Admission of a Partner: Entries
Admission of a New
Partner
When firm requires additional capital or managerial help or both for the expansion of its business a new partner may be admitted to supplement its existing resources. According to the Partnership Act 1932, a new partner can be admitted into the firm only with the consent of all the existing partners unless otherwise agreed upon. With the admission of a new partner, the partnership firm is reconstituted and a new agreement is entered into to carry on the business of the firm.
A newly admitted partner acquires two main rights in the firm –
2. Right to share the profits of the partnership firm.
New Profit-Sharing Ratio: When new partner is admitted he acquires his share in profits from the old partners. In other words, on the admission of a new partner, the old partners sacrifice a share of their profit in favour of the new partner. But what will be the share of new partner and how he will acquire it from the existing partners is decided mutually among the old partners and the new partner.
Let total share = 1; Sumit’s share = 1/5
Remaining share = 1 − 1/5 = 4/5
Vishal’s new share = 4/5 × 2/5 = 8/25
Sumit’s share = 1/5 × 5/5 = 5/25
New profit-sharing ratio of Anil, Vishal and Sumit will be 12:8:5.
Note: It has been assumed that the new partner acquired his share from old partners in old ratio.
Illustration 2. Akshay and Bharati are partners sharing profits in the ratio of 3:2. They admit Dinesh as a new partner for 1/5th share in the future profits of the firm which he gets equally from Akshay and Bharati. Calculate new profit-sharing ratio of Akshay, Bharati and Dinesh.
Dinesh’s share = 1/5, gets equally from Akshay and Bharati = 1/5 × 1/2 = 1/10
Akshay’s share = 3/5 − 1/10 = 5/10
Bharati’s share = 2/5 − 1/10 = 3/10
Dinesh’s share = 1/5 × 2/2 = 2/10
New profit-sharing ratio between Akshay, Bharati and Dinesh will be 5:3:2.
Illustration 3. Anshu and Nitu are partners sharing profits in the ratio of 3:2. They admitted Jyoti as a new partner for 3/10 share which she acquired 2/10 from Anshu and 1/10 from Nitu. Calculate the new profit-sharing ratio of Anshu, Nitu and Jyoti.
Jyoti’s share = 3/10 which she acquires 2/10 from Anshu and 1/10 from Nitu.
New share = Old share – Surrendered share
Anshu’s new share = 3/5 − 2/10 = 4/10
Nitu’s new share = 2/5 − 1/10 = 3/10
Jyoti’s share = 3/10
Anshu : Nitu : Jyoti = 4:3:3.
Illustration 4. Ram and Shyam are partners in a firm sharing profits in the ratio of 3:2. They admit Ghanshyam as a new partner. Ram surrenders 1/4 of his share and Shyam 1/3 of his share in favour of Ghanshyam. Calculate new profit-sharing ratio of Ram, Shyam and Ghanshyam.
Ram surrenders 1/4 of his share = 3/5 × 1/4 = 3/20
Ram’s new share =3/5 – 3/20 = (12 – 3)/20 = 9/20
Shyam surrenders 1/3 of his share = 2/5 × 1/3 = 2/15
Shyam’s new share = 2/5 – 2/15 = 4/15
Ghanshyam’s new share = Ram’s sacrifice + Shyam’s Sacrifice
= 3/20 + 2/15 = (9 + 8)/60 = 17/60
Ram = 9/20 × 3/3 = 27/60; Shyam = 4/15 × 4/4 = 16/60
Ram : Shyam : Ghanshyam = 27:16:17
Illustration 5. Das and Sinha are partners in a firm sharing profits in 4:1 ratio. They admitted Pal as a new partner for 1/4 share in the profits, which he acquired wholly from Das. Determine the new profit-sharing ratio of the partners.
Pal’s share = 1/4, acquires wholly from Das
Das’s new share = Old Share – Share Surrendered
= 4/5 – 1/4 = (16 – 5)/20 = 11/20
Sinha’s new share = 1/5 × 4/4 = 4/20
Das : Sinha : Pal = 11:4:5.
Accounting Treatment of Goodwill at the time of admission of a New
Partner
(a) When goodwill already exists in books: The existing goodwill must be written off by debiting the old partners in their old profit-sharing ratio and crediting the Goodwill A/c.
The amount of premium brought in by the new partner is shared by the existing partners in their ratio of sacrifice. If this amount is paid to the old partners directly (privately) by the new partner, no entry is made in the books of the firm. But, when the amount is paid through the firm, not privately, the following journal entries are passed:
(i) Cash A/c Dr.
