Chapter – 3: Partnership: Admission of a Partner

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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

Cash / Bank/ Assets A/c Dr.

To New Partner’s Capital A/c (for amount of capital)

To Premium A/c (for amount of goodwill)

  1. For amount of goodwill brought in by new partner credited to Old Partner’s Capital A/cs in their Sacrificing Ratio.

Premium A/c Dr.

To Old Partner’s Capital A/cs

  1. When old partners withdraw the amount of goodwill.
Old Partner’s 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 Partner’s 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 C’s 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 A’s Capital A/c

 

 

7,500

 

To B’s 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) A’s Capital A/c Dr.

 

12,500

 

 

B’s Capital A/c Dr.

 

7,500

 

 

To Goodwill A/c

 

 

20,000

 

(For existing goodwill written off in Old Ratio)

 

 

 

Workings: C’s 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 partner’s share of goodwill is charged to his capital account and t/f to old partner’s 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 Partner’s Capital A/c

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

New Partner’s Capital A/c Dr.

To Old Partner’s Capital A/cs

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

Old Partner’s 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 Partner’s 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 C’s Capital A/c

 

 

50,000

 

(For amount of capital brought in by C)

 

 

 

 

C’s Capital A/c Dr.

 

12,000

 

 

To A’s Capital A/c

 

 

7,500

 

To B’s Capital A/c

 

 

4,500

 

(For C’s share of goodwill credited to A’s and B’s Capital A/cs in their sacrificing ratio.)

 

 

 

 

 

 

 

 

(b) Bank A/c Dr.

 

50,000

 

 

To C’s Capital A/c

 

 

50,000

 

(For amount of capital brought in by C)

 

 

 

 

C’s Capital A/c Dr.

 

12,000

 

 

To A’s Capital A/c

 

 

7,500

 

To B’s Capital A/c

 

 

4,500

 

(For C’s share of goodwill credited to A’s and B’s Capital A/cs in their sacrificing ratio.)

 

 

 

 

A’s Capital A/c Dr.

 

15,000

 

 

B’s 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 partner’s 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 partner’s capital accounts in their sacrificing ratio. Entries will be in following manner:

  1. For amount of Capital + Goodwill brought in by new partner

Cash / Bank/ Assets A/c Dr.

To New Partner’s Capital A/c (Amount of Capital)

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

  1. For amount of goodwill brought in by new partner credited to old partner’s capital accounts in their sacrificing ratio.

Premium A/c Dr.

To Old Partner’s Capital A/cs

  1. For amount of goodwill not brought in by new partner charged to his capital account and credited to old partner’s capital accounts in their sacrificing ratio.
New Partner’s Capital A/c Dr.

To Old Partner’s 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 Partner’s 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 C’s 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 A’s Capital A/c

 

 

4,500

 

To B’s Capital A/c

 

 

2,700

 

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

 

 

 

 

C’s Capital A/c Dr.

 

4,800

 

 

To A’s Capital A/c

 

 

3,000

 

To B’s 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)

 

 

 

 

A’s Capital A/c Dr.

 

2,250

 

 

B’s Capital A/c Dr.

 

1,350

 

 

To Bank A/c

 

 

3,600

 

(For amount of goodwill withdrawn by old partners)

 

 

 

 

A’s Capital A/c Dr.

 

10,000

 

 

B’s Capital A/c Dr.

 

6,000

 

 

To Goodwill A/c

 

 

16,000

 

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

 

 

 

Workings:

C’s 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) – Issued by The Institute of Chartered Accountants of IndiaAccording to AS – 10 goodwill should be recorded in the books only when some consideration in money or money’s 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.



  « Chapter – 2: Reconstitution of a Firm Chapter – 4: Partnership: Retirement/Death of a Partner: »  

  Posted on Thursday, November 11th, 2021 at 4:40 PM under   Accountancy | RSS 2.0 Feed