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    Reconstitution of A Partnership Firm-Admission of A Partner

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    Karthik Manikandan
    1. The document discusses the accounting treatment for the reconstitution of a partnership firm due to the admission of a new partner. 2. Key steps include determining the capital contribution of the incoming partner, revaluing assets and liabilities, adjusting the capital accounts of all partners based on the new profit sharing ratios, and accounting for any goodwill. 3. Goodwill may be paid privately or brought into the firm in cash, assets, or left unrecorded, with different accounting entries for each. The capital accounts are adjusted to reflect partners' interests in the new partnership.

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    Reconstitution of A Partnership Firm-Admission of A Partner

    Uploaded by

    Karthik Manikandan
    75 views6 pages
    1. The document discusses the accounting treatment for the reconstitution of a partnership firm due to the admission of a new partner. 2. Key steps include determining the capital contribution of the incoming partner, revaluing assets and liabilities, adjusting the capital accounts of all partners based on the new profit sharing ratios, and accounting for any goodwill. 3. Goodwill may be paid privately or brought into the firm in cash, assets, or left unrecorded, with different accounting entries for each. The capital accounts are adjusted to reflect partners' interests in the new partnership.

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    1. The document discusses the accounting treatment for the reconstitution of a partnership firm due to the admission of a new partner. 2. Key steps include determining the capital contribution of the incoming partner, revaluing assets and liabilities, adjusting the capital accounts of all partners based on the new profit sharing ratios, and accounting for any goodwill. 3. Goodwill may be paid privately or brought into the firm in cash, assets, or left unrecorded, with different accounting entries for each. The capital accounts are adjusted to reflect partners' interests in the new partnership.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    75 views6 pages

    Reconstitution of A Partnership Firm-Admission of A Partner

    Uploaded by

    Karthik Manikandan
    1. The document discusses the accounting treatment for the reconstitution of a partnership firm due to the admission of a new partner. 2. Key steps include determining the capital contribution of the incoming partner, revaluing assets and liabilities, adjusting the capital accounts of all partners based on the new profit sharing ratios, and accounting for any goodwill. 3. Goodwill may be paid privately or brought into the firm in cash, assets, or left unrecorded, with different accounting entries for each. The capital accounts are adjusted to reflect partners' interests in the new partnership.

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    of 6

    CHAPTER 3

    RECONSTITUTION OF A PARTNERSHIP FIRM- ADMISSION OF A PARTNER


    RECONSTITUTION OF A PARTNERSHIP FIRM
    Partnership is an agreement between two or more persons for sharing profits of a business carried
    on by all or any of them acting for all. Any change in the relationship among partners are called
    Reconstitution of a Partnership Firm.
    Modes of Reconstitution of a Partnership Firm
    Reconstitution of a Partnership Firm usually takes place in any of the following ways:
    1. Changes in profit sharing ratio
    2. Admission of a partner
    3. Retirement of a partner
    4. Death of a partner
    5. Amalgamation of two partnership firms
    ADMISSION OF A PARTNER
    Inclusion of a new person as partner to an existing firm is called admission of a partner. The new
    partner who joins the business is called incoming partner, he receives the following rights:
    a. A right to share the assets of the firm
    b. A right to share profits/loss of the business
    For acquisition of the right to share the asset, he has brought in an agreed amount of capital. For the
    right to share profits he is required to bring his share of goodwill.
    Accounting Treatment at the time of Admission of a partner
    1. Capital of incoming partner
    2. Ascertainment of new ratio and sacrificing ratio
    3. Revaluation of assets and liabilities
    4. Distribution of reserves and accumulated profits or losses
    5. Treatment of goodwill
    6. Adjustment of capital accounts

    I. Capital of Incoming Partner


    The new partner has brought in an agreed amount of capital; the journal entry is:

    Cash/Assets a/c Dr
    Incoming Partner’s Capital A/c

    II. Ascertainment of New Ratio and Sacrificing Ratio

    a. New Profit Sharing Ratio

    On admission of a partner, the profit sharing ratio among old partners will change keeping
    in view their respective contribution to the profit sharing ratio of the new partner. Hence, there
    is a need to ascertain the New Profit Sharing Ratio.
    b. Sacrificing Ratio
    The ratio in which the old partners agreed to sacrifice their share of profit in favour
    of the incoming partners is called sacrificing ratio.