To Premium for Goodwill A/c
(Amount brought by new partner as premium)
(ii) Premium for Goodwill A/c Dr.
To Sacrificing Partners Capital A/c (Individually)
(Goodwill distributed among sacrificing partners in their sacrificing ratio)
If the partners decide that the amount of premium credited to their capital accounts should be retained in business, there is no need to pass any additional entry. If, however, they decide to withdraw their amounts, (in full or in part) the following additional entry will be passed:
(iii) Sacrificing Partners’ Capital A/c (Individually) Dr.
To Cash A/c
(The amount of goodwill withdrawn by the existing partners)
(c) Accounting Treatment of New Partner’s Goodwill, he is unable to bring in cash/assets:
When new partner is unable to bring his share of goodwill in cash or assets, then premium for goodwill
is not credited at the time of admission. New Partner’s Current A/c is debited with his share of goodwill
and Sacrificing Partners’ Capital A/c are credited in S.R.
Hidden Goodwill
Sometimes the value of goodwill is not given at the time of admission of a new partner. In such a situation it has to be inferred from the arrangement of the capital and profit-sharing ratio.
Steps for calculating Hidden Goodwill:
1. Firm’s Required Capital = New Partner’s Capital × Reciprocal of his share
Based on the amount brought in by C and his share in profit, the total capital of the newly constituted firm works out to be = Rs.1,80,000 (Rs. 60,000 × 3).
But the actual total capital of A, B and C works out as = Rs. 1,50,000
(Rs. 45,000 + Rs. 45,000 + Rs. 60,000).
Hence, it can be inferred that the difference is on account of goodwill i.e., Rs. 30,000 (Rs. 1,80,000 – Rs. 1,50,000).
C’s Current account can be debited by Rs. 10,000 (his share of goodwill) and A and B’s Capital accounts credited by Rs. 5,000 each.
When firm requires additional capital or managerial help or both for the expansion of its business a new partner may be admitted to supplement its existing resources. According to the Partnership Act 1932, a new partner can be admitted into the firm only with the consent of all the existing partners unless otherwise agreed upon. With the admission of a new partner, the partnership firm is reconstituted and a new agreement is entered into to carry on the business of the firm.
A newly admitted partner acquires two main rights in the firm –
2. Right to share the profits of the partnership firm.
New Profit-Sharing Ratio: When new partner is admitted he acquires his share in profits from the old partners. In other words, on the admission of a new partner, the old partners sacrifice a share of their profit in favour of the new partner. But what will be the share of new partner and how he will acquire it from the existing partners is decided mutually among the old partners and the new partner.
Let total share = 1; Sumit’s share = 1/5
Remaining share = 1 − 1/5 = 4/5
Vishal’s new share = 4/5 × 2/5 = 8/25
Sumit’s share = 1/5 × 5/5 = 5/25
New profit-sharing ratio of Anil, Vishal and Sumit will be 12:8:5.
Note: It has been assumed that the new partner acquired his share from old partners in old ratio.
Illustration 2. Akshay and Bharati are partners sharing profits in the ratio of 3:2. They admit Dinesh as a new partner for 1/5th share in the future profits of the firm which he gets equally from Akshay and Bharati. Calculate new profit-sharing ratio of Akshay, Bharati and Dinesh.
Dinesh’s share = 1/5, gets equally from Akshay and Bharati = 1/5 × 1/2 = 1/10
Akshay’s share = 3/5 − 1/10 = 5/10
Bharati’s share = 2/5 − 1/10 = 3/10
Dinesh’s share = 1/5 × 2/2 = 2/10
New profit-sharing ratio between Akshay, Bharati and Dinesh will be 5:3:2.
Illustration 3. Anshu and Nitu are partners sharing profits in the ratio of 3:2. They admitted Jyoti as a new partner for 3/10 share which she acquired 2/10 from Anshu and 1/10 from Nitu. Calculate the new profit-sharing ratio of Anshu, Nitu and Jyoti.
Jyoti’s share = 3/10 which she acquires 2/10 from Anshu and 1/10 from Nitu.
New share = Old share – Surrendered share
Anshu’s new share = 3/5 − 2/10 = 4/10
Nitu’s new share = 2/5 − 1/10 = 3/10
Jyoti’s share = 3/10
Anshu : Nitu : Jyoti = 4:3:3.
Illustration 4. Ram and Shyam are partners in a firm sharing profits in the ratio of 3:2. They admit Ghanshyam as a new partner. Ram surrenders 1/4 of his share and Shyam 1/3 of his share in favour of Ghanshyam. Calculate new profit-sharing ratio of Ram, Shyam and Ghanshyam.
