Admission of a Partner 49

Reconstitution of a Partnership Firm –

Admission of a Partner 2 3:2. On April 1, 2017 they admitted John as a new partner with 1/6 share in
profits of the firm. With this change now there are three partners of the firm and
it stands reconstituted.
Change in the profit sharing ratio among the existing partners: Sometimes the
LEARNING OBJECTIVES
After studying this chapter
you will be able to:
P artnership is an agreement between two or more
persons (called partners) for sharing the profits
of a business carried on by all or any of them acting
partners of a firm may decide to change their existing profit sharing ratio. This
may happen an account of a change in the existing partners’ role in the firm. For
example, Ram, Mohan and Sohan are partners in a firm sharing profits in the
• Explain the concept of for all. Any change in the existing agreement ratio of 3:2:1. With effect from April 1,2017 they decided to share profits equally
reconstitution of apartnership amounts to reconstitution of the partnership firm. as Sohan brings in additional capital. This results in a change in the existing
firm; This results in an end of the existing agreement and agreement leading to reconstitution of the firm.
• Identify the matters that need
adjustments in the books of a new agreement comes into being with a changed
relationship among the members of the partnership Retirement of an existing partner: It means withdrawal by a partner from the
firm when a new partner is
admitted; firm and/or their composition. However, the firm business of the firm which may be due to his bad health, old age or change in
• Determine the new profit continues. The partners often resort to reconstitution business interests. In fact a partner can retire any time if the partnership is at
sharing ratio and calculate
of the firm in various ways such as admission of a will. For example, Roy, Ravi and Rao are partners in the firm sharing profits in
the sacrificing ratio; the ratio of 2:2:1. On account of illness, Ravi retired from the firm on March 31,
• Define goodwill and new partner, change in profit sharing ratio,
enumerate the factors that retirement of a partner, death or insolvence of a 2017. This results in reconstitution of the firm now having only two partners.
affect it; partner. In this chapter we shall have a brief idea Death of a partner: Partnership may also stand reconstituted on death of a
• Explain the methods of about all these and in detail about the accounting
valuationof goodwill;
partner, if the remaining partners decide to continue the business of the firm as
implications of admission of a new partner or an on usual. For example, X,Y and Z are partners in a firm sharing profits in the ratio
• Describe how goodwill will
be treated under different change in the profit sharing ratio. 3:2:1. X died on March 31, 2017. Y and Z decide to carry on the business sharing
situations when a new future profits equally. The continuity of business by Y and Z sharing future
partner is admitted; 2.1 Modes of Reconstitution of a Partnership profits equally leads to reconstitution of the firm.
• Make necessaryadjustments Firm
for revaluation of assets and
reassessmentofliabilities; Reconstitution of a partnership firm usually takes 2.2 Admission of a New Partner
• Make necessaryadjustments place in any of the following ways:
for accumulated profits and When firm requires additional capital or managerial help or both for the
losses; Admission of a new partner: A new partner may be expansion of its business a new partner may be admitted to supplement its
• Determine the capital of each admitted when the firm needs additional capital or existing resources. According to the Partnership Act 1932, a new partner can
partner, if required according be admitted into the firm only with the consent of all the existing partners unless
to the new profit sharing ratio managerial help. According to the provisions of
and make necessary Partnership Act 1932 unless it is otherwise provided otherwise agreed upon. With the admission of a new partner, the partnership
adjustments; in the partnership deed a new partner can be firm is reconstituted and a new agreement is entered into to carry on the business
• Make necessaryadjustments
adm itted only when the exist ing partne rs of the firm.
on change in the profit
sharing ratio among the unanimously agree for it. For example, Hari and A newly admitted partner acquires two main rights in the firm–
existing partners. Haqque are partners sharing profits in the ratio of 1. Right to share the assets of the partnership firm; and
2. Right to share the profits of the partnership firm.
For the right to acquire share in the assets and profits of the partnership
firm, the partner brings an agreed amount of capital either in cash or in kind.
Moreover, in the case of an established firm which may be earning more profits
than the normal rate of return on its capital the new partner is required to
contribute some additional amount known as premium or goodwill. This is done

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50 Accountancy – Partnership Accounts Admission of a Partner 51

primarily to compensate the sacrificing partners for loss of their share in super Illustration 2
profits of the firm. Akshay and Bharati are partners sharing profits in the ratio of 3:2. They admit
Following are the other important points which require attention at the time Dinesh as a new partner for 1/5th share in the future profits of the firm which
of admission of a new partner: he gets equally from Akshay and Bharati. Calculate new profit sharing ratio of
1. New profit sharing ratio; Akshay, Bharati and Dinesh.
2. Sacrificing ratio;
3. Valuation and adjustment of goodwill; Solution
4. Revaluation of assets and Reassessment of liabilities; 1 2
5. Distribution of accumulated profits (reserves); and Dinesh’s share = or
5 10
6. Adjustment of partners’ capitals.
3 1 5
Akshay’s share =  
2.3 New Profit Sharing Ratio
5 10 10
When new partner is admitted he acquires his share in profits from the old partners. 2 1 3
In other words, on the admission of a new partner, the old partners sacrifice a Bharati’s share =  
5 10 10
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 New profit sharing ratio between Akshay, Bharati and Dinesh will be 5:3:2.
mutually among the old partners and the new partner. However, if nothing is
specified as to how does the new partner acquire his share from the old partners; Illustration 3
it may be assumed that he gets it from them in their profit sharing ratio. In any
case, on admission of a new partner, the profit sharing ratio among the old Anshu and Nitu are partners sharing profits in the ratio of 3:2. They admitted
partners will change keeping in view their respective contribution to the profit Jyoti as a new partner for 3/10 share which she acquired 2/10 from Anshu and
sharing ratio of the incoming partner. Hence, there is a need to ascertain the new 1/10 from Nitu. Calculate the new profit sharing ratio of Anshu, Nitu and Jyoti.
profit sharing ratio among all the partners. This depends upon how does the
new partner acquires his share from the old partners for which there are many Solution
possibilities. Let us understand it with the help of the following illustrations. 3
Jyoti’s share =
10
Illustration 1
3 2 4
Anil and Vishal are partners sharing profits in the ratio of 3:2. They admitted Anshu’s new share =  
Sumit as a new partner for 1/5 share in the future profits of the firm. Calculate 5 10 10
new profit sharing ratio of Anil, Vishal and Sumit. Nitu’s new share = Old share – Share Surrendered
Solution 2 1 3
=  
1 5 10 10
Sumit’s share = The new profit sharing ratio between
5
1 4 Anshu, Nitu and Jyoti will be 4 : 3 : 3.
Remaining share = 1 =
5 5
Anil’s new share =
3
of
4 12 Illustration 4
=
5 5 25 Ram and Shyam are partners in a firm sharing profits in the ratio of 3:2. They
2 4 8
Vishal’s new share = of = admit Ghanshyam as a new partner. Ram sacrificed 1/4 of his share and Shyam
5 5 25
New profit sharing ratio of Anil, Vishal and Sumit will be 12:8:5. 1/3 of his share in favour of Ghanshyam. Calculate new profit sharing ratio of
Ram, Shyam and Ghanshyam.
Note: It has been assumed that the new partner acquired his share from old partners in
old ratio.

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52 Accountancy – Partnership Accounts Admission of a Partner 53

Solution As stated earlier, the new partner is required to compensate the old partner’s
3 for their loss of share in the super profits of the firm for which he brings in an
Ram’s old share = additional amount as premium for goodwill. This amount is shared by the
5
1 3 3 existing partners in the ratio in which they forgo their shares in favour of the
Share sacrificed by Ram = of 
5 20
new partner which is called sacrificing ratio.
4
3 3 9 The ratio is normally clearly given as agreed among the partners which could
Ram’s new share =  
be the old ratio, equal sacrifice, or a specified ratio. The difficulty arises where
5 20 20
the ratio in which the new partner acquires his share from the old partners is
2
Shyam’s old share = not specified. Instead, the new profit sharing ratio is given. In such a situation,
5
1 2 2 the sacrificing ratio is to be worked out by deducting each partner’s new share
Share sacrificed by Shyam = of 
from his old share. Look at the illustrations 6 to 8 and see how sacrificing ratio
3 5 15
2 2 4 is calculated in such a situation.
Shyam’s new share =  
5 15 15 Illustration 6
Ghanshyam’s new share = Ram’s sacrifice + Shyam’s Sacrifice
3 2 17 Rohit and Mohit are partners in a firm sharing profits in the ratio of 5:3. They
  = admit Bijoy as a new partner for 1/7 share in the profit. The new profit sharing
20 15 60
New profit sharing ratio among Ram, Shyam and Ghanshyam will be 27:16:17. ratio will be 4:2:1. Calculate the sacrificing ratio of Rohit and Mohit.

Illustration 5 Solution
Das and Sinha are partners in a firm sharing profits in 4:1 ratio. They admitted
5
Pal as a new partner for 1/4 share in the profits, which he acquired wholly from Rohit’s old share =
8
Das. Determine the new profit sharing ratio of the partners.
4
Rohit’s new share =
Solution 7
1 5 4 3
Pal’s share = Rohit’s sacrifice =  
4 8 7 56
Das’s new share = Old Share – Share Surrendered
3
4 1 11 Mohit’s old share =
=  = 8
5 4 20
2
1 Mohit’s new share =
Sinha’s new share = 7
5 3 2 5
The new profit sharing ratio among Das, Sinha and Pal will be 11:4:5. Mohit’s sacrifice =  
8 7 56
2.4 Sacrificing Ratio Sacrificing ratio among Rohit and Mohit will be 3:5.
The ratio in which the old partners agree to sacrifice their share of profit in
favour of the incoming partner is called sacrificing ratio. The sacrifice by a partner Illustration 7
is equal to : Amar and Bahadur are partners in a firm sharing profits in the ratio of 3:2. They
admitted Mary as a new partner for 1/4 share. The new profit sharing ratio
Old Share of Profit – New Share of Profit
between Amar and Bahadur will be 2:1. Calculate their sacrificing ratio.