    Sacrificing Ratio= Old Ratio- New ratio


    Distinction between New Profit - Sharing ratio and sacrificing ratio:

    New Profit Sharing Ratio Sacrificing Ratio


    It is related to all the Partners (including new) It is related to old partners only
    It is the ratio in which the all partner (including It is the ratio in which old partners have
    new) will share profit in future. sacrificed their share in favour of new Partner
    or when profit sharing Ratio is changed.
    New Profit sharing Ratio = Old Ratio - Sacrificing Ratio = Old Ratio - New Ratio
    Sacrificing Ratio

    III. Revaluation of assets and liabilities

    For ascertaining the profit or loss on revaluation of assets and liabilities, the firm has to
    prepare the Revaluation account or Profits and Loss Adjustment account.
    Revaluation account is a nominal account which is prepared to bring the assets and
    liabilities of the firm to their true values and to find out the profits or loss on revaluation of
    assets and revaluation of liabilities.
    The revaluation account is credited with increase in the value of assets and decrease in the
    value liabilities and debited with decrease in the value of assets and increase in the value of
    liabilities. The balance in the Revaluation Account represents the profits or loss on revaluation
    and is transferred to the old partners’ capital account in their Old Ratio.

    Journal Entries;
    IV. Distribution of reserves and accumulated profits or losses

    (i) For distribution of undistributed profit and reserve.

    Reserves A/c Dr
    Profit & Loss A/c(Profit) Dr.
    To Partner’s Capital A/c [individually]
    [Reserves and Profit & Loss (Profit) transferred to all partner’s capitals A/c in
    existing profit sharing ratio]

    (ii) For distribution of loss

    Partner’s Capital A/c Dr. [individually]


    To Profit and Loss A/c [Loss]

    [Profit & Loss (loss) transferred to all partner’s capitals A/c in existing profit
    sharing ratio]

    V. Accounting Treatment of Goodwill

    1. When Goodwill (Premium) is paid by the New Partner Privately- No Entry

    2. When Goodwill brought in Cash by the New Partner

    Cash/Bank A/c ...Dr.


    To Old Partners' Capital A/c (Sacrificing Ratio)

    3. Goodwill Withdrawn by the Sacrificing (Old) Partners

    Old Partners' Capital A/c s ...Dr.


    To Cash/Bank A/c (Sacrificing Ratio)

    4. Goodwill not brought in Cash

    New Partner's Capital or Current A/c ... Dr.


    To Old Partners' Capital or current A/c [Sacrificing Ratio]

    5. Goodwill brought in Kind

    Assets A/c ...Dr.


    To Old Partners’ capital A/c (Sacrificing Ratio)
    6. Hidden goodwill

    It is excess of estimated total capital of the firm over the adjusted combined capital
    of all the partners (including new partner)
    Sometime goodwill is not given in question, but required to determine on basis of
    given information
    Calculation of goodwill Amount

    Total Estimated capital


    (New partner capital × reciprocal of his share) XXX

    Less : Adjusted capital of all partners ( including new partner) XXX

    Goodwill of the firm XXX

    VI. Adjustment of capital

    Adjustment of capital may be classified into two types:

    a) Adjustment of old partner capital on basis of new partner capital


    On admission of a new partner, capital of old partner will be adjusted in proportionate to
    their new profit sharing ratio.
    Following steps are followed:

    Particular
    Amt.
    STEP1: Calculate total estimated capital of the firm XX
    (New partner’s capital × Reciprocal of his share)

    STEP2: Determine new capital of old partner XXX

    Total capital (STEP-1) is divided in their new profit sharing ratio.

    STEP3: Ascertain adjusted capital of old partner by preparing partner capital A/c XXX

    STEP4: Find out surplus/deficit of old partner by comparing Step-2 & STEP-3 XXX
    ACCOUNTING ENTRY

    (i) Surplus partner will withdraw surplus capital from .


    Surplus partner Capital A/c Dr. XXX
    To cash A/c or partner Current A/c XXX
    (Being Surplus partner will withdraw surplus capital from firm)

    (ii) Deficit partner will bring deficit capital in the firm.

    Cash A/c or partner Current A/c Dr. XXX


    To Deficit partner Capital A/c XXX
    (Being Deficit partner will bring deficit capital in the firm)
    Note : Surplus / Deficit of old partner can be adjusted through Cash A/c or Partner
    Current A/c as per instruction of the question.

    b) Adjustment of new partner capital on basis of old partner capital

    On admission of a new partner, new partner will contribute capital in proportionate to his
    share of profit.

    Following steps are followed:

    Particular Amt.
    STEP1: Calculate total estimated capital of the firm
    (Sum of adjusted capital of the old partners × Reciprocal of their share) XXX

    STEP2: Determine capital of new partner


    { Total capital (STEP-1) × Reciprocal of new partner share} XXX

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