Partnership Accounts Admission of a New Partner

CPT Section A Fundamentals of Accountancy Chapter 8 Unit 3

Prof. Deepak Jaggi

Learning Objectives

(1) Understand the reasons for which revaluation or assets and liabilities is done.

(2) Logic of treatment of Reserves and Debit Balances in case of admission of partner.

(3) Techniques of arriving at the various Ratio’s.

(4) Understand the Goodwill adjustment.

(5) To Lay a solid foundation of accounting treatment in case of admission of partner.

Partnership Accounts (Admission of a Partner)

When 2 or more Partners are already doing business & they admit 1 more partner into their running business it is a case of Admission of a Partner

Cont.…

Example

Partners already doing business- A and B = Old Partners

Partner Admitted Now – C = Incoming Partner

All the three partners together – A, B & C = New Partners

Reasons for Admission of Partner

Additional capital required

Specialized skill of the incoming partner

Expansion of Business

Avoiding competition

Conti..

Profit Sharing Ratios

Types of Profits Sharing Ratios

Contd…

Old Ratio – Old Partners A & B

New Ratio – New Partners A,B& C

Sacrifice Ratio - Old Partners A & B

Old Ratio Types of Profits Sharing Ratios

Contd…

Given

Otherwise Equal

Among Old Partners

New Ratio Types of Profits Sharing Ratios

Contd…

Given

Otherwise Apply Formulae

1 – Share of Incoming Partner = Balance Left

Balance Left x Old Ratio = New Ratio of Old Partners

Sacrifice Ratio Types of Profits Sharing Ratios

Contd…

Old Ratio – If Old and New Ratio of Old Partners is same

Otherwise Apply the Formulae

Sacrifice given = Old Ratio – New Ratio

Example of Ratios - Question Deepika and Ranbir – Old Partners - Ratio 3:2, Aditya Admitted for ¼ share

D 3/5

9/20

R 2/5

6/20

A x

5/20

OR =3:2

NR=9:6:5

SR=3:2

Working: 1-1/4 = ¾ D = ¾ x 3/5 = 9/20 R = ¾ x 2/5 = 6/20 A = ¼ x 5/5 = 5/20

Revaluation of Various Assets and Liabilities:

Value Again

• Convert Book Values into Agreed Values

Revaluation Account

Conti…

Revaluation Account is a Nominal Account

Changes in the values of Assets and Liabilities.

Revaluation Account or

Profit & Loss Adjustment A/c

Revaluation Profit / Loss is distributed among old partners in their old ratios.

Conti..

Revaluation Account Hint for Problem Solving

When Assets Increase and Liabilities Decrease = Good Thing = Revaluation A/c Credit

When Assets Decrease and Liabilities Increase = Bad Thing = Revaluation A/c Debit.

Conti..

Revaluation Account Example - Entries

Conti..

(1) For asset increase (Good) Asset A/c ………. Dr. To Revaluation A/c

(2) For Liability decrease (Good) Liability A/c ………….. Dr. To Revaluation A/c

(3) For Asset decrease (Bad) Revaluation A/c……… Dr. To Asset A/c

(4) For liability increase (Bad) Revaluation A/c…………………. Dr. To Liability A/c

It is the money value of reputation of business

When the name, fame, reputation etc. expressed in terms of money.

GOODWILL

Conti..

Factors Affecting Goodwill Valuation

Operating Profits

Number of years in Business (Experience) • Location

Type of Business/Product

People Doing the Business (Partners etc.)

Treatment of Goodwill - Conti..

Goodwill Case -I

When incoming partner brings cash for his share of goodwill

(Incoming partner pays premium in cash for goodwill)

Cash/Bank A/c…. Dr. To Old partner’s Capital A/c

CO(SAC)

If l amount is withdrawn by old partners partly or fully

Old partner’s capital A/c …. Dr. To Cash / Bank A/c

OC(SAC)

Treatment of Goodwill - Conti…

Goodwill Case -II

Goodwill is Raised and Written Off

(ie. Goodwill amount not brought in cash)

Goodwill A/c……… Dr. To Old Partner’s Capital

A/c (old ratio) GO(Old)

New Partners Capital A/c . Dr.