Ram surrenders 1/4 of his share = 3/5 × 1/4 = 3/20
Ram’s new share =3/5 – 3/20 = (12 – 3)/20 = 9/20
Shyam surrenders 1/3 of his share = 2/5 × 1/3 = 2/15
Shyam’s new share = 2/5 – 2/15 = 4/15
Ghanshyam’s new share = Ram’s sacrifice + Shyam’s Sacrifice
= 3/20 + 2/15 = (9 + 8)/60 = 17/60
Ram = 9/20 × 3/3 = 27/60; Shyam = 4/15 × 4/4 = 16/60
Ram : Shyam : Ghanshyam = 27:16:17
Illustration 5. Das and Sinha are partners in a firm sharing profits in 4:1 ratio. They admitted Pal as a new partner for 1/4 share in the profits, which he acquired wholly from Das. Determine the new profit-sharing ratio of the partners.
Pal’s share = 1/4, acquires wholly from Das
Das’s new share = Old Share – Share Surrendered
= 4/5 – 1/4 = (16 – 5)/20 = 11/20
Sinha’s new share = 1/5 × 4/4 = 4/20
Das : Sinha : Pal = 11:4:5.
(a) When goodwill already exists in books: The existing goodwill must be written off by debiting the old partners in their old profit-sharing ratio and crediting the Goodwill A/c.
The amount of premium brought in by the new partner is shared by the existing partners in their ratio of sacrifice. If this amount is paid to the old partners directly (privately) by the new partner, no entry is made in the books of the firm. But, when the amount is paid through the firm, not privately, the following journal entries are passed:
(i) Cash A/c Dr.
To Premium for Goodwill A/c
(Amount brought by new partner as premium)
(ii) Premium for Goodwill A/c Dr.
To Sacrificing Partners Capital A/c (Individually)
(Goodwill distributed among sacrificing partners in their sacrificing ratio)
If the partners decide that the amount of premium credited to their capital accounts should be retained in business, there is no need to pass any additional entry. If, however, they decide to withdraw their amounts, (in full or in part) the following additional entry will be passed:
(iii) Sacrificing Partners’ Capital A/c (Individually) Dr.
To Cash A/c
(The amount of goodwill withdrawn by the existing partners)
(c) Accounting Treatment of New Partner’s Goodwill, he is unable to bring in cash/assets:
When new partner is unable to bring his share of goodwill in cash or assets, then premium for goodwill
is not credited at the time of admission. New Partner’s Current A/c is debited with his share of goodwill
and Sacrificing Partners’ Capital A/c are credited in S.R.
Hidden Goodwill
Sometimes the value of goodwill is not given at the time of admission of a new partner. In such a situation it has to be inferred from the arrangement of the capital and profit-sharing ratio.
Steps for calculating Hidden Goodwill:
1. Firm’s Required Capital = New Partner’s Capital × Reciprocal of his share
Based on the amount brought in by C and his share in profit, the total capital of the newly constituted firm works out to be = Rs.1,80,000 (Rs. 60,000 × 3).
But the actual total capital of A, B and C works out as = Rs. 1,50,000
(Rs. 45,000 + Rs. 45,000 + Rs. 60,000).
Hence, it can be inferred that the difference is on account of goodwill i.e., Rs. 30,000 (Rs. 1,80,000 – Rs. 1,50,000).
C’s Current account can be debited by Rs. 10,000 (his share of goodwill) and A and B’s Capital accounts credited by Rs. 5,000 each.
Illustration 06
Sunil and Dalip are partners in a firm sharing profits and losses in the ratio of 5:3. Sachin is admitted in the firm for 1/5 share of profits. He is to bring in Rs. 2,00,000 as capital and Rs. 40,000 as his share of goodwill. Give the necessary journal entries:
Sunil and Dalip are partners in a firm sharing profits and losses in the ratio of 5:3. Sachin is admitted in the firm for 1/5 share of profits. He is to bring in Rs. 2,00,000 as capital and Rs. 40,000 as his share of goodwill. Give the necessary journal entries:
(a) When
the amount of goodwill is retained in the business.
(b) When the amount of
goodwill is fully withdrawn.
(c) When 50% of the amount of goodwill is fully
withdrawn.
Solution:
(a) When the amount of goodwill credited to existing partners is retained in business
Journal Entries
(b) When the amount of goodwill credited to existing partners is fully
withdrawn.
Journal Entries
(c) When 50% of the amount of
goodwill credited to existing partners is withdrawn.