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54 Accountancy – Partnership Accounts Admission of a Partner 55

Solution Ramesh’s sacrifice = Suresh’s gain+Mohan’s gain

3 7 10
=  
1
Mary’s share = 42 42 42
4
3 In this case, the whole sacrifice is by Ramesh alone.
Remaining share = 1 1 =
4 4
This 3/4 share is to be shared by Amar and Bahadur in the ratio of 2:1. Test your Understanding - I
Therefore,
1. A and B are partners sharing profits in the ratio of 3:1. They admit C for 1/4
6 2
Amar’s new share = 2 of 3 = or share in the future profits. The new profit sharing ratio will be:
3 4 12 4 9 3 4
3 1
Bahadur’s new share = 1 of 3 = or (a) A
16
, B
16
, C
16
3 4 12 4
8 4 4
New profit sharing ratio of Amar, Bahadur and Mary will be 2:1:1. (b) A , B , C
3 2 2 16 16 16
Amar’s sacrifice =  
5 4 20 10 2 4
2 1 3 (c) A , B , C
16 16 16
Bahadur’s sacrifice =  
5 4 20 8 9 10
(d) A , B , C
Sacrificing ratio among Amar and Bahadur will be 2:3. 16 16 16
2. X and Y share profits in the ratio of 3:2. Z was admitted as a partner who sets
Illustration 8 1/5 share. New profit sharing ratio, if Z acquires 3/20 from X and 1/20 from
Y would be:
Ramesh and Suresh are partners in a firm sharing profits in the ratio of 4:3. (a) 9 : 7 : 4 (b) 8 : 8 : 4 (c) 6 : 10 : 4 (d) 10 : 6 : 4
They admitted Mohan as a new partner. The profit sharing ratio of Ramesh,
3. A and B share profits and losses in the ratio of 3 : 1, C is admitted into
Suresh and Mohan will be 2:3:1. Calculate the gain or sacrifice of old partner. partnership for 1/4 share. The sacrificing ratio of A and B is:
(a) equal (b) 3 : 1 (c) 2 : 1 (d) 3 : 2.
Solution
4 2.5 Goodwill
Ramesh’s old share =
7 Goodwill is also one of the special aspects of partnership accounts which requires
2 adjustment (also valuation if not specified) at the time of reconstitution of a firm
Ramesh’s new share =
6 viz., a change in the profit sharing ratio, the admission of a partner or the
4 2 10
Ramesh’s sacrifice =   retirement or death of a partner.
7 6 42
3 2.5.1 Meaning of Goodwill
Suresh’s new share =
6
3 Over a period of time, a well-established business develops an advantage of
Suresh’s old share = good name, reputation and wide business connections. This helps the business
7
3 3 3 to earn more profits as compared to a newly set up business. In accounting, the
Suresh’s gain =  
6 7 42 monetary value of such advantage is known as “goodwill”.
1 7 It is as an intangible asset. In other words, goodwill is the value of the
Mohan’s share = or
6 42 reputation of a firm in respect of the profits expected in future over and above
the normal profits. It is generally observed that when a person pays for goodwill,

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56 Accountancy – Partnership Accounts Admission of a Partner 57

he/she pays for something, which places him in the position of being able to earn calculated by another method. Hence, the method by which goodwill is to be
super profits as compared to the profit earned by other firms in the same industry. calculated, may be specifically decided between the existing partners and the
In simple words, goodwill can be defined as “the present value of a firm’s incoming partner.
anticipated excess earnings” or as “the capitalised value attached to the differential The important methods of valuation of goodwill are as follows:
profit capacity of a business”. Thus, goodwill exists only when the firm earns super 1. Average Profits Method
profits. Any firm that earns normal profits or is incurring losses has no goodwill. 2. Super Profits Method
3. Capitalisation Method
2.5.2 Factors Affecting the Value of Goodwill
2.5.4.1 Average Profits Method
The main factors affecting the value of goodwill are as follows:
1. Nature of business: A firm that produces high value added products or Under this method, the goodwill is valued at agreed number of ‘years’ purchase
having a stable demand is able to earn more profits and therefore has of the average profits of the past few years. It is based on the assumption that a
more goodwill. new business will not be able to earn any profits during the first few years of its
2. Location: If the business is centrally located or is at a place having heavy operations. Hence, the person who purchases a running business must pay in
customer traffic, the goodwill tends to be high. the form of goodwill a sum which is equal to the profits he is likely to receive for
3. Efficiency of management: A well-managed concern usually enjoys the the first few years. The goodwill, therefore, should be calculated by multiplying
advantage of high productivity and cost efficiency. This leads to higher the past average profits by the number of years during which the anticipated
profits and so the value of goodwill will also be high. profits are expected to accrue.
4. Market situation: The monopoly condition or limited competition enables For example, if the past average profits of a business works out at Rs. 20,000
the concern to earn high profits which leads to higher value of goodwill. and it is expected that such profits are likely to continue for another three years,
5. Special advantages: The firm that enjoys special advantages like import the value of goodwill will be Rs. 60,000 (Rs. 20,000  3),
licences, low rate and assured supply of electricity, long-term contracts
for supply of materials, well-known collaborators, patents, trademarks, Illustration 9
etc. enjoy higher value of goodwill. The profit for the five years of a firm are as follows – year 2013 Rs. 4,00,000;
year 2014 Rs. 3,98,000; year 2015 Rs. 4,50,000; year 2016 Rs. 4,45,000 and
2.5.3 Need for Valuation of Goodwill year 2017 Rs. 5,00,000. Calculate goodwill of the firm on the basis of 4 years
Normally, the need for valuation of goodwill arises at the time of sale of a business. purchase of 5 years average profits.
But, in the context of a partnership firm it may also arise in the following
circumstances: Solution
1. Change in the profit sharing ratio amongst the existing partners; Year Profit
2. Admission of new partner; (Rs.)
3. Retirement of a partner; 2013 4,00,000
4. Death of a partner; and 2014 3,98,000
5. Dissolution of a firm involving sale of business as a going concern. 2015 4,50,000
6. Amalgamation of partnership firms. 2016 4,45,000
2017 5,00,000
Total 21,93,000
2.5.4 Methods of Valuation of Goodwill
Total Profit of Last 5 Years 21,93,000
Since goodwill is an intangible asset it is very difficult to accurately calculate its Average Profit = = Rs. = Rs. 4,38,600
No.of years 5
value. Various methods have been advocated for the valuation of goodwill of a
Goodwill = Average Profits × No. of years purchased
partnership firm. Goodwill calculated by one method may differ from the goodwill = Rs. 4,38,600 × 4 = Rs. 17,54,400

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58 Accountancy – Partnership Accounts Admission of a Partner 59

The above calculation of goodwill is based on the assumption that no change Illustration 11
in the overall situation of profits is expected in the future.
Calculate goodwill of a firm on the basis of three year’ purchase of the weighted
The above illustration is based on simple average. Sometimes, if there exists average profits of the last four years. The profit of the last four years were: 2012
an increasing on decreasing trend, it is considered to be better to give a higher Rs. 20,200; 2013 Rs. 24,800; 2014 Rs. 20,000 and 2015 Rs. 30,000. The weights
weightage to the profits to the recent years than those of the earlier years. Hence, assigned to each year are : 2012 – 1; 2013 – 2; 2014 – 3 and 2015 – 4.
it is a advisable to work out weighted average based on specified weights like 1, You are supplied the following information:
2, 3, 4 for respective year’s profit. However, weighted average should be used 1. On September 1, 2014 a major plant repair was undertaken for Rs. 6,000,
only if specified. (See illustrations 10 and 11). which was charged to revenue. The said sum is to be capitalised for
goodwill calculation subject to adjustment of depreciation of 10% p.a.
Illustration 10 on reducing balance method.
The profits of firm for the five years are as follows: 2. The Closing Stock for the year 2013 was overvalued by Rs. 2,400.
Year Profit
3. To cover management cost an annual charge of Rs. 4,800 should be
(Rs.) made for purpose of goodwill valuation.
2012–13 20,000
Solution
2013–14 24,000
2014–15 30,000
Calculation of Adjusted Profit 2012 2013 2014 2015
2015–16 25,000 Rs. Rs. Rs. Rs.
2016–17 18,000
Given Profits 20,200 24,800 20,000 30,000
Calculate the value of goodwill on the basis of three years’ purchase of Less: Management Cost 4,800 4,800 4,800 4,800
weighted average profits based on weights 1,2,3,4 and 5 respectively. Add: Capital Expenditure 15,400 20,000 15,200 25,200
Charged to Revenue - - 6,000 -
Solution 15,400 20,000 21,200 25,200
Less: Unprovided Depreciation - - 200 580
Year Ended 31 March
st
Profit Weight Product
(Rs.) 15,400 20,000 21,000 24,620
Less: over valuation of Closing Stock - 2,400 - -
2012–13 20,000 1 20,000
15,400 17,600 21,000 24,620
2013–14 24,000 2 48,000
2014–15 30,000 3 90,000 Add: over value of opening stock - - 2,400 -
2015–16 25,000 4 1,00,000
Adjusted Profits 15,400 17,600 23,400 24,620
2016–17 18,000 5 90,000