To Goodwill A/c (New Ratio)

NG(New)

Conti..

Treatment of Goodwill Conti..

Net Entry for the Goodwill Raised and Written

Off ie. Goodwill directly adjusted through the

Partner’s Capital a/c

Incoming Partner’s Capital A/c………………….. Dr.

To Old Partner’s Capital A/c

(Sacrifice Ratio )

IO (SAC)

When New Partner Pays Premium For Goodwill Privately / Secretly

No Entry

Reserves

Accumulated Profits

Reserves are undistributed profits belonging to the partners.

Contd…

Examples of Reserves • Profit & Loss A/c (Accumulated Profit) • General Reserve / Contingency Reserve. • Reserve fund • Workmen compensation fund • Capital Reserve, etc.

Contd…

Reserves cont..

Journal Entry:

Reserve A/c ……. Dr.

To Old partner’s capital A/cs

(in old ratio)

Deferred losses (Accumulated losses)

• To be borned by old Partners

Examples of Deferred Losses

• Profit & Loss a/c (Asset Side) • Deferred Advertising, etc.

Contd…

Deferred losses

Entry for Deferred Losses

Old partner’s Capital A/c …. Dr.

To Deferred Losses A/c

Capital Adjustment

4 NEW’S • 1) New Partner • 2) New Capital • 3) New Firm • 4) New Ratio

Contd…

Capital Adjustment – Contd..

Capitals of New Partners

Adjusted in New Ratio

1) Capital A/c – Debit Side

2) Balance Sheet - Liability Side

Contd…

Capital Adjustment – Contd..

Total Capital of the new Firm =

Capital of Incoming Partner / His Share Example :- Incoming Partner’s Capital is 100,000 and his share is ¼ , then

Total Capital = 1,00,000 / ¼ = 1,00,000 x 4 = 4,00,000

Contd…

Capital Adjustment – Contd..

Total Capital 4,00,000

Distributed among New Partners Distributed among New Partners

• In New Ratio

Accounting Treatment

Information Given

• 1) Balance Sheet of Old Firm

• 2) Adjustments

To be Prepared

• 1) Revaluation Account • 2) Partner’s Capital / Current A/c • 3) Cash / Bank A/c • 4) Balance Sheet of New Firm

Steps to Solve the Question

1 R

• Find out 3 Ratios

2 T

• Transfer all the old Balance Items in one of the

things prepared

3 A

• Solve the Adjustments

Practical Problem Q.1. Ranbir Kapor and Imran khan are partners in a firm sharing profit & losses in the ratio of 3:2 respectively. Their Balance Sheet as on 31st December 2000 was as under:

Liabilities ? Assets ?

Sundry Creditors

Ranbir Kapoor’s

Capital

Imran Khan’s Capital

General reserve

7,000

32,000

22,000

12,000

Cash at Bank

Sundry debtors

Land & Building

Stock

Plant &

Machinery

Furniture &

Fixture

8,000

14,000

25,000

10,000

12,000

73,000 73,000

4000

Problem no.1 Conti..

On 1st January 2001, they are to admit Arjun in the partnership. The terms being that:

He shall pay ₹10,000 as his share of goodwill, 50% amount of goodwill shall be withdrawn by the old partners.

He shall bring ₹ 12,000 as his capital for 1/4th share in future profit.

For the purpose of Arjun’s admission, it was agreed that assets be revalued as follows:

• 1. Land & Building is to be valued at ₹ 30,000 • 2. Plant & Machinery to be valued at ₹ 10,000 • 3. Stock valued at ₹ 12,000 and Furniture &Fixtures at ₹ 2,000 • 4. Provision at 5% to be made for doubtful debts on debtors.

