Admission of a Partner
Complete Chapter Notes
One of the highest-weightage chapters in the Class 12 board exam. Learn how the new profit-sharing ratio is calculated, how goodwill is treated under AS-26, how assets and liabilities are revalued, and how capitals are adjusted — with a solved numerical for every single case.
A New Partner Buys a Share of Future Profits
When a new partner joins a firm, he pays for two things: a share in the assets of the firm and a share in its future profits. The old partners give up a part of their share, so the new partner must compensate them. Every topic in this chapter — new ratio, sacrificing ratio, goodwill, revaluation, reserves and capital adjustment — simply answers one question: how do we settle the accounts fairly on the date of admission?
1. Meaning and Effects of Admission
According to Section 31 of the Indian Partnership Act, 1932, a new partner can be admitted into a firm only with the consent of all the existing partners, unless the partnership deed provides otherwise. A firm usually admits a new partner when it needs more capital, better managerial skills, or wider business connections.
Admission is a form of reconstitution of the firm: the old agreement ends, a new agreement begins, and the business continues without interruption. On admission, the incoming partner acquires two rights:
Right to Share Future Profits
The new partner receives a share of the profits earned after the date of admission. For this right, he compensates the old partners by paying a premium for goodwill.
Right to Share the Assets
The new partner acquires a share in the assets of the firm. For this right, he brings in capital, in cash or in kind.
Adjustments required at the time of admission: (i) calculation of the new profit-sharing ratio and the sacrificing ratio, (ii) accounting treatment of goodwill, (iii) revaluation of assets and reassessment of liabilities, (iv) distribution of reserves and accumulated profits or losses, and (v) adjustment of the capitals of the partners, if agreed.
2. New Profit-Sharing Ratio
The new profit-sharing ratio is the ratio in which all partners, including the new one, will share future profits. Its calculation depends on the information given in the question. The three standard cases are explained below with a numerical for each.
Case 1 — Only the share of the new partner is given
When the question gives only the new partner’s share, it is assumed that the old partners continue to share the remaining profit in their old ratio. Remaining share = 1 − share of the new partner.
Solution: Remaining share = 1 − 1/5 = 4/5. A’s new share = 4/5 × 3/5 = 12/25. B’s new share = 4/5 × 2/5 = 8/25. C’s share = 1/5 = 5/25. New ratio = 12 : 8 : 5.
Case 2 — New partner acquires his share from old partners in a given ratio
Here the question states the proportion in which the old partners give up their shares. Deduct each partner’s surrendered portion from his old share.
Solution: C takes from A = 1/5 × 2/3 = 2/15, and from B = 1/5 × 1/3 = 1/15. Converting old shares to fifteenths: A = 9/15, B = 6/15. A’s new share = 9/15 − 2/15 = 7/15. B’s new share = 6/15 − 1/15 = 5/15. C’s share = 3/15. New ratio = 7 : 5 : 3.
Case 3 — Old partners surrender a fraction of their own shares
Here each old partner gives up a stated fraction of his own share. The new partner’s share is the total of all surrendered portions.
Solution: A surrenders 3/5 × 1/4 = 3/20. B surrenders 2/5 × 1/5 = 2/25. C’s share = 3/20 + 2/25 = 15/100 + 8/100 = 23/100. A’s new share = 3/5 − 3/20 = 9/20 = 45/100. B’s new share = 2/5 − 2/25 = 8/25 = 32/100. New ratio = 45 : 32 : 23.
3. Sacrificing Ratio
The sacrificing ratio is the ratio in which the old partners give up their shares in favour of the new partner. It decides how the premium for goodwill brought by the new partner is divided among the old partners.
4. Accounting Treatment of Goodwill (AS-26)
The new partner acquires a share of future profits which the old partners have built through years of effort. He therefore compensates them by paying a premium for goodwill equal to his share of the firm’s goodwill. As per Accounting Standard 26, self-generated goodwill cannot be raised in the books, so a Goodwill Account is never opened at the time of admission. The premium is adjusted through the partners’ capital or current accounts.
Case A — Premium brought in cash and retained in the business
| Step | Particulars | L.F. | Dr. | Cr. |
|---|---|---|---|---|
| 1 | Cash / Bank A/c Dr. | ✕✕ | ||
| To New Partner’s Capital A/c (capital) | ✕✕ | |||
| To Premium for Goodwill A/c | ✕✕ | |||
| (Being capital and premium for goodwill brought in by the new partner) | ||||
| 2 | Premium for Goodwill A/c Dr. | ✕✕ | ||
| To Sacrificing Partners’ Capital A/cs (in sacrificing ratio) | ✕✕ | |||
| (Being premium for goodwill credited to the sacrificing partners in the sacrificing ratio) | ||||
Case B — Premium withdrawn by the old partners (fully or partly)
Add one more entry after Case A: Sacrificing Partners’ Capital A/cs Dr. → To Cash / Bank A/c with the amount withdrawn.