Journal Entries
Illustration 07
Vijay and Sanjay are partners in a firm sharing profits and losses in the ratio of 3:2. They decide to admit Ajay into partnership with 1/4 share in profits. Ajay brings in Rs. 3,00,000 for capital and the requisite amount of premium in cash. The goodwill of the firm is valued at Rs. 2,00,000. The new profit sharing ratio is 2:1:1. Vijay and Sanjay withdraw their share of goodwill. Give necessary journal entries.
Solution
(a) Ajay will bring Rs. 50,000 (1/4 of Rs. 2,00,000) as his share of goodwill (premium)
(b) Sacrificing Ratio is 2:3 as calculated below:
Vijay : Sanjay : Ajay
Old Ratio 3 : 2 : --- = 5
New Ratio 2 : 1 : 1 = 4
Vijay = 3/5 − 2/4 = (12 – 10)/20 = 2/20
Sanjay = 2/5 – 1/4 = (8 – 5)/20 = 3/20
Journal Entries
Solution:
(a) When the amount of goodwill credited to existing partners is retained in business
Journal Entries
|
Date |
Particulars |
L.F. |
Debit Rs. |
Credit Rs. |
|
(i) (ii)
|
Cash A/c Dr.
To Sachin’s Capital A/c To Premium for Goodwill A/c (Amt. brought by Sachin as Capital and G/W) |
|
2,40,000 40,000
|
|
|
Premium for Goodwill A/c Dr.
To Sunil’s Capital A/c To Dalip’s Capital A/c (G/W transferred to Sunil and Dalip in S.R. 5:3) |
40,000
15,000
Journal Entries
|
Date |
Particulars |
L.F. |
Debit Rs. |
Credit Rs. |
|
(i)
|
Cash A/c Dr.
To Sachin’s Capital A/c To Premium for Goodwill A/c (Amt. brought by Sachin as Capital and G/W) |
|
2,40,000 40,000
15,000 |
|
|
Premium for Goodwill A/c Dr.
To Sunil’s Capital A/c To Dalip’s Capital A/c (G/W transferred to Sunil and Dalip in S.R. 5:3) |
||||
|
Sunil’s Capital A/c Dr.
Dalip’s Capital A/c Dr. To Cash A/c (G/W amount withdrawn by Sunil and Dalip.) |
40,000
15,000
Journal Entries
|
Date |
Particulars |
L.F |
Debit Rs. |
Credit Rs. |
|
(i) (ii) (iii)
|
Cash A/c Dr.
To Sachin’s Capital A/c To Premium for Goodwill A/c (Amount brought by Sachin as Capital and G/W) |
|
2,40,000 40,000 12,500
7,500 |
|
|
Premium for Goodwill A/c Dr.
To Sunil’s Capital A/c To Dalip’s Capital A/c (G/W transferred to Sunil and Dalip in S.R. 5:3) |
||||
|
Sunil’s Capital A/c Dr.
Dalip’s Capital A/c Dr. To Cash A/c (50% of G/W amount withdrawn by Sunil and Dalip.) |
40,000
15,000
Vijay and Sanjay are partners in a firm sharing profits and losses in the ratio of 3:2. They decide to admit Ajay into partnership with 1/4 share in profits. Ajay brings in Rs. 3,00,000 for capital and the requisite amount of premium in cash. The goodwill of the firm is valued at Rs. 2,00,000. The new profit sharing ratio is 2:1:1. Vijay and Sanjay withdraw their share of goodwill. Give necessary journal entries.
Solution
(a) Ajay will bring Rs. 50,000 (1/4 of Rs. 2,00,000) as his share of goodwill (premium)
(b) Sacrificing Ratio is 2:3 as calculated below:
Vijay : Sanjay : Ajay
Old Ratio 3 : 2 : --- = 5
New Ratio 2 : 1 : 1 = 4
Vijay = 3/5 − 2/4 = (12 – 10)/20 = 2/20
Sanjay = 2/5 – 1/4 = (8 – 5)/20 = 3/20
Journal Entries
|
Date |
Particulars |
L.F |
Debit Rs. |
Credit Rs. |
|
(i) (ii) (iii)
|
Cash A/c Dr.
To Ajay’s Capital A/c To Premium for Goodwill A/c (Amount brought by Ajay as Capital and G/W) Premium for Goodwill A/c Dr. To Vijay’s Capital A/c To Sanjay’s Capital A/c (G/W transferred to Vijay and Sanjay in S.R. 2:3) Vijay’s Capital A/c Dr. Sanjay’s Capital A/c Dr. To Cash A/c (G/W amount withdrawn by Vijay and Sanjay.) |
|
3,50,000 50,000
30,000 |
50,000 20,000
30,000 |
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