15 3,48,000 Calculation of weighted average profits:

(Rs.)
Year Profit Weight Product
3,48,000
Weighted Average Profit = Rs. = Rs. 23,200 2012 15,400 1 15,400
15 2013 17,600 2 35,200
Goodwill = Rs. 23,200 × 3 = Rs. 69,600 2014 23,400 3 70,200
2015 24,620 4 98,480
Total 10 2,19,280

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60 Accountancy – Partnership Accounts Admission of a Partner 61

2,19,280 Illustration 12
Weight Average Profit = Rs. = Rs. 21,928
10 The books of a business showed that the firm’s capital employed on
Goodwill = Rs. 21,928 × 3 = Rs. 65,784 December 31, 2015, Rs. 5,00,000 and the profits for the last five years were:
Notes to Solution 2011–Rs. 40,000: 2012 -Rs. 50,000; 2013-Rs. 55,000; 2014-
(i) Depreciation of 2014 = 10% of Rs. 6000 for 4 months Rs.70,000 and 2015-Rs. 85,000. You are required to find out the value
= Rs. 6000  10/100  4/12 = Rs. 200 of goodwill based on 3 years purchase of the super profits of the business,
(ii) Depreciation of 2015 = 10% of Rs. 6000 – Rs. 200 for one year given that the normal rate of return is 10%.
= Rs. 5800  10/100 + Rs. 580
(iii) Closing Stock of 2014 will become opening stock for the year 2015. Solution
Firm's Capital  Normal Rate of Return
2.5.4.2 Super Profits Method Normal Profits =
100
The basic assumption in the average profits (simple or weighted) method of 5,00,000  10
calculating goodwill is that if a new business is set up, it will not be able to = Rs. = Rs. 50,000
100
earn any profits during the first few years of its operations. Hence, the person Average Profits:
who purchases an existing business has to pay in the form of goodwill a sum
equal to the total profits he is likely to receive for the first ‘few years’. But it is Year Profit
contended that the buyer’s real benefit does not lie in total profits; it is limited (Rs.)
to such amounts of profits which are in excess of the normal return on capital 2011 40,000
employed in similar business. Therefore, it is desirable to value, goodwill on 2012 50,000
the basis of the excess profits and not the actual profits. The excess of actual 2013 55,000
profits over the normal profits is termed as super profits. 2014 70,000
2015 85,000
Firm’s Capital × Normal Rate of Return
Normal Profit = Total 3,00,000
100
Firms capital includes partners capital and reserves and surplus but excludes
fictitious assets and goodwill. Average Profits = Rs. 3,00,000/5 = Rs. 60,000
Super Profit = Rs. 60,000 – Rs. 50,000 = Rs. 10,000
Suppose an existing firm earns Rs. 18,000 on the capital of Rs. 1,50,000
Goodwill = Rs. 10,000  3 = Rs. 30,000
and the normal rate of return is 10%. The Normal profits will work out at
Rs. 15,000 (1,50,000 × 10/100). The super profits in this case will be Rs. 3,000
Illustration 13
(Rs. 18,000 – 15,000). The goodwill under the super profit method is ascertained
by multiplying the super profits by certain number of years’ purchase. If, in the The capital of the firm of Anu and Benu is Rs. 1,00,000 and the market rate of
above example, it is expected that the benefit of super profits is likely to be interest is 15%. Annual salary to partners is Rs. 6,000 each. The profits for the
available for 5 years in future, the goodwill will be valued at Rs. 15,000 last 3 years were Rs. 30,000; Rs. 36,000 and Rs. 42,000. Goodwill is to be
(3,000 × 5). Thus, the steps involved under the method are: valued at 2 years purchase of the last 3 years’ average super profits. Calculate
1. Calculate the average profit, the goodwill of the firm.
2. Calculate the normal profit on the firm’s capital on the basis of the normal
rate of return, Solution
3. Calculate the super profits by deducting normal profit from the average
15
profits, and Interest on capital = 1,00,000  = Rs. 15,000….........(i)
4. Calculate goodwill by multiplying the super profits by the given number 100
of years’ purchase. Add: partner’s salary = Rs. 6,000  2 = Rs. 12,000............. (ii)

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62 Accountancy – Partnership Accounts Admission of a Partner 63

Normal Profit(i+ii) = Rs. 27,000 Goodwill = Capitalised value – Net Assets

1,08,000 = Rs. 10,00,000 – Rs. 8,20,000
Average Profit = Rs. 30,000+Rs.36,000+Rs.42,000 = Rs. = Rs.1,80,000
3 (b) Capitalisation of Super Profits: Goodwill can also be ascertained by capitalising the
= Rs. 36,000 super profit directly. Under this method there is no need to work out the capitalised
Super Profit = Average Profit–Normal Profit value of average profits. It involves the following steps.
= Rs. 36,000–Rs. 27,000 (i) Calculate capital of the firm, which is equal to total assets (excluding goodwill
= Rs. 9,000 and ficticious assets) minus outside liabilities.
Goodwill = Super Profit × No of years’ purchase (ii) Calculate normal profits on capital employed.
= Rs. 9,000 × 2
(iii) Calculate average profit for past years, as specified.
= Rs. 18,000
(ii) Calculate super profits by deducting normal profits from average profits.
(iii) Multiply the super profits by the required rate of return multiplier, that is,
2.5.4.3 Capitalisation Method
Goodwill = Super Profits × 100 Normal Rate of Return
Under this method the goodwill can be calculated in two ways: (a) by capitalizing
the average profits, or (b) by capitalising the super profits. In other words, goodwill is the capitalised value of super profits. The amount of goodwill
worked out by this method will be exactly the same as calculated by capitalising the
(a) Capitalisation of Average Profits: Under this method, the value of goodwill average profits.
is ascertained by deducting the actual firm’s capital in the business from the For example, using the data given in illustration 14 where the average profits are Rs.
capitalized value of the average profits on the basis of normal rate of return. 1,00,000 and the normal profits are Rs. 82,000 (10% of Rs. 8,20,000), the super profits
worked out as Rs. 18,000 (Rs. 1,00,000 – Rs. 82,000), the goodwill will be calculated as
This involves the following steps: follows.
(i) Ascertain the average profits based on the past few years’ performance.
100
(ii) Capitalize the average profits on the basis of the normal rate of return to Rs. 18,000 × = Rs. 1,80,000.
10
ascertain the capitalised value of average profits as follows:

Average Profits × 100/Normal Rate of Return Illustration 15

(iii) Ascertain the actual firm’s capital (net assets) by deducting outside 1. The goodwill of a firm is to be worked out at three years’ purchase of the
liabilities from the total assets (excluding goodwill and ficticious assets). average profits of the last five years which are as follows:
Firms’ Capital = Total Assets (excluding goodwill) – Outside Liabilities Years Profits (Loss)
Where outside Liabilities include both long term and short term Liabilities. (Rs.)
(iv) Compute the value of goodwill by deducting net assets from the 2012 10,000
capitalised value of average profits, i.e. (ii) – (iii). 2013 15,000
2014 4,000
Illustration 14 2015 (5,000)
A business has earned average profits of Rs. 1,00,000 during the last few years 2016 6,000
and the normal rate of return in a similar business is 10%. Ascertain the value
2. The capital of the firm is Rs. 1,00,000 and normal rate of return is 8%,
of goodwill by capitalisation average profits method, given that the value of net
the average profits for last 5 years are Rs. 12,000 and goodwill is to be
assets of the business is Rs. 8,20,000.
worked out at 3 years’ purchase of super profits,
Solution 3. Rama Brothers earn an average profit of Rs. 30,000 with a capital of
Capitalised Value of Average Profits Rs. 2,00,000. The normal rate of return in the business is 10%. Using
1,00,000  100 capitalisation of super profits method work out the value the goodwill of
Rs. = Rs. 10,00,000
10 the firm.

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64 Accountancy – Partnership Accounts Admission of a Partner 65

Solution (i) Bank A/c Dr.