Case C — Premium not brought in cash (fully or partly)
If the new partner is unable to bring his share of goodwill in cash, his Current Account is debited for the unpaid portion: New Partner’s Current A/c Dr. → To Sacrificing Partners’ Capital A/cs (in sacrificing ratio).
Working: Z’s share of goodwill = 2,00,000 × 1/4 = ₹50,000. Since no sacrifice details are given, X and Y sacrifice in the old ratio 3 : 2, so the premium is credited as X ₹30,000 and Y ₹20,000.
| Date | Particulars | L.F. | Dr. (₹) | Cr. (₹) |
|---|---|---|---|---|
| Cash A/c Dr. | 2,00,000 | |||
| To Z’s Capital A/c | 1,50,000 | |||
| To Premium for Goodwill A/c | 50,000 | |||
| (Being capital and premium for goodwill brought in by Z) | ||||
| Premium for Goodwill A/c Dr. | 50,000 | |||
| To X’s Capital A/c | 30,000 | |||
| To Y’s Capital A/c | 20,000 | |||
| (Being premium for goodwill divided between X and Y in the sacrificing ratio 3 : 2) | ||||
Case D — Hidden (Inferred) Goodwill
Sometimes the value of goodwill is not given directly. It is then inferred from the capital brought in by the new partner.
Solution: Implied total capital = 1,50,000 × 4/1 = ₹6,00,000. Actual total capital = 3,90,000 + 1,50,000 = ₹5,40,000. Hidden goodwill = 6,00,000 − 5,40,000 = ₹60,000. Z’s share = 60,000 × 1/4 = ₹15,000, adjusted by debiting Z’s Current Account and crediting X and Y in the sacrificing ratio.
5. Revaluation of Assets and Reassessment of Liabilities
On admission, assets and liabilities are shown at their current values so that any gain or loss belongs to the old partners, who owned the business when the change in values took place. A Revaluation Account is prepared. Decreases in assets, increases in liabilities and unrecorded liabilities are debited; increases in assets, decreases in liabilities and unrecorded assets are credited. The balance — profit or loss on revaluation — is transferred to the old partners’ capital accounts in the old ratio. The new partner never shares this profit or loss.
| Dr. — Particulars / ₹ | Cr. — Particulars / ₹ | ||
|---|---|---|---|
| To Stock A/c | 10,000 | By Plant A/c | 40,000 |
| To Provision for Doubtful Debts A/c | 5,000 | ||
| To Profit transferred to Capital A/cs: A (3/5) 15,000 B (2/5) 10,000 | 25,000 | ||
| Total | 40,000 | Total | 40,000 |
6. Treatment of Reserves and Accumulated Profits / Losses
Reserves and accumulated profits or losses appearing in the Balance Sheet on the date of admission were earned before the new partner joined. They are therefore transferred to the old partners’ capital accounts in the old ratio:
| Item | Journal Entry (old partners, old ratio) |
|---|---|
| General Reserve, Reserve Fund, Profit & Loss A/c (credit balance), Workmen Compensation Reserve in excess of any claim | Reserve / P&L A/c Dr. → To Old Partners’ Capital A/cs |
| Profit & Loss A/c (debit balance), Deferred Revenue Expenditure, Advertisement Suspense A/c | Old Partners’ Capital A/cs Dr. → To P&L A/c / Advertisement Suspense A/c |
7. Adjustment of Capitals (If Agreed)
Partners may agree that after admission, the capitals of all partners should be in proportion to the new profit-sharing ratio. The question can be framed in two ways.
Basis (i) — New partner’s capital based on the combined capital of old partners
Solution: Combined adjusted capital of A and B = 2,10,000 + 1,50,000 = ₹3,60,000, which represents the remaining share of 4/5. Total capital of the firm = 3,60,000 × 5/4 = ₹4,50,000. C’s capital = 4,50,000 × 1/5 = ₹90,000.
Basis (ii) — Old partners’ capitals based on the capital of the new partner
Working: Total capital = 1,00,000 × 4/1 = ₹4,00,000. Required capitals: A = 4,00,000 × 2/4 = ₹2,00,000; B = 4,00,000 × 1/4 = ₹1,00,000. A has a deficit of ₹20,000 (brings in); B has a surplus of ₹20,000 (withdraws).
| Date | Particulars | L.F. | Dr. (₹) | Cr. (₹) |
|---|---|---|---|---|
| Bank A/c Dr. | 20,000 | |||
| To A’s Capital A/c | 20,000 | |||
| (Being deficit capital brought in by A) | ||||
| B’s Capital A/c Dr. | 20,000 | |||
| To Bank A/c | 20,000 | |||
| (Being surplus capital withdrawn by B) | ||||
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20 MCQs — Admission of a Partner
Mixed difficulty — theory, ratio cases, goodwill treatment, and CUET-level numericals in Q17–Q20. The answer with a full explanation is given below each question.
Chapter 3 — Live Quiz
20 questions · Admission of a Partner · One at a time · Instant feedback
