Accounting for�Partnership Firms�:�Admission�of�a partner

Accounting for Partnership Firms : Admission of a partner

Meaning:

When a new partner is admitted in a running business due to the requirement of more capital or may be to take advantage of the experience and competence of the newly admitted partner or any other reason, it is called admission of a partner in partnership firm.

According to section 31(1) of Indian partnership Act,1932, “A new partner can be admitted only with the consent of all the existing partners.”

At the time of admission of a new partner, following adjustments are required:

1. Calculation of newprofitsharing ratio and sacrificing ratio.

2.Accounting treatment of Goodwill.

3. Accounting treatment of accumulated profit.

4. Accounting treatment of revaluation of assets and reassessment of liabilities.

5.Adjustment of capital in newprofit sharing ratio.

Calculation of new profit sharing ratio.

Following types of problems may arise for the calculation of new profit sharing ratio.

Case (i) When old ratio is given and share of new partner is given.

Illustration 1. (When newpartner acquires hisshare from all partnersin their old ratio)

A and B are partners in a firm sharing profits and losses in the ratio 1:2. They admitted C into the partnership and decided to give him 1/3rd share of the future profits. Find the new ratio of the partners.

Solution:

(i) Calculation of Sacrifice Share:

A’s sacrifice = 1/3 of 1/3 = 1/9

B’s sacrifice = 2/3 of 1/3 = 2/9

Sacrificing Ration = 1/9 : 2/9 = 1:2 (which is equal to old ratio)

(ii) Calculation of New Profit sharing Ratio:

New share=Old share - Sacrifice share

A’s new share =1/31/9=31/9=2/9

B’s new share =2/32/9=62/9=4/9

C’s new share =1/9+ 2/9 = 3/9

New ratio among A,BandC = 2/9:4/9:3/9 = 2:4:3 respectively

Note: Unless agreed otherwise, it is presumed that the new partner acquires his share in profits from the old partnersin their old profitsharing ratio.

Note:- In this case only New Partner's share is given then

Sacrificing Ratio = Old Ratio = 1:2

There is no need to calculate it

Case (ii) When new partner acquires his/her share from all partnersin agreed share.

Illustration 2. (When new partner acquires his share from all partners in agreed share)

L and M are partners in a firm sharing profits and losses in the ratio of 7:3. They admitted N for 3/7th share, which he takes 2/7th from L and 1/7 from M. Calculate the new profit sharing ratio.

Solution:

(i) As sacrifice share of old partners are given in the question itself, hence there is no need to calculate it.

(ii) Calculation of New profit sharing ratio:

New share = old share - sacrifice share

L’s new share = 7/10 - 2/7 = 49 - 20/70 = 29/70

M’s new share = 3/10 - 1/7 = 21 - 10/70 = 11/70

N’s new share = 2/7 + 1/7 = 3/7 (given)

New ratio among L,M and N = 29/70:11/70:3/7 = 29:11:30/70 = 29:11:30

Case (iii) When new partner acquires his/her share from all partnersin certain ratio.

Illustration 3.

X and Y are partners in a firm sharing profit and losses in the ratio of 3:2. Z is admitted as partner in the firm for 1/6th share in profits. Z acquires his share from X and Y in the ratio of 2:1. Calculate new profit sharing ratio of partners.

Solution:

(i) Calculation of Sacrifice share:

Given sacrificing Ratio = X:Y = 2:1

therefore :

X’s sacrifice= 2/3 of 1/6 = 2/18

Y’s sacrifice =1/3 of 1/6 = 1/18

(ii) Calculation of New Profit Sharing Ratio:

New share = Old share - Sacrifice share

X’s newshare = 3/5 - 2/8 = 54 - 10/90 = 44/90

Y’s newshare = 2/5 - 1/18 = 36 - 5/90 = 31/90

Z’s newshare = 2/18 + 1/18 = 3/18 or 1/6 (Given)

New ratio among X,Y and Z = 44/90:31/90:1/6 = 44:31:15/90 = 44:31:15

Case (iv) When new partner acquires hisshare from all partners as a fraction of their share.

Illustration 4. (When new partner acquires hisshare from all partners as a fraction oftheir share)

A and B are partners in a firm sharing profit and losses in the ratio of 5:3. A surrenders 1/5th of his share, where as B surrenders 1/3 of his share in favour of C, a new partner. Calculate the new profit sharing ratio .