To New Partner’s Capital A/c
1. Total Profits = Rs. 10,000 + Rs. 15,000 + Rs. 4,000 + Rs. 6,000 – Rs. 5,000
(Amount brought by new partner for his share
= Rs. 30,000
of goodwill).
Average Profits = Rs. 30,000/5 = Rs. 6,000
Goodwill = Average Profits × 3 = Rs. 6,000  3 = Rs.18,000 (ii) New Partner’s Capital A/c Dr.
2. Average Profit = Rs. 12,000 To Sacrificing Partner’s Capital A/c’s
8 (Individually)
Normal Profit = Rs.1,00,000  = Rs. 8,000 (Goodwill brought by new partners distributed
100
among the existing partners in their sacrificing
Super Profit=Average Profit – Normal profit = Rs. 12,000 – Rs. 8,000 ratio)
= Rs. 4,000
Goodwill=Super Profit  3 = Rs. 4,000  3 = Rs. 12,000 If the partners decide that the amount of premium for goodwill credited to
3. Normal Profit= Rs. 2,00,000  10/100 = Rs. 20,000 their capital accounts should be retained in business, an additional entry is not
Super Profit = Average Profit – Normal Profit = Rs. 30,000 – Rs. 20,000 passed. If, however, they decide to withdraw their amounts, (in full or in part)
= Rs. 10,000 the following additional entry will be passed:
Goodwill=Super Profit  100/Normal Rate of Return
Existing Partner’s Capital A/c (Individually) Dr.
= 10,000  100/10 = Rs. 1,00,000.
To Bank A/c
2.5.5 Treatment of Goodwill (The amount of goodwill withdrawn by the
existing partners)
As stated earlier, the incoming partner who acquires his share in the profits of
the firm from the existing partners brings in additional amount to compensate Illustration 16
them for loss of their share in super profits. It is termed as his share of goodwill
(also called premium for goodwill). 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 1/5th share of profits. He brings in
2.5.5.1 When the new Partner brings goodwill in cash. Rs. 20,000 as capital and Rs. 4,000 as his share of goodwill by cheque. Give the
necessary journal entries,
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 (a) When partners decided to retain goodwill in business.
directly (privately) by the new partner, no entry is passed in the books of the (b) When the amount of goodwill is fully withdrawn.
firm. But, when the amount is paid through the firm, which is generally the (c) When 50% of the amount of goodwill is withdrawn.
case, the following journal entries are passed:
Solution
(i) Bank A/c Dr. (a) When the amount of goodwill credited to existing partners is retained
To Premium for Goodwill A/c
(Amount brought by new partner as premium)
in business.

(ii) Goodwill A/c Dr.

To Sacrificing Partners Capital A/c
(Individually)(Goodwill distributed among the
existing partners’ in their sacrificing ratio).

Alternatively, it is credited to the new partner’s capital account and then

adjusted in favour of the existing partners in their sacrificing ratio. In that case
the journal entries will be as follows:

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66 Accountancy – Partnership Accounts Admission of a Partner 67

Books of Sunil and Dalip Illustration 17

Journal
Date Particulars L.F. Debit Credit Vijay and Sanjay are partners in a firm sharing profits and losses in the ratio
(Rs.) (Rs.) of 3:2. They admitted Ajay into partnership with 1/4 share in profits. Ajay
(i) Bank A/c Dr. 24,000 brings in Rs. 30,000 for capital and the requisite amount of premium in
To Sachin’s Capital A/c 20,000 cash. The goodwill of the firm is valued at Rs. 20,000. The new profit sharing
To Premium for Goodwill A/c 4,000
(The amount brought in by Sachin as
ratio is 2:1:1. Vijay and Sanjay withdraw their share of goodwill. Give
Capital and Goodwill) necessary journal entries.

(ii) Premium for Goodwill A/c Dr. 4,000 Solution

To Sunil’s Capital A/c 2,500
To Dalip’s Capital A/c 1,500 (a) Ajay will bring Rs. 5,000 (1/4 of Rs. 20,000) as his share of goodwill (premium)
(Goodwill transferred to Sunil and Dalip
in the ratio of 5:3) (b) Sacrificing Ratio is 2:3 as calculated below:
Alternatively, For Vijay, old ratio is 3/5 and the new ratio is 2/4, hence, his sacrificing ratio is
(i) Cash A/c Dr. 24,000 2 3 12 -10 2
To Sachin’s Capital A/c 24,000 − =
= =
5 4 20 20
(ii) Sachin’s Capital A/c Dr 4,000
To Sunil’s Capital A/c 2,500 For Sanjay, old ratio is 2/5 and the new ratio is 1/4, hence, his sacrificing
To Dalip’s Capital A/c 1,500 2 1 3
ratio is = − = 85 =
Note: It assumed that the sacrificing ratio is the same as old profit sharing ratio. 5 4 20 20

(b) When the amount of goodwill credited to existing partners is fully

withdrawn. Books of Vijay and Sanjay
Journal Journal

Date Particulars L.F. Debit Credit Date Particulars L.F. Debit Credit
(Rs.) (Rs.) (Rs.) (Rs.)
1. Same as in (a) above 1. Bank A/c Dr. 35,000
2. Same as in (a) above, To Ajay’s Capital A/c 30,000
3. Sunil’s Capital A/c Dr. 2,500 To Premium for Goodwill A/c 5,000
Dalip’s Capital A/c Dr. 1,500 (The amount of capital and goodwill
To Bank A/c 4,000 brought by Ajay)
(Cash withdrawn by Sunil and Dalip
equal to their share of goodwill) 2. Premium for Goodwill A/c Dr. 5,000
To Vijay’s Capital A/c 2,000
(c) When 50% of the amount of goodwill credited to existing partners To Sanjay’s Capital A/c 3,000
is withdrawn. (the amount of goodwill brought by Ajay
Journal shared by Vijay and Sanjay in their
Date Particulars L.F. Debit Credit sacrificing ratio)
(Rs.) (Rs.)
3. Vijay’s Capital A/c Dr. 2,000
1. Same as in (a) above, Sanjay’s Capital A/c Dr. 3,000
2. Same as in (a) above To Bank A/c 5,000
3. Sunil’s Capital A/c Dr. 1,250 (Cash withdrawn by Vijay and Sanjay
Dalip’s Capital A/c Dr. 750 for their share of goodwill)
To Cash A/c 2,000
(Cash withdrawn for 50% of their share
of goodwill) Note: Alternatively, journal entries (1) and (2) could be as given on the next page:

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68 Accountancy – Partnership Accounts Admission of a Partner 69

Books of Vijay and Sanjay Solution

Journal Books of Srikant and Raman
Journal
Date Particulars L.F. Debit Credit
(Rs.) (Rs.) Date Particulars L.F. Debit Credit
(Rs.) (Rs.)
1. Bank A/c Dr. 35,000
To Ajay’s Capital A/c 35,000 1. Bank A/c Dr. 38,000
(Ajay brought in Rs. 30,000 for capital To Venkat’s Capital A/c 30,000
To Premium for Goodwill A/c 8,000
and Rs. 5,000 as goodwill) (Amount brought in by Venkat as his
capital and his share of goodwill)
2. Ajay’s Capital A/c Dr. 5,000
2. Premium for Goodwill A/c Dr. 8,000
To Vijay’s Capital A/c 2.000
To Srikant’s Capital A/c 4,800
To Sanjay’s Capital A/c 3,000
To Raman’s Capital A/c 3,200
(Amount of goodwill brought in by Ajay (Goodwill brought in by Venkat shared
shared by Vijay and Sanjay in their
by old partners in their ratio of sacrifice)
sacrificing in the ratio of 2:3)
3. Srikant’s Capital A/c Dr. 7,200
When goodwill already exists in books: Goodwill, if existing in the books of the Raman’s Capital A/c Dr. 4,800
firm, it is written off at the time of admission of a partner. To Goodwill A/c 12,000
For example, in Illustration 17, the goodwill of the firm is valued at Rs. (Goodwill already appearing in books
20,000 and Ajay who is admitted to 1/4 share in its profits, brings in Rs. 5,000 written-off in the old ratio)
as his share of goodwill. Suppose, goodwill already appeared in books at Rs. Note: Since nothing is given about the ratio in which the new partner acquires his share
10,000 the following additional journal entry shall be passed for writing off the of profit from Srikant and Raman, it is implied that they sacrifice their share of
existing amount of goodwill. profit in favour of Venkat in the old ratio i.e., 3:2.

Date Particulars L.F. Debit Credit When the new partner does not bring goodwill in cash, partly or fully
(Rs.) (Rs.)
Goodwill not brought by the new partner will be debited to current account of
Vijay’s Capital A/c Dr. 6,000
Sanjay’s Capital A/c Dr. 4,000
new partner while sacrificing partners' capital accounts will be credited for their
To Goodwill A/c 10,000 respective shares.
(Goodwill written-off in old ratio) When the new partner does not bring the share of goodwill, there exists two
possibilities :
Illustration 18 (a) Goodwill does not exist in the books; and.
(b) Goodwill exists in the books.
Srikant and Raman are partners in a firm sharing profits and losses in the
ratio of 3:2. They admit Venkat into partnership with 1/3 share in the profits. Goodwill does not exist in the books
Venkat brings in Rs. 30,000 as his capital. He also brings in the necessary
When goodwill does not exist in the books, sacrificing partners are credited with
amount for his share of goodwill. On the date of admission, the goodwill is
their share of goodwill and new partner is debited by the amount of goodwill not
valued at Rs. 24,000 and the goodwill account appears in the books at Rs.
brought by him. The journal entry in this case is :
12,000. Venkat brings in the necessary amount for his share of goodwill and Incoming (New) Partners Current A/c Dr.
agrees that the existing goodwill account be written off. Record the necessary To Sacrificing Partners Capital A/c (individually)
journal entries in the books of the firm. (Account of goodwill not brought in by new partner)
Sometimes the new partner brings part of premium for goodwill in cash. In
such a situation, new partners current account will be debited by the amount
not brought by new partner.

