Accounts Class 12th ( Ch 3 Admission Of a New Partner )

Accounts ( Ch 3 Admission Of a New Partner )

Meaning = Admission of a New Partner means a new partner being admitted in a firm . It is also a mode of Reconstitution of the Partnership Firm .

According to Section 31 of the Indian Partnership Act 1932 = A new Partner shall not be Admitted into the Firm without the consent of all existing Partners .

Rights of a New Partner ⇾

1.) Right to share in Profit of the Firm.

2.) Right to share in the Net Assets ( Assets - Liabilities) of the Firm.

Responsibilities of a New Partner 

1.) Compensation of His/Her share of Goodwill.

2.) His/Her Share of Capital ( Assets - Liabilities )

Adjustments on the Admission of a New Partner - 

1.) To Calculate the New Profit Sharing Ratio.

2.) To Calculate the Sacrificing Ratio.

3.) Accounting Treatment of Goodwill.

4.) Accounting Treatment of Reserves , Accumulated Profit or Loss.

5.) Revaluation of Assets and Reassessment of Liabilities.

6.) Accounting Treatment of Hidden Goodwill.

❇️ New Profit Sharing Ratio ⇾

Meaning - New Profit Sharing is the Ratio in which all Partners including the New or Incoming Partner Share the Future Profit or Loss of the Firm .

✱ A New Partner Brings His/Her Share of Capital

    Cash / Bank / Asset  A/C   Dr.

       To New Partner's Capital A/C 

Their are Two Types Goodwill are :

1.) Purchased Goodwill

2.) Non Purchased Goodwill

Accounting Treatment of Purchased Goodwill on the Admission of a Partner are :

Such Goodwill will be write off among the old Partners in their Old Profit Sharing Ratio .

  Journal Entry :

  Old Partner's Capital A/c Dr.

    To Goodwill A/c

Accounting Treatment of Non-Purchased Goodwill on the Admission of a Partner are :

A New Partner brings His/Her Share of Goodwill in the following ways ;

1.) When Partner brings Cash Privately( Out of Business )

       

  Journal Entry = No Entry Takes place in the books of Partnership Firm.

2.) When Partner brings his share of Goodwill in Cash or Kind .

   Journal Entry:

a)  Partner brings his share of Goodwill in Cash or Kind and which is Retained in Business.

     Cash/Bank/Assets A/c  Dr.

       To Premium to Goodwill A/c

b) When Premium to Goodwill A/c Transferred to Sacrificing Partner's Capital A/c.

     Premium to Goodwill A/c Dr.

       To  Sacrificing Partner's Capital/Current A/c.

        ( In their Sacrificing Ratio )

c) When Sacrificing Partners want to Withdrawn the Amt. of Goodwill which is bring by the New         Partner .

    Sacrificing Partner's Capital/Current A/c.  Dr.

      To Cash/Bank/Asset  A/c 

3.) When Partner does not Bring his share of Goodwill in Cash or Kind .

     New Partner's Current A/c  Dr.

       To Sacrificing Partner's Capital/Current A/c

          ( In their Sacrificing Ratio )

                        Hidden Goodwill

Hidden Goodwill = Capital of the firm –Sum of all ( Including New ) Partner Capital

 ✱ Capital of the Firm =  New Partner's Capital X Reciprocal of his Share

✱ Sum of all Partner's Capital = Here the Capital of the Partner will be taken after all adjustments.

       Adjustments of Capital Accounts 

1.) When New Partner's Capital is not given

For Example =  A: B
                           3: 2   ,  C = 1/5
C brings his Share of Capital Proportionately A & B's Capital After all adjustments Rs 3,00,000 and Rs 4,00,000 respectively .

Let Total Profit = *( A + B + C ) = 1
           C =  1/5
Remaining Share ( A + B ) = 1/1 - 1/5 = 4/5

A+B's Capital = 3,00,000+4,00,000=7,00,000

Capital of the Firm = 7,00,000 X 5/4 = 8,75,000

C's Share of Capital = 8,75,000 X 1/5= 1,75,000

So, New Partner's Capital is Rs 1,75,000

2.) When Old Partners want to Adjust their Capital on the basis of New Partner's Capital.

For Example =  A: B
                           3: 2   ,  C = 1/5
In Future -  A: B : C
New Ratio  2 : 2 : 1

C brings his Share of Capital Rs 2,00,000 . The Capital of A and B after all Adjustments Rs 4,30,000 and Rs 3,80,000 Respectively . A & B want to adjust their Capital on the basis of C's Share of Capital and his Share of Profit for this actual Cash be Bought or Paid if necessary .

   C's Share of Capital = Rs 2,00,000
   C's Share of Profit = 1/5

Total Capital of the Firm = 2,00,000 X 5/1 = 10,00,000

A's Required Capital = 10,00,000 X 2/5 = 4,00,000

B's Required Capital = 10,00,000 X 2/5 = 4,00,000
So,
   A's Capital A/c  Dr.  30,000
     To Cash  A/c                     30,000

  Cash A/c    Dr.  20,000
    To B's Capital A/c       20,000

Click here to see Chapter Fourth :-