Prepare: Profit & Loss Adjustment A/c, Partners Capital A/cs & Balance Sheet of the new firm.

Solution

Contd..

Profit and Loss Adjustment Account Particulars Amount Amount Particulars Amount Amount

To Plant & Machinery

To Furniture & Fixtures A/c

To R.D.D. A/c

To Partners Capital A/c.

Ranbir Kapoor (3/5)

Imran Khan (2/5)

1,380

920

2,000

2,000

700

2,300

By Land and Building

A/c

By Stock A/c

5,000

2,000

7,000 7,000

Solution Conti..

Partner’s Capital A/c

Particulars Ranbir Imran Arjun Particulars Ranbir Imran Arjun

To Cash / Bank (GW) A/c

To Balance c/d (Bal. Fig.)

3,000 2,000

29,720 12,000

By Balance b/d

By Cash / Bank (GW)

By Bank A/c

By General Reserve A/c

By Profit and Loss Adj.

A/c

32,000

6,000 4000

-

1380 920

22,000

-

4,800

-

-

12000

-

-

31,720 12,000 46,580 31,720 12,000

43580

7200

46580

Solution Conti..

Contd..

Bank Account

Particulars Amount Particulars Amount

To Balance b/d

To Ranbir ‘s Cap A/c

To Imran’s Cap A/c

To Arjun’s Cap A/c

8,000

6,000

4,000

12,000

By Ranbir’s Cap A/c

By Imran’s Cap A/c

By Balance c/d (Bal.

Fig)

3,000

2,000

25,000

30,000 30,000

Solution Conti..

Old PSR = SR in the question as, New PSR is not given directly or indirectly.

It is recommended to always find out the ratios separately

Liabilities Amt. Amt. Assets Amt. Amt.

Partner’s Capital

Ranbir Kapoor

Imran Khan

Arjun

43,580

29,720

12,000 85,300

7,000

Land and Building

Plant and Machinery

Stock

Furniture & Fixtures

Debtors

Less: R.D.D. @5%

Cash/Bank

14,000

700

30,000

10,000

12,000

2,000

13,300

25,000

92,300 92,300

Creditors

MCQ”s

MCQ:1

Q.1. Profit or loss on revaluation is shared among the partners in _____ ratio.

a) Old Profit

b) New Profit Sharing

c) Capital

d) Equal

A) Old Profit

MCQ.2 Q.2. X, Y and Z are equal partners in a firm with capital of ₹16,800, ₹ 12,600 and ₹ 6,000 respectively. With bills payable ₹ 3,300, creditors ₹ 6,000, cash ₹ 600, debtors ₹ 10,800 , stocks ₹ 11,400 , furniture ₹ 2,400 and building ₹ 19,500 R is admitted to the firm and brings ₹ 9,000 as goodwill and ₹ 15,000 as capital. Half the goodwill is withdrawn by old partners, and stock and furniture is depreciated by 10%. A provision of 5% on debtors is created and value of building is taken at ₹ 27,000. The profit on revaluation will be:

(a) ₹5,500

(b) ₹5,580

(c) ₹5,400

(d) ₹5,680

b) ₹5580

MCQ.3 Q.3. X and Y are partners sharing profits and losses in the ratio of 3:2(X’s Capital is ₹ 30,000 and Y’s Capital is ₹ 15,000) . They admitted Z agreed to give 1/5th share of profits to him. How much Z should bring in towards his capital?

Ans. d) ₹ 11,250

a)₹9,000 b)₹12,000

c)₹14,500 d)₹11,250

MCQ.4

Ans. b) Goodwill will be raised to ₹30,000 in old profit sharing ratio.

Q.4. X and Y are partners sharing the profit in the ratio of 3:2. They take Z as the new partner, who is supposed to bring ₹ 25,000 against capital and ₹ 10,000 against goodwill. New profit sharing ratio is 1:1:1. Z is able to bring only his share of capital. How this will be treated in the books of the firm.