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70 Accountancy – Partnership Accounts Admission of a Partner 71

For example, for the share of goodwill of Rs. 50,000 the new partner brings The journal entries will be as under :-
Rs. 20,000 only. In this situation the journal entry will be : (i) When the value of goodwill appears in the books and is written off
Partners capital A/c (old) Dr. (In profit sharing ratio)
(i) Bank A/c Dr. 20,000 20,000 To Goodwill A/c
To Premium for Goodwill A/c
(Goodwill appearing in the books written-off)
(Premium for goodwill brought by the new
partner)
(ii) For new value of goodwill :-
(ii) Premium for Goodwill A/c Dr. 20,000 Incoming partners' current A/c. Dr.
Incoming partners current A/c Dr. 30,000 50,000 To Sacrificing partners capital A/c. [In sacrificing ratio)
To sacrificing partners capital A/c's (individually)
(individually)
(Goodwill credited in sacrificing ratio) Illustration 20
Illustration 19 Ram and Rahim are partners in a firm sharing profits and losses in the ratio of
3:2. Rahul is admitted into partnership for 1/3 share in profits. He brings in Rs.
Ahuja and Barua are partners in a firm sharing profits and losses in the ratio of 10,000 as capital, but is not in a position to bring any amount for his share of
3:2. They decide to admit Chaudhary into partnership for 1/5 share of profits, goodwill which has been valued at Rs. 30,000. Give necessary journal entries
which he acquires equally from Ahuja and Barua. Goodwill is valued at under each of the following situations:
Rs. 30,000. Chaudhary brings in Rs. 16,000 as his capital but is not in a (a) When there is no goodwill appearing in the books of the firm; and
position to bring any amount for goodwill. No goodwill account exists in books (b) When the goodwill appears at Rs 15,000 in the books of the firm.
of the firm. Goodwill account is to be raised at full value. Record the necessary
journal entries. Solution

Solution (a) When no goodwill appears in the books

Book of Ahuja and Barua
Books of Ram and Rahim
Journal
Journal
Date Particulars L.F. Debit Credit
(Rs.) (Rs.) Date Particulars L.F. Debit Credit
1. Bank A/c Dr. 16,000 Amount Amount
To Chaudhary’s Capital A/c 16,000 (Rs.) (Rs.)
(Amount brought for capital) Bank A/c Dr. 10,000
2. Chaudhary’s Current A/c Dr. 30,000 To Rahul's Capital A/c 10,000
To Ahuja’s Capital A/c 18,000 (Amount brought by Rahul as Capital)
To Barua’s Capital A/c 12,000 Rahul's Current A/c Dr. 30,000
(Goodwill credited to sacrificing partner’s To Ram's Capital A/c 18,000
accounts) To Rahim's Capital A/c 12,000
(Goodwill not brought by Rahul debited to his
When goodwill exists in the books : current account and credited to old partners in
sacrificing ratio)
Goodwill appearing in the books will be written-off by debiting old partners
‘capital accounts in their old profit sharing ratio. Thereafter new value of goodwill
will be given effect by crediting sacrificing partners' capital accounts and debiting
new partners’ current account.

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72 Accountancy – Partnership Accounts Admission of a Partner 73

(b) When goodwill appears in the books at Rs. 15,000 Accounting Standard 26 implies that:
(a) Purchased goodwill may be accounted for in the books and shown as an
Date Particulars L.F. Debit Credit asset, where it is accounted for in the books and shown as assets, it
Amount Amount
should be written off as early as possible, but where it is to be written- off
(Rs.) (Rs.)
in more than one accounting year, it should be written off in a period not
Bank A/c Dr. 10,000 10,000
exceeding 10 years. In line with what is prescribed by the Accounting
To Rahul's Capital A/c
(Amount brought by Rahul as Capital) Standard, goodwill appearing in the balance sheet in written off at the
time of firm's reconstitution.
Rahul's Current A/c Dr. 15,000
To Ram's Capital A/c 9,000 (b) Self - generated goodwill is not accounted for in the books and shown as
To Rahim's Capital A/c 6,000 an asset. Thus if self generated goodwill be debited to goodwill account it
(Goodwill not brought by Rahul debited to his should be written - off in the same financial year and should not be
current account and credited to old partners shown as an asset in the balance sheet. Alternatively value of goodwill
in sacrificing ratio)
may be adjusted by deducting new partners' current account and
Ram's Capital A/c Dr. 9,000 crediting in their sacrificing ratio. The effect under both the methods is
Rahim's Capital A/c 6,000
same.
To Goodwill A/c 15,000
(Goodwill affeacing in the books written - off
in old profit sharing ratio) Test your Understanding – II
Choose the correct alternative –
1. At the time of admission of a new partner, general reserve appearing in the old
Applicability of Accounting Standard 26: Intangible Assets balance sheet is transferred to:
The Standard comes into effect in respect of expenditure incurred on intangible (a) all partner’s capital account
items during the accounting periods commencing on or after April 1, 2003. As per (b) new partner’s capital account
the Standard, Intangible Asset under AS 26 is defined as an identifiable, non (c) old partner’s capital account
monetary, without physical existence and held for use in the production or supply (d) none of the above.
of goods or services for rental to others or for administrative purposes. 2. Asha and Nisha are partner’s sharing profit in the ratio of 2:1. Asha’s son
Ashish was admitted for 1/4 share of which 1/8 was gifted by Asha to her son.
Significant requirements of AS 26 w.r.t Intangible Assets: The remaining was contributed by Nisha. Goodwill of the firm in valued at
1. Intangible asset should be recognised by fulfilling the criteria as recognised Rs. 40,000. How much of the goodwill will be credited to the old partner’s
under AS 26. capital account.
2. If an in asset does not satisfy recognition criteria, it should be expensed. (a) Rs. 2,500 each
(b) Rs. 5,000 each
3. Internally generated goodwill should not be recognised as an asset.
(c) Rs. 20,000 each
4. Internally generated brands, mastheads, and publishing titles and other similar (d) None of the above.
in substance should not be recognised as intangible assets. 3. A, B and C are partner’s in a firm. If D is admitted as a new partner:
5. Internally generated assets other than the goodwill, brands, mastheads, and (a) old firm is dissolved
publishing titles may be recognised provided they satisfy recognition criteria as (b) old firm and old partnership is dissolved
prescribed by AS 26. (c) old partnership is reconstituted
6. Intangible assets should be written off as early as possible but not exceeding its (d) None of the above.
estimated life, which normally should not be beyond 10 years.

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74 Accountancy – Partnership Accounts Admission of a Partner 75

4. On the admission of a new partner increase in the value of assets is debited to: Solution
(a) Profit and Loss Adjustment account
(b) Assets account (a) Sam brings his share of goodwill
(c) Old partner’s capital account
(d) None of the above. Books of Hem, Nem and Sam
5. At the time of admission of a partner, undistributed profits appearing in the Journal
balance sheet of the old firm is transferred to the capital account of:
(a) old partners in old profit sharing ratio
Date Particulars L.F. Debit Credit
(b) old partners in new profit sharing ratio
Amount Amount
(c) all the partner in the new profit sharing ratio.
(Rs.) (Rs.)
2.5.5.2 Hidden Goodwill 1. Bank A/c Dr. 82,000
To Sam's Capital A/c 60,000
Sometimes the value of goodwill is not given at the time of admission of a new To Premium for Goodwill A/c 22,000
partner. In such a situation it has to be inferred from the arrangement of the (Amoun brought by Sam as Capital and
Premium for goodwill)
capital and profit sharing ratio. Suppose, A and B are partners sharing profits
equally with capitals of Rs. 45,000 each. They admitted C as a new partner for 2. Premium for goodwill A/c Dr. 22,000
To Hem's Capital A/c 13,200
one-third share in the profit. C brings in Rs. 60,000 as his capital. Based on the
To Nem's Capital A/c 8,800
amount brought in by C and his share in profit, the total capital of the newly (Premium for goodwill credited to
constituted firm works out to be Rs.1,80,000 (Rs. 60,000 × 3). But the actual sacrificing partners' capital account in
total capital of A, B and C works out as Rs. 1,50,000 (Rs. 45,000 + Rs. 45,000 their sacrificing ratio)
+ 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). Which is to be shared equally (old (b) Sam does not bring his share of goodwill
ratio) by A and B. This shall raise their capital accounts to Rs. 60,000 each and
Books of Hem, Nem and Sam
total capital of the firm to Rs. 1,80,000. In this, C’s Current account will be
Journal
debited by Rs. 10,000 (his share of goodwill) and A and B’s Capital accounts
credited by Rs. 5,000 each. Date Particulars L.F. Debit Credit
Amount Amount
Illustration 21 (Rs.) (Rs.)

Hem and Nem are partners in a firm sharing profits in the ratio of 3:2. Their 1. Bank A/c Dr. 60,000
To Sam's Capital A/c 60,000
capitals were Rs. 80,000 and Rs. 50,000 respectively. They admitted Sam on (Cash brought by Sam for his
Jan. 1, 2017 as a new partner for 1/5 share in the future profits. Sam brought capital)
Rs. 60,000 as his capital. Calculate the value of goodwill of the firm and record 2. 22,000
Sam's Current A/c Dr.
necessary journal entries on Sam’s admission, if: To Hem's Capital A/c 13,200
(a) Sam brings his share of goodwill To Nem's Capital A/c 8,800
(b) Sam does not bring his share of goodwill
Working Notes :
Value of Firm's goodwill
Sam's Capital = Rs. 60,000

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76 Accountancy – Partnership Accounts Admission of a Partner 77

Sam's Share = 1/5 Illustration 22

Total capital of Firm = Rs. 60,000 × 5 = Rs. 3,00,000
Hem + Nem + Sam = Rs. 80,000 + Rs. 50,000 + Rs. 60,000 Rajinder and Surinder are partners in a firm sharing profits in the ratio of 4:1.
= Rs. 1,90,000 On April 15, 2017 they admit Narender as a new partner. On that date there
Goodwill of the firm = Rs. 3,00,000 - Rs. 1,90,000 = Rs. 1,10,000 was a balance of Rs. 20,000 in general reserve and a debit balance of Rs. 10,000
Sam's Share = Rs. 1,10,000 × 1/5 = Rs. 22,000 in the profit and loss account of the firm. Pass necessary journal entries regarding
adjustment of a accumulate a profit or loss.

