PARTNERSHIP: ADMISSION OF A PARTNER

TABLE OF CONTENTS
 

Q.1. What is meant by admission of a Partner? What is the purpose of admission of a Partner?

Answer: Sometimes, it becomes difficult to run the partnership business due to lack of sufficient capital or managerial help or both. In this case a firm may decide to admit a new partner into the firm. But according to Indian Partnership Act 1932, no partner can be admitted into the firm without the consent of all the existing partners. A person who is admitted, as a partner into the firm does not thereby becomes liable for any act of the firm, done before his admission. A partner is admitted for any one or more of the following reasons:

  1. In order to acquire more capital for the business.
  2. In order to have more managerial skill, a competent and experienced person is needed.
  3. In order to expand and boost up the business.
  4. In order to increase the goodwill by admitting a well-reputed person into the business.
  5. In order to reduce the competition.

Q.2. State the two main rights acquired by a New Partner.

Answer: Rights of a New Partner:

  1. Sharing in the assets of the firm: - In order to acquire the right of becoming the owner of a part of assets of the firm, new partner has to contribute towards the amount of capital into the business.
  2. Sharing in the future profits or losses of the firm: - In order to have right to share in profit in future new partner has to pay for the amount of goodwill into the business.

Q.3. Mention various matters that need adjustment at the time of admission of a partner. (D.H.S.E.)

Answer: Required adjustments at the time of admission of a Partner:

  1. Calculation of New Profit Sharing Ratio.
  2. Revaluation of Assets and Liabilities of the firm.
  3. Treatment of Goodwill.
  4. Adjustment of Accumulated Reserves and Profits /Losses.
  5. Adjustment of Capital (if agreed).

Q.4. Explain the accounting treatment of Goodwill at the time of admission of a Partner.

Answer: Accounting treatment of goodwill at the time of admission of a partner is classified in four parts:

(1) When new partner pays amount of goodwill privately: In this case no entry will be passed in the books of the firm.

(2) When new partner brings his share of goodwill in Cash or kind. In this case the following entries are passed:

  1. For amount of Capital + Goodwill brought in by new partner
  2. Cash / Bank/ Assets A/c Dr.

    To New Partnerís Capital A/c (for amount of capital)

    To Premium A/c (for amount of goodwill)

  3. For amount of goodwill brought in by new partner credited to Old Partnerís Capital A/cs in their Sacrificing Ratio.
  4. Premium A/c Dr.

    To Old Partnerís Capital A/cs

  5. When old partners withdraw the amount of goodwill.

Old Partnerís Capital A/c Dr.

To Cash/Bank A/c

Condition: When new partner brings his share of goodwill in cash, in this case no goodwill should already appear in the books. In case goodwill already appears in the books it should be written off in old ratio. Entry will be:

Old Partnerís Capital A/cs Dr.

To Goodwill A/c

Example: A and B are partners sharing profit and losses in the ratio of 5:3. C is admitted as a new partner for 1/5th share. C brings Rs. 15,000 as his Capital and necessary amount of his share of goodwill in cash. Total goodwill of the firm is Rs. 60,000. Goodwill already appears in the Balance Sheet of A and B is Rs. 20,000. Pass necessary journal entries.

Solution:

Journal

S. No.

Particulars

L.F.

Dr.

Rs.

Cr.

Rs.

(i)

Cash A/c Dr.

 

27,000

 
 

To Cís Capital A/c

   

15,000

 

To Premium A/c

   

12,000

 

(For amount of Capital and Goodwill brought in by C)

     

(ii)

Premium A/c Dr.

 

12,000

 
 

To Aís Capital A/c

   

7,500

 

To Bís Capital A/c

   

4,500

 

(For amount of goodwill brought in by C credited to A and B in their Sacrificing Ratio, which is 5:3)

     

(iii)

Aís Capital A/c Dr.

 

12,500

 
 

Bís Capital A/c Dr.

 

7,500

 
 

To Goodwill A/c

   

20,000

 

(For existing goodwill written off in Old Ratio)

     

Workings: Cís Share of Goodwill = 1/5 x Rs. 60,000 = Rs. 12,000

 



(3) When new partner does not bring his share of goodwill in cash.

In this case new partnerís share of goodwill is charged to his capital account and t/f to old partnerís capital accounts in their sacrificing ratio. Entries for this will be:

(i) For amount of capital brought in by new partner

Cash / Bank/ Assets A/c Dr.

To New Partnerís Capital A/c

(ii) For new partnerís share of goodwill credited to old partnerís capital accounts in their sacrificing ratio

New Partnerís Capital A/c Dr.

To Old Partnerís Capital A/cs

(iii) When old partners withdraw the amount of goodwill.

Old Partnerís Capital A/c Dr.

To Cash/Bank A/c

Condition: No goodwill should already appear in the books. In case goodwill already appears in the books it should be written off in old ratio. Entry will be:

Old Partnerís Capital A/cs Dr.

To Goodwill A/c

Example: A and B are partners sharing profits and losses in the ratio of 5:3. C is admitted as a new partner for 1/5th share. C brings Rs. 50,000 as his capital but he is not able to bring his share of Goodwill in cash. Total Goodwill of the firm is Rs. 60,000. Pass necessary journal entries when in the books of A and B:

  1. No Goodwill already appears.
  2. Goodwill already appears at Rs. 24,000.

Solution:

Journal

Date

Particulars

L.F.