• a) X and Y will share goodwill bought by Z as 4,000 : 1,000 • b) Goodwill will be raised to ₹30,000 in old profit sharing ratio • c) Both • d) None

MCQ.5

Q.5. X and Y are partners sharing the profit in the ratio of 3:2. They take Z as the new partner, who is supposed to bring ₹ 25,000 against capital and ₹ 10,000 against goodwill. New profit sharing ratio is 1:1:1. Z bought cash for his share of capital and agreed to compensate to X and Y outside the firm . How this will be treated in the books of the firm.

Ans. a) Cash bought by Z will only be credited to his capital account.

a) Cash bought by Z will only be credited to his capital account.

b) Goodwill will be raised to full value in old ratio.

c) Goodwill will be raised to full value in new ratio.

d) Cash bought by Z will be credited to his account and debited to his share of goodwill, which will be debited to X and Y’s account in sacrificing ratio.

MCQ.6 Q.6. Karan and Arjun are partners of a partnership firm sharing profits in the ratio of

5:3 respectively. Rohit was admitted on the following terms: Rohit would pay ₹

50,000 as capital and ₹ 16,000 as goodwill, for 1/5th share of profit. Machinery would

be appreciated by 10% (book value ₹ 80,000) and building would be depreciated by

20% (₹ 2,00,000). Unrecorded debtors o ₹ 1,250 would be bought into books now

and a creditors amounting to ₹ 2,750 died and need not to pay anything to its estate.

Find the distribution of profit / loss on revaluation, Karan and Arjun.

Ans. a) Loss – 17,500 : 10,500: 0

a) Loss – 17,500 : 10,500: 0 b) Loss – 14,000 : 8,400 : 5,600. c) Profits – 17,500: 10,500: 0. d)Profits -14,000 : 8,400 : 5,600

MCQ.7

Ans. a) 3 : 1

Q.7. X and Y are partners sharing profits and losses in the ratio 5:3. On admission, Z bring ₹ 70,000 cash and ₹ 48,000 against goodwill. New profit sharing ratio between X, Y and Z

are 7: 5 : 4. The sacrificing ratio among X and Y will be

a) 3 : 1

b) 4 : 7.

c) ₹ 20,000

d) None of these

MCQ.8

Q.8. X and Y are partners with capital of ₹ 10,000 and ₹ 20,000 respectively and sharing profits equally. They admitted Z as their third partner with one-fourth profits of the firm on the payment of ₹ 12,000 . The amount of hidden goodwill is:

Ans. a) 6,000

a) 6,000

b) 10,000.

c) 8,000

d) None

MCQ.9

Q.9. Unless given otherwise, the ratio of sacrifice is the same as ______

Ans. C) Old profit sharing ratio

a) New profit sharing ratio

b) Equal ratio.

c) Old profit sharing ratio

d) None of the above

MCQ.10

Q.10. A and B are shares profits and losses in the ratio of 2 : 1. They take C as a partner and the new profit sharing ratio becomes 3: 2: 1. C brings ₹ 4,500 as premium for goodwill. The full value of goodwill will be.

Ans. C) ₹ 27,000

a) ₹ 4,500

b) ₹ 18,000

c) ₹ 27,000

d) ₹ 24,000

Lesson Summary

• Prepare – Revaluation A/c

•Partner’s Capital A/c •Cash Bank A/c •New Balance Sheet

•Capital Adjustment = 4 New’s

•Total Capital = Capital of Incoming Partner / His Share

•Outsider becomes Insider

• Incoming Partner = 1 •C

Old Partners = 2 A & B

New Partners = 3

A, B & C

Given -Balance Sheet &

Adjustment

Ratios = OR, NR, SR

Goodwill = CO(SAC) or

IO(SAC)

Thank You