Do It Yourself Solution
1. A firm’s profits for the last three years are Rs. 5,00,000; Rs. 4,00,000 and
Rs. 6,00,000. Calculate value of firm’s goodwill on the basis of four years’ Books of Rajinder,Surinder and Narender
purchase of the average profits for the last three years. Journal
2. A firm’s profits during 2013, 2014, 2015 and 2016 were Rs. 16,000;
Date Particulars L.F. Debit Credit
Rs. 20,000; Rs. 24,000 and Rs. 32,000 respectively. The firm has capital
2017 Amount Amount
investment of Rs. 1,00,000. A fair rate of return on investment is 18% p.a.
(Rs.) (Rs.)
Compute goodwill based on three years’ purchase of the average super profits
for the last four years. Apr.15 General Reserve A/c Dr. 20,000
3. Based on the data given in the above question, calculate goodwill by To Rajinder’s capital A/c 16,000
capitalisation of super profits method. Will the amount of goodwill be different To Surender’s capital A/c 4,000
if it is computed by capitalisation of average profits? Confirm your answer by (General Reserve balance transferred
numerical verification. to the capital account of Rajinder and
Surinder on Narender’s admission)
4. Giri and Shanta are partners in a firm sharing profits equally. They admit
Kachroo into partnership who, in addition to capital, brings Rs. 20,000 as
Rajinder’s Capital A/c Dr. 8,000
goodwill for 1/5th share of profits in the firm. What shall be journal entries if:
Surender’s Capital A/c Dr. 2,000
(a) no goodwill appears in the books of the firm.
To Profit and Loss A/c 10,000
(b) goodwill appears in the books of the firm at Rs. 40,000.
(Debit balance of Profit and Loss A/c
transferred to old partners’ capital
2.6 Adjustment for Accumulated Profits and Losses accounts)
Sometimes a firm may have accumulated profits not yet transferred to capital
accounts of the partners. These are usually in the form of general reserve, 2.7 Revaluation of Assets and Reassessment of Liabilities
reserve and/or Profit and Loss Account. The new partner is not entitled to At the time of admission of a new partner, it is always desirable to ascertain
have any share in such accumulated profits. These are distributed among whether the assets of the firm are shown in books at their current values. In
the partners by transferring it to their capital current accounts in old profit case the assets are overstated or understated, these are revalued. Similarly, a
sharing ratio. Similarly, if there are some accumulated losses in the form of a reassessment of the liabilities is also done so that these are brought in the
debit balance of profit and loss account and/or deferred revenue expenditure books at their correct values. At times there may also be some unrecorded
appearing in the balance sheet of the firm. assets and liabilities of the firm. These also have to be brought into the books
It should be transferred to the old pa rtners ’ capita l ac co unt s of the firm. For this purpose the firm has to prepare the Revaluation Account.
(see Illustration 22). The gain or loss on revaluation of each asset and liability is transferred to this
account and finally its balance is transferred to the capital accounts of the old
partners in their old profit sharing ratio. In other words, the revaluation

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78 Accountancy – Partnership Accounts Admission of a Partner 79

account is credited with increase in the value of each asset and decrease in its Illustration 23
liabilities because it is a gain and is debited with decrease in the value of assets Following is Balance Sheet of A and B who share profits in the ratio of 3:2.
and increase in its liabilities is debited to revaluation account because it is a
Balance Sheet of A and B as on April 1, 2015
loss. Similarly unrecorded assets are credited and unrecorded liabilities are
debited to the revaluation account. If the revaluation account finally shows a Liabilities Amount Assets Amount
credit balance then it indicates net gain and if there is a debit balance then it (Rs.) (Rs.)
indicates net loss. Which will be transferred to the capital accounts of the old Sundry creditors 20,000 Cash in hand 3,000
partners in old ratio. Captials Debtors 12,000
The journal entries recorded for revaluation of assets and reassessment of A 30,000 Stock 15,000
liabilities are as follows: B 20,000 50,000 Furniture 10,000
Plant and Machinery 30,000
(i) For increase in the value of an asset
70,000 70,000
Asset A/c Dr.
To Revaluation A/c (Gain)
(ii) For reduction in the value of an asset On that date C is admitted into the partnership on the following terms:
Revaluation A/c Dr. 1. C is to bring in Rs. 15,000 as capital and Rs. 5,000 as premium for
To Asset A/c (Loss) 1
goodwill for 6
share.
(iii) For appreciation in the amount of a liability
Revaluation A/c Dr. 2. The value of stock is reduced by 10% while plant and machinery is
To Liability A/c (Loss) appreciated by 10%.
(iv) For reduction in the amount of a liability 3. Furniture is revalued at Rs. 9,000.
4. A provision for doubtful debts is to be created on sundry debtors at 5%
Liability A/c Dr.
and Rs. 200 is to be provided for an electricity bill.
To Revaluation A/c (Gain)
5. Investment worth Rs. 1,000 (not mentioned in the balance sheet) is to be
(v) For an unrecorded asset
taken into account.
Asset A/c Dr.
6. A creditor of Rs. 100 is not likely to claim his money and is to be written
To Revaluation A/c (Gain) off.
(vi) For an unrecorded liability Record journal entries and prepare revaluation account and capital account
Revaluation A/c Dr. of partners.
To Liability A/c (Loss)
(vii) For transfer of gain on Revaluation if credit balance Solution
Revaluation A/c Dr. Books of A, B and C
To Old Partners Capital A/cs (Old ratio) Journal
(individually)
(viii) For transferring loss on revaluation Date Particulars L.F. Debit Credit
2015 Amount Amount
Old partner’s Capital A/cs Dr.
(Rs.) (Rs.)
(Individually) (Old ratio)
April Bank A/c Dr. 20,000
To Revaluation A/c 01 To C’s capital account 15,000
To Goodwill A/c 5,000
Note: Entries (i), (ii), (iii) and (iv) are recorded only with the amount increase and decrease (Cash brought in by C as capital
in the value of assets and liabilities. and goodwill/premium)

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80 Accountancy – Partnership Accounts Admission of a Partner 81

Partner’s Capital Accounts

02 Goodwill A/c Dr. 5,000 Dr. Cr.
To A’s Capital A/c 3,000
To B’s Capital A/c 2,000 Date Particulars A B C Date Particulars A B C
(Premium divided between 2015 (Rs.) (Rs.) (Rs.) 2015 (Rs.) (Rs.) (Rs.)
A and B in sacrificing ratio 3:2)
Apr.01 Balance 33,480 22,320 15,000 Apr.1 Balance b/d 30,000 20,000
03 Revaluation A/c Dr. 3,100 c/d Bank 15,000
To Stock A/c 1,500 Go o d w i l l 3,0 00 2,0 0 0
To Furniture 1,000 Revaluation 480 320
To Provision for Doubtful Debt A/c 600 (Profit)
(Revaluation in the value of assets
on revaluation) 33,48 0 22,32 0 15 ,0 00 33 ,4 80 22 ,3 20 15 ,0 00
04 Plant and Machinery A/c Dr. 3,000
Investment A/c 1,000
To Revaluation A/c 4,000 Illustration 24
(Increase in the value of assets
on revaluation)
Given below is the Balance Sheet of A and B, who are carrying on partnership
business as on March 31,2017. A and B share profits in the ratio of 2:1.
05 Revaluation A/c Dr. 200
To Outstanding Electricity A/c 200 Balance Sheet of A and B as at March 31, 2017
(Amount provided for outstanding
Liabilities Amount Assets Amount
electricity bill)
(Rs.) ( Rs.)
06 Sundry Creditors A/c Dr. 100
Bills Payable 10,000 Cash in hand 10,000
To Revaluation A/c 100
Sundry creditors 58,000 Cast at bank 40,000
(Amount not likely to be claimed
Outstanding expenses 2,000 Sundry debtors 60,000
by the creditors written off)
Capitals Stock 40,000
07 Revaluation A/c Dr. 800 A 1,80,000 Plant and machinery 1,00,000
To A’s Capital A/c 480 B 1,50,000 3,30,000 Building 1,50,000
To B’s Capital A/c 320
4,00,000 4,00,000
(Profit on revaluation of assets and
re-assessment of liabilities transferred
to A and B in old profit sharing ratio) C is admitted as a partner on the date of the balance sheet on the following
terms:
Revaluation Account
Dr. Cr. 1. C will bring in Rs 1,00,000 as his capital and Rs 60,000 as his share of
goodwill for 1/4 share in profits.
Particulars Amount Particulars Amount 2. Plant is to be appreciated to Rs 1,20,000 and the value of buildings is to be
(Rs.) (Rs.) appreciated by 10%.
Stock 1,500 Plant and Machinery 3,000 3. Stock is found overvalued by Rs 4,000.
Furniture 1,000 Investments 1,000 4. A provision for doubtful debts is to be created at 5% of debtors.
Provision for Doubtful 600 Sundry Creditors 100 5. Creditors were unrecorded to the extend of Rs 1,000.
Outstanding Electricity 200
Record revaluation Account, partners’ capital accounts, and the Balance
Profit on Revaluation
transferred to: Sheet of the constituted firm after admission of the new partner.
A’s Capital 480
B’s Capital 320
4,100 4,100

