ADMISSION OF A PARTNER
HARIKUMAR.G
ADMISSION OF A PARTNER-
Inclusion of a new person as a partner to an existing firm is called admission of a partner. The new partner who joins the business is called the incoming partner or new partner.
RIGHTS OF INCOMING PARTNERS
For acquisition of the right to share the asset, the new partner has to bring an agreed amount of the capital.
Admission of a partner necessitates the following accounting adjustment in the books of the firm
REVALUATION ACCOUNT
A revaluation account is a nominal account prepared to bring the asset and liabilities of the firm to their true values and to find out the profit or loss arising there from.
JOURNAL ENTRIES
Revaluation a/c
Asset a/c
Revaluation
Liability
a/c Dr a/c
Revaluation a/c
Revaluation a/c
Liability a/c
Old partners capital a/c
Revaluation
REVALUATION ACCOUNT
PARTICULARS | AMOUNT | PARTICULARS | AMOUNT |
Assets A/c(individually) -Decrease in value on revaluation Liabilities A/c(individually) increase in amount on reassessment Unrecorded liabilities A/c artners Capital A/c(Remuneration) Cash?Bank A/c(Expenses) Gain(profit)on revaluation transferred to partners capital or current A/c | | Assests A/c(ndividually) increase in value on revaluation Liabilities A/c(indivually) Decrease in amount on reassesment unrecorded Assests Loss on revaluation transferred to Partners Capital Or Current A/c | |
ADJUSTMENT FOR RESERVE AND OTHER ACCUMULATED PROFIT OR LOSS
The incoming partner is not entitled to any share in the accumulated profit or loss of the business appearing in the balance sheet as on the date of admission.
The balance appearing in the form of reserves or profit or loss account balance should be transferred to the capital account of old partners in their old profit sharing ratio.
METHODS OF TREATMENT OF GOODWILL
PREMIUM METHOD
Under this method the new partner brings in his share of goodwill in cash. The amount of premium brought in by the new partner is shared amongst the old partner in their sacrificing ratio.
Journal entry
Goodwill
Old partners capital a/c
By combining the above two entries, one entry may be passed as follows
Cash/Bank a/c Dr
Old partners capital a/c
GOODWILL BROUGHT IN CASH IS WITHDRAWN BY OLD PARTNERS
If the partnership agreement so permits, the old partners can withdrawn either fully or partially, the amount brought in by the new partners for goodwill. In such case two entries are given in firm books
For the amount brought in for goodwill
On withdrawing the amount by old partners
Cash
WHEN ONLY A PORTION OF GOODWILL BROUGHT IN CASH BY NEW PARTNER
In such a situation, the actual amount of goodwill brought in cash is credited to premium account. The unpaid amount of goodwill is debited to new partners capital account.
J ournal entry
Cash a/c Dr
Old partners capital A/C
REVALUATION METHOD OF TREATMENT OF GOODWILL
Under this method, the new partner does not bring in his share of goodwill in cash instead, a goodwill account is raised in the firms book. Goodwill account is created in its full value by crediting the amount in the old partners capital account in their old ratio. The goodwill account should be shown on the asset side of the balance sheet.
The journal entry for raising the goodwill is
Goodwill a/c Dr
Old partners capital a/c
MEMORANDUM REVALUATION METHOD
Al partners A/c Dr
Goodwill A/c
(The value of goodwill writeen of by debiting all partners including the new partners in their new profit sharing ratio)
Under this method .goodwill is raised in the books at its full value and written off immediately after admission. On raising the goodwill, the value is credited to the old partners capital account in their old ratio. And on writing it off all partners (including new partners) capital account are debited with the value of goodwill in their new profit sharing ratio.
Journal entries
Old partners capital Account
(Full value of goodwill shared in old ratio)
The incoming partners may contribute his share of goodwill in the form of assets instead of bringing cash. The asset brought in by the new partners will be debited and goodwill account will be credited. Later the share of goodwill will be transferred to the capital account will be credited. Later the share of goodwill will be transferred to the capital account of old partners in their sacrificing ratio.
ADJUSTMENT OF CAPITAL
At the time of admission, the partner may agree that their capital account should be adjusted as to make it in proportion to the new profit sharing ratio. This can be done either
ADJUSTMENT OF CAPITAL ON THE BASIS OF NEW PARTNERS CAPITAL
Similarly if the balance is less than the required amount of capital, the deficiency will brought by the partners in cash or will be transferred to their current account.
Under this method, the total capital of the firm is calculated on the basis of the share of new partner and the amount of capital brought by him. Capital required for each partner is ascertained on the basis of the total capital of the firm and new profit sharing ratio. The required amount of capital will now be compared with actual amount of capital of each partner after all adjustment are made. If the balance is more than the required amount, the excess will be withdrawn by partner from the firm or will transferred to their current account.
NEW PARTNERS BRING HIS CAPITAL ON THE BASIS OF OLD PARTNERS CAPITAL
Under this method, the amount of capital to be contributed by the new partner is ascertained on the basis of the combined capital of old partners. In such a case ,first of all ,balance of old partners capital account after making all adjustments should be calculated. The combined capital of old partners is found out and on the basis the old capital of the new firm is ascertained. From the total capital, the share of new partners capital is calculated by applying the new profit sharing ratio.