [Premium not brought] New Partner’s Loan Account Dr. [Premium not brought temporarily] To Premium for Goodwill Account [Amount of Premium] 3.For sharing of Premium for Goodwill: Premium for Goodwill Account Dr. To Old Partner’s Capital Accounts [in sacrificing ratio] 4.Withdrawal of Premium money: Old Partner’s Capital Accounts Dr. To Bank Account

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Rohit Agarwal 9883248954 Note:• When the incoming partner pays his share of Firm’s Goodwill privately, no entry is passed in the books of the firm. • If the new partner is bringing his personal goodwill, then such goodwill has to be immediately written off in the new ratio. • When the value of the goodwill of the firm is not specifically given in the problem, the value of such hidden goodwill has to be calculated in the following steps: 1. Total Capital = Incoming Partner’s Capital / Incoming Partner’s Share 2. Actual Capital = Sum of capitals of all the partners, including the new partner. 3. Goodwill = Total Capital – Actual Capital The second method is of making the adjustment through Goodwill Account, by raising and writing off goodwill. In this method, the whole of the amount brought by the new partner is credited to his capital account and then goodwill is raised at its full value by crediting the old partners’ capital accounts in old ratio and immediately it is written off by debiting all the partners’ in new ratio. The entries for this are: 1. For amount brought in cash by new partner: Bank Account Dr. [Amount brought by Partner] To New Partner’s Capital Account 2. For raising goodwill in old ratio: Goodwill Account Dr. To Old Partner’s Capital Accounts [in old ratio] 3. For writing off Goodwill in new ratio: All Partner’s Capital Accounts [in new ratio] To Goodwill Account Steps for solving problems: Step 1: Prepare Revaluation Account and transfer the profit or loss on Revaluation Account to the Partners’ Capital Account. • At the time of admission of a partner, the assets and liabilities are revalued so that the profit or loss on such revaluation may be ascertained and adjusted in the Old Partners’ capital account, since it belongs to old partners and not to the new partner. ¾For Increase in Value of Assets: ¾For Decrease in Value of Assets: Assets A/c Dr. Revaluation A/c Dr. To Revaluation A/c To Assets A/c ¾ For Decrease in Value of Liabilities: ¾ For Increase in Value of Liabilities Liabilities A/c Dr. Revaluation A/c Dr. To Revaluation A/c To Liabilities A/c • Revaluation account (or Profit & Loss Adjustment Account) is a nominal account, prepared to ascertain the profit or loss arising out of revaluation of assets and liabilities. • It is credited with increase in value of assets and decrease in value of liabilities and debited with any decrease in assets and increase in liabilities. • Unrecorded assets are recorded through this account as increase in assets. Unrecorded liabilities are recorded through this account as increase in liabilities. • The balance of this account shows the profit or loss arising out of revaluation of assets and liabilities, which is transferred to the Partners’ Capital Account in their old profit sharing ratio. Step 2: Transfer Reserves, Accumulated Profit/Losses and goodwill appearing in the balance sheet to the Partners’ Capital Account. • This is done because the Accumulated Profit/Losses and goodwill appearing in the balance sheet belong to the old partners and not to the new partner. ¾ For Transfer of Reserves and Accumulated Profits: Reserve A/c Dr. P & L A/c Dr. Workmen Compensation Reserve A/c Dr. [Excess of Reserve over actual liability] Investment Fluctuation Reserve A/c Dr.

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Rohit Agarwal 9883248954 Joint Life Policy Reserve A/c Dr. To Old Partners’ Capital (or Current) A/c (in old profit sharing ratio) ¾ For Transfer of Accumulated Losses and goodwill: Old Partners’ Capital (or Current) A/c (in old profit sharing ratio) Dr. To Goodwill A/c To Profit & Loss A/c To Deferred Revenue Expenditure A/c Step 3: Make entry for capital brought in by the incoming partner along with the adjustment of premium for goodwill. As discussed earlier. Step 4: Make adjustment of capital, if required by the problem. Situation 1: Adjusting the capitals of on the basis of the capital of Incoming Partner. • Calculate Total Capital = New partner’s Capital / Incoming Partner’s Share • Calculate new capitals of old partners = Total capital X Their respective share. • Calculate the adjusted capitals of partners from Partners’ Capital Account. • Find the difference between them and make the adjustment entry.[Refer Copy for details] Situation 2: Adjusting the capitals of on the basis of the combined capital of Partners. • Calculate the adjusted capitals of partners from Partners’ Capital Account. • Calculate the Total capital by adding them up. • Calculate new capitals of old partners = Total capital X Their respective share. • Find the difference between them and make the adjustment entry.[Refer Copy for details] Step 5: Prepare Bank Account & Revised Balance sheet of the firm. • When Revaluation Account is prepared the assets and liabilities appear in the Balance Sheet of new firm at their revised figures Memorandum Revaluation Method A Memorandum Revaluation Account is a nominal account prepared when the partners decide that the revised figures of assets and liabilities are not to be shown in the new Balance sheet. This account is prepared in two parts. The first part is exactly same as normal revaluation account. In second part, reverse entries are passed to complete the double entry and the balance is transferred to all partners’ capital account in new ratio. 1. What is hidden goodwill and how it is calculated? [ISC 2004] 2. Under what circumstances premium for goodwill paid by the incoming partner would never be recorded in the books of account? [ISC 2003, 06 ] 3. State any four factors upon which the value of goodwill depends. [ISC 2001] 4. Why are assets and liabilities revalued at the time of admission of partner? [ISC 2001] 5. Mention the accounting treatment required when the incoming partner brings personal goodwill into the business. [ISC 2000] 6. What do you mean by memorandum revaluation account? How it is prepared? [ISC 1998] 7. Why is general reserve distributed amongst old partners before a new partner is admitted? [ISC 1997] 8. Why is goodwill sometimes recorded in the books and immediately written off? [ISC 1995, 08]

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