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82 Accountancy – Partnership Accounts Admission of a Partner 83

Solution
Do It Yourself
Books of A and B
Revaluation Account 1. Aslam, Jackab, Hari are equal partners with capitals of Rs. 1,500, Rs. 1,750
Dr. Cr. and Rs. 2,000 respectively. They agree to admit Satnam into equal partnership
Particulars Amount Particulars Amount upon payment in cash of Rs. 1,500 for one-fourth share of the goodwill and
(Rs.) (Rs.) Rs. 1,800 as his capital, both sums to remain in the business. The liabilities
of the old firm amount Rs. 3,000 and the assets, apart from cash, consist of
Stock in hand 4,000 Plant and machinery 20,000 Motors Rs. 1,200, Furniture Rs. 400, Stock Rs. 2,650, Debtors of Rs. 3,780.
Provision for doubtful debts 3,000 Buildings 15,000 The Motors and Furniture were revalued at Rs. 950 and Rs. 380 respectively,
Creditors and the depreciation written-off. Ascertain cash in hand and prepare the
profit on revaluation 1,000 balance sheet of the firm after Satnam’s admission.
transferred to:
A’s Capital 18,000 2. Benu and Sunil are partners sharing profits in the ratio of 3:2 on April 1,
B’s Capital 9,000 27,000 2017. Ina was admitted for 1/4 share who paid Rs. 2,00,000 as capital and
Rs. 1,00,000 for premium for goodwill in cash. At the time of admission,
35,000 35,000 general reserve amounting to Rs. 1,20,000 and profit and loss account
amounting to Rs. 60,000 appeared on the liability side of the balance sheet.
Required: Record necessary journal entries to record the above transactions.
Partners’ Capital Accounts
3. Ashoo and Rahul are partners sharing profits in the ratio of 5:3. Gaurav was
Dr. Cr.
admitted for 1/5 share and was asked to contribute proportionate capital and
Date Particulars A B C Date Particulars A B C Rs. 4,000 for premium (goodwill). The Capitals of Ashoo and Rahul, after all
2017 (Rs.) (Rs.) (Rs.) 2017 (Rs.) (Rs.) (Rs.)
adjustments relating to revaluation, goodwill etc., worked out to be Rs. 45,000
March Balance 2,38,000 1,79,000 1,00,000 March Balance b/d 1,80,000 1,50,000 and Rs. 35,000 respectively.
31 c/d 31 Bank 1,00,000 Required: Calculate New Profit sharing ratio, capital to be brought in by Gaurav
Goodwill 40,000 20,000 and record necessary journal entries for the same.
Revaluation 18,000 9,000
2,38,000 1,79,000 1,00,000 2,38,000 1,79,000 1,00,000
2.8 Adjustment of Capitals
Sometimes, at the time of admission, the partners agree that their capitals should
Balance Sheet of A, B and C as on April 01, 2016 also be adjusted so as to be proportionate to their profit sharing ratio. In such
Liabilities Amount Assets Amount a situation, if the capital of the new partner is given, the same can be used as a
(Rs.) (Rs.) base for calculating the new capitals of the old partners. The capitals thus
Bills Payable 10,000 Cash in hand 10,000 ascertained should be compared with their old capitals after all adjustments
Sundry Creditors 59,000 Cash at bank 2,00,000 relating to goodwill reserves and revaluation of assets and liabilities, etc. have
Outstanding Expenses 2,000 Sundry Debtors 60,000 been made; and then the partner whose capital falls short, will bring in the
Capitals Less: Provision for 3,000 57,000 necessary amount to cover the shortage and the partner who has a surplus, will
A 2,38,000 doubtful debts withdraw the excess amount of capital. (See Illustration 25)
B 1,79,000 Stock 36,000
C 1,00,000 5,17,000 Plant and Machinery 1,20,000
Buildings 1,65,000 Illustration 25
5,88,000 5,88,000 A and B are partners sharing profits in the ratio of 2:1. C is admitted into the
firm for 1/4 share of profits. C brings in Rs. 20,000 in respect of his capital. The
capitals of old partners A and B, after all adjustments relating to goodwill,
revaluation of assets and liabilities, etc., are Rs. 45,000 and Rs. 15,000
respectively. It is agreed that partners’ capitals should be according to the new
profit sharing ratio.

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84 Accountancy – Partnership Accounts Admission of a Partner 85

Determine the new capitals of A and B and record the necessary journal
Cash A/c Dr. 5,000
entries assuming that the partner whose capital falls short, brings in the amount To B’s Capital A/c 5,000
of deficiency and the partner who has an excess, withdraws the excess amount. (Deficiency made good by additional
amount brought in by B)
Solution
Sometimes, the total capital of the firm may clearly be specified and it is
1. Calculation of new profit sharing ratio: Assuming the new partner C quires agreed that the capital of each partner should be proportionate to his share in
his share from A and B in their old profit sharing ratio, i.e 2:1. profits. In such a situation each partner’s capital (including the new partner’s
Total Share =1 capital to be brought by him) is calculated on the basis of his share in profits.
1 By bringing in additional amount or withdrawal of excess amount, the final
C’s Share = capital of each partner can be brought up to the required level.
4
It may be noted that subject to agreement among the partners, surplus or
1 3
Remaining Shares = 1− = deficiency in each old partners’ capital accounts can also be taken care of simply
4 4 by transfer to their respective current accounts. (See Illustration 26)
3 2 6
A’s New Share = × =
4 3 12 Illustration 26

B’s New Share =

3
×
1
=
3 A, B and C are partners in a firm sharing profits the ratio of 3:2:1. D is admitted
4 3 12 into the firm for 1/4 share in profits, which he gets as 1/8 from A and 1/8 from
1 3 3 B. The total capital of the firm is agreed upon as Rs. 1,20,000 and D is to bring
C’s New Share = × = in cash equivalent to 1/4 of this amount as his capital. The capitals of other
4 3 12
partners are also to be adjusted in the ratio of their respective shares in profits.
Thus, new profit sharing ratio between A,B and C is 6:3:3 or 2:1:1.
2. Required Capital of A and B The capitals of A, B and C after all adjustments are Rs. 40,000, Rs. 35,000 and
C’s capital (who has 1/4 share in profits) is Rs. 20,000. B’s new share in profits Rs. 30,000 respectively. Calculate the new capitals of A,B and C, and record the
1/4. Hence his capital will also be Rs. 20,000. A’s new share is 2/4 which is double of necessary journal entries.
C’s share. Hence his capital will be Rs. 40,000.
Alternatively, based on C’s capital, the total capital of the firm works out at Solution
Rs. 80,000 (4/1 × Rs.20,000). Hence, based on their share in profits, the capital of A and B
will be: 1. Calculation of new profit sharing ratio:
2 1 1 3
A’s capital = of 80,000 = Rs. 40,000 A =  
4 2 8 8
1 1 1 5
B’s capital = of 80,000 = Rs. 20,000 B =  
4 3 8 24
The capital of A and B after all adjustments have been made, are Rs. 45,000 C will continue to get 1/6 as his share in the profits.
and Rs. 15,000 respectively. Hence, A will withdraw Rs. 5,000 (Rs. 45,000– Thus, the new profit sharing ratio between A,B,C and D will be:
Rs.40,000) from the firm whereas B will contribute additional amount of 3 5 1 1 9 5 4 6
: : : or : : : or 9:5:4:6
Rs. 5,000 (Rs. 20,000–Rs.15,000). The journal entries will be : 8 24 6 4 24 24 24 24
Date Particulars L.F. Debit Credit 2. Required capitals of all partners:
Amount Amount 9
(Rs.) (Rs.) A’s Capital = Rs. 1,20,000  = Rs. 45,000
24
A’s Capital A/c Dr. 5,000
5
To Cash A/c 5,000 B’s Capital = Rs. 1,20,000  = Rs. 25,000
(Excess capital withdrawn by A) 24

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86 Accountancy – Partnership Accounts Admission of a Partner 87

4 Illustration 27
C’s Capital = Rs. 1,20,000  = Rs. 20,000
24 A and B are partners in a firm sharing profits in the ratio 2:1. C is admitted into
6 the firm with 1/4 share in profits. He will bring in Rs. 30,000 as capital and
D’s Capital = Rs. 1,20,000  = Rs. 30,000
24 capitals of A and B are to be adjusted in the profit sharing ratio. The Balance
Hence, A will bring in Rs. 5,000 (Rs. 45,000 – Rs. 40,000), B will withdraw Sheet of A and B as on March 31, 2017 (before C’s admission) was as under:
Rs. 10,000 (Rs. 35,000 – Rs. 25,000), C will withdraw Rs. 10,000 (Rs. 30,000 Balance Sheet of A and B as at March 31,2017
– Rs, 20,000) and D will bring in Rs. 30,000. Alternatively, the current
Liabilities Amount Assets Amount
accounts can be opened and the amounts to be brought in or withdrawn by
(Rs.) (Rs.)
A, B and C will be transferred to their respective current accounts subject to
the agreement among the partners. The journal entries in this regard will be Creditors 8,000 Cash in hand 2,000
Bills payable 4,000 Cash at bank 10,000
recorded as follows:
General Reserve 6,000 Sundry debtors 8,000
Books of A, B, C and D
Capitals: A 50,000 Stock 10,000
Journal
B 32,000 82,000 Furniture 5,000
Date Particulars L.F. Debit Credit Machinery 25,000
Amount Amount Building 40,000
(Rs.) (Rs.)
1,00,000 1,00,000
Cash A/c Dr. 5,000
To A’s Capital A/c 5,000 Other terms of agreement are as under:
(Deficiency made good by
1. C will bring in Rs. 12,000 as his share of goodwill.
additional amount brought in by A)
2. Building was valued at Rs. 45,000 and Machinery at Rs. 23,000.
B’s Capital A/c Dr. 3. A provision for bad debts is to be created @ 6% on debtors.
C’s Capital A/c Dr. 10,000
4. The capital accounts of A and B are to be adjusted by opening current accounts.
To Cash A/c 10,000
(Excess amounts withdrawn by B and C) 20,000 Record necessary journal entries, show necessary ledger accounts and prepare
fund’s Balance Sheet after C’s admission.
Cash A/c Dr. 30,000
To D’s Capital A/c 30,000 Books of A, B and C
(Cash brought in by D as Capital) Journal