Debit

Rs.

Credit

Rs.

(a)

Bank A/c Dr.

 

50,000

 
 

To Cís Capital A/c

   

50,000

 

(For amount of capital brought in by C)

     
 

Cís Capital A/c Dr.

 

12,000

 
 

To Aís Capital A/c

   

7,500

 

To Bís Capital A/c

   

4,500

 

(For Cís share of goodwill credited to Aís and Bís Capital A/cs in their sacrificing ratio.)

     
         

(b)

Bank A/c Dr.

 

50,000

 
 

To Cís Capital A/c

   

50,000

 

(For amount of capital brought in by C)

     
 

Cís Capital A/c Dr.

 

12,000

 
 

To Aís Capital A/c

   

7,500

 

To Bís Capital A/c

   

4,500

 

(For Cís share of goodwill credited to Aís and Bís Capital A/cs in their sacrificing ratio.)

     
 

Aís Capital A/c Dr.

 

15,000

 
 

Bís Capital A/c Dr.

 

9,000

 
 

To Goodwill A/c

   

24,000

 

(For existing goodwill in the books written off in old ratio)

     

(4) When new partner brings only a part of his share of goodwill in cash or kind.

In this case amount brought in by new partner as his share of goodwill t/f to old partnerís capital accounts in their sacrificing ratio and the amount that is not brought in by him is charged to his capital account and is also t/f to old partnerís capital accounts in their sacrificing ratio. Entries will be in following manner:

  1. For amount of Capital + Goodwill brought in by new partner
  2. Cash / Bank/ Assets A/c Dr.

    To New Partnerís Capital A/c (Amount of Capital)

    To Premium A/c (Amount of Goodwill brought in by new partner)

  3. For amount of goodwill brought in by new partner credited to old partnerís capital accounts in their sacrificing ratio.
  4. Premium A/c Dr.

    To Old Partnerís Capital A/cs

  5. For amount of goodwill not brought in by new partner charged to his capital account and credited to old partnerís capital accounts in their sacrificing ratio.

New Partnerís Capital A/c Dr.

To Old Partnerís Capital A/cs

Condition: No goodwill should already appear in the books. In case goodwill already appears in the books it should be written off in old ratio. Entry will be:

Old Partnerís Capital A/cs Dr.

To Goodwill A/c

Example: A and B are partners sharing profits and losses in the ratio of 5:3. C is admitted as a new partner for 1/5th share. C brings Rs. 50,000 as his capital and brings only 60% of his share of Goodwill in cash. Total Goodwill of the firm is Rs. 60,000. Pass necessary journal entries when A and B withdraw 50% of the amount brought in by C as his share of goodwill in cash. Goodwill already appears in the books at Rs. 16,000.

Solution:

Journal

Date

Particulars

L.F.

Debit

Rs.

Credit

Rs.

 

Bank A/c Dr

 

57,200

 
 

To Cís Capital A/c

   

50,000

 

To Premium A/c

   

7,200

 

(For amount of capital and goodwill brought in by C)

     
 

Premium A/c Dr.

 

7,200

 
 

To Aís Capital A/c

   

4,500

 

To Bís Capital A/c

   

2,700

 

(For amount of goodwill brought in by credited to old partnerís capital account in their sacrificing ratio)

     
 

Cís Capital A/c Dr.

 

4,800

 
 

To Aís Capital A/c

   

3,000

 

To Bís Capital A/c

   

1,800

 

(For amount of goodwill not brought in by C charged to his capital A/c and credited to old partner in their sacrificing ratio)

     
 

Aís Capital A/c Dr.

 

2,250

 
 

Bís Capital A/c Dr.

 

1,350

 
 

To Bank A/c

   

3,600

 

(For amount of goodwill withdrawn by old partners)

     
 

Aís Capital A/c Dr.

 

10,000

 
 

Bís Capital A/c Dr.

 

6,000

 
 

To Goodwill A/c

   

16,000

 

(For existing goodwill in the books written off in old ratio)

     

Workings:

Cís Share of Goodwill = 1/5 x Rs. 60,000 = Rs. 12,000.

But C brings only 60% of his share of goodwill in cash i.e. Rs. 12,000 x 60/100 = Rs. 7,200.

C does not bring 40% of his share of goodwill in cash i.e. Rs. 12,000 x 40/100 = Rs. 4,800.

 

Recommendation of Accounting Standard 10 (AS-10) Ė Issued by The Institute of Chartered Accountants of India

According to AS Ė 10 goodwill should be recorded in the books only when some consideration in money or moneyís worth has been paid for it. Thus, in case of admission or retirement/death of a partner or in case of change in profit sharing ratio among partners, goodwill, following the accounting standard should not be raised in the books of the firm because no consideration in or money worth is paid for it. If any partner brings any premium over and above his capital should be distributed to other existing partners.

If goodwill is evaluated at the time of change in the constitution of the firm (by way of admission/retirement/death/change in profit sharing ratio), goodwill should not be brought in books since it is inherent goodwill. If it is raised then it should be immediately written off.



 

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