Alternatively, for entries (2) and (3) above shall be Date Particulars L.F. Debit Credit
2017 Amount Amount
Books of A, B, C and D
(Rs.) (Rs.)
Journal
March 1 Cash A/c Dr. 42,000
Date Particulars L.F. Debit Credit To C’s Capital A/c 30,000
Amount Amount To Goodwill A/c 12,000
(Rs.) (Rs.) (Amounts of capital and goodwill
A’s Current A/c Dr. 5,000 brought in by C)
To A’s Capital A/c 5,000 Goodwill A/c Dr. 12,000
(Deficiency in A’s capital transferred to To A’s Capital A/c 8,000
A’s Current Account) To B’s Capital A/c 4,000
B’s Capital A/c Dr. 10,000 (Goodwill brought in by C transferred to
C’s Capital A/c Dr. 10,000 A and B in their ratio of sacrifice)
To B’s Current A/c 10,000 Revaluation A/c Dr. 2,480
To C’s Current A/c 10,000 To Machinery A/c 2,000
(Excess Capital of B transferred To Provision for Bad Debts A/c 480
to their current account) (Decrease in the value of machinery and
creation of provision for bad debts)

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88 Accountancy – Partnership Accounts Admission of a Partner 89

Partners’ Current Accounts

Building A/c Dr. 5,000 Dr. Cr.
To Revaluation A/c 5,000
(Increase in the value of building) Date Particulars A B C Date Particulars A B C
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
Revaluation A/c Dr. 2,520
To A’s Capital A/c 1,680 Balance c/d 3,680 8,840 - Capital A/cs 3,680 8,840 -
To B’s Capital A/c 840
(Profit on revaluation distributed Balance Sheet of A, B and C as on March 31, 2017
between A and B)
Liabilities Amount Assets Amount
General Reserve A/c Dr. 6,000 (Rs.) (Rs.)
To A’s Capital A/c 4,000
To B’s Capital A/c 2,000 Creditors 8,000 Cash in hand 44,000
(Undistributed profit transferred Bills Payable 4,000 Cash at bank 10,000
to A and B) Partners Current accounts: Sundry Debtors 8000
A 3,680 Less: Provision 480 7,520
A’s Capital A/c Dr. 3,680
B 8,840 12,520 for
To A’s Current A/c 3,680
(The excess of capital transferred to Capitals Doubtful Debts 10,000
partner’s current account) A 60,000 Stock 5,000
B 30,000 Furniture 23,000
B’s Capital A/c Dr. 8.840 C 30,000 1,20,000 Machinery 45,000
To B’s Current A/c 8,840 Buildings
(The excess of B’s capital transferred to 1,44,520 1,44,520
partner’s current account)
Revaluation Account Notes
Dr. Cr. 1. New Profit Sharing Ratio
Particulars Amount Particulars Amount Since nothing is given as to how C acquired his share from A and B. It is assumed that A
(Rs.) (Rs.) and B, between themselves continue to share the profit in the old ratio of 2:1.
Machinery 2,000 Building 5,000 1
C’s Share of Profits =
Provision for bad debts 480 4
Transfer of profit on
revaluation to: Remaining Share = 1 1  3
A’s Capital 1,680 4 4
B’s Capital 840 2,520 2 3 6 1
A’s New Share = of  
5,000 5,000 3 4 12 2
1 3 3 1
B’s New Share = of
 
Partners’ Capital Accounts
3 4 12 4
Dr. Cr.
Thus, new profit sharing ratio between A, B and C is 2:1:1.
Date Particulars A B C Date Particulars A B C
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) 2. New Capitals of A and B
Current Accounts 3,680 8,840 Balance b/d 50,000 32,000 C’s capital is Rs 30,000 and his share of profits is 1/4. Based on C’s capital, the total
Balance c/d 60,000 30,000 30,000 Cash 30,000 capital of the firm will work out at Rs 1,20,000 (4/1 × 30,000) and the respective capitals
Goodwill 8,000 4,000 of A and B will be as follows :
General Reserve 4,000 2,000
2
Revaluation 1,680 840 A’s Capital = of 1,20,000 = Rs. 60,000
(transfer of profit) 4
63,680 38,840 30,000 63,680 38,840 30,000 1
B’s Capital = of 1,20,000 = Rs. 30,000
4

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90 Accountancy – Partnership Accounts Admission of a Partner 91

Illustration 28 66,000
Average Profits = Rs. = Rs. 16,500
The Balance Sheet of W and R who shared profits in the ratio of 3 : 2 was as 4
5
follows on January 01, 2015. = Rs. 41,250
Goodwill at 2 ½ Years purchase = Rs.16,500 
2
Balance Sheet of W and R as on Jan. 01, 2015
4
Liabilities Amount Assets Amount B’s share of goodwill = Rs. 41,250  = Rs, 11,000.
(Rs.) (Rs.) 15

Sundry Creditors 20,000 Cash in hand 5,000 Books of W, R and B

Partner’s Capital Sundry Debtors 20,000 Journal
W 40,000 Less: Provision for 700 19,300
Date Particulars L.F. Debit Credit
R 30,000 70,000 doubtful debts
2015 (Rs.) (Rs.)
Stock 25,000
Plant and Machinery 35,000 Jan. 01 Cash A/c Dr. 41,000
Patents 5,700 To B’s Capital A/c 30,000
90,000 90,000 To Goodwill A/c 11,000
(Sum brought in by B as his Capital and
his share (4/5) of the goodwill)
On this date B was admitted as a partner on the following conditions:
1. He was to get 4/15 share of profit. Goodwill A/c Dr. 11,000
2. He had to bring in Rs 30,000 as his capital. To W’s Capital A/c 6,600
3. He would pay cash for goodwill which would be based on 2 ½ years To R’s Capital A/c 4,400
(Goodwill brought by B credited to W’s
purchase of the profits of the past four years.
and R’s capital accounts in old profit
4. W and R would withdraw half the amount of goodwill premium brought
ratio of 3:2 )
by B.
5. The assets would be revalued as: Sundry Debtors at book value less a W’s Capital A/c Dr. 3,300
provision of 5%; Stock at Rs 20,000; Plant and Machinery at Rs 40,000; R’s Capital A/c 2,200
and Patents at Rs 12,000. To Cash A/c 5,500
6. Liabilities were valued at Rs 23,000, one bill for goods purchased having (Amount (half of goodwill)
been omitted from books. withdrawn by the old partners)
7. Profit for the past four years were : Revaluation A/c Dr. 5,300
2011 15,000 2013 14,000 To Provision for Doubtful Debts A/c 300
2012 20,000 2014 17,000 To Stock A/c 5,000
Give necessary journal entries and ledger accounts to record the above, (Increase in provision for doubtfull debts to
and prepare the Balance Sheet after B’s admission. Rs 1,000 (5% of Rs 20,000) and decrease
in value of stock)
Solution Plant and Machinery A/c Dr. 5,000
The goodwill of the firm is Rs 41,250 worked out as under : Patents A/c Dr. 6,300
Profits : To Revaluation A/c 11,300
Year 2011 15,000 (Increase in value of Plant and
Year 2012 20,000 Machinery and Patents)
Year 2013 14,000
Revaluation A/c Dr. 3,000
Year 2014 17,000
66,000 To Sundry Creditors A/c 3,000
(Increase in liabilities)

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92 Accountancy – Partnership Accounts Admission of a Partner 93

Revaluation Account
Revaluation A/c Dr. 3,000 Dr. Cr.
To W’s Capital A/c 1,800
Particulars Amount Particulars Amount
To R’s Capital A/c 1,200 (Rs.) (Rs.)
(Being profit on adjustment transferred
to partners’ capital accounts) Provision for 300 Plant and Machinery 5,000
doubtful debts Patents 6,300
Stock 5,000
Cash Account
Sundry Creditors 3,000
Dr. Cr.
Profit transferred to:
Date Particulars J.F. Amount Date Particulars J.F. Amount W 3/5 1,800
2015 (Rs.) 2015 (Rs.) R 2/5 1,200 3,000
Jan. 1 Balance b/d 5,000 Jan. 1 W’s Capital 3,300 11,300 11,300
B’s Capital 30,000 R’s Capital 2,200
Goodwill 11,000 Balance c/d 40,500
Balance Sheet of W, R and B as on January 01, 2015
46,000 46,000
Liabilities Amount Assets Amount
(Rs.) (Rs.)
B’s Capital Account Sundry Creditors 23,000 Cash in hand 40,500
Dr. Cr. Capitals: Sundry debtors : 20,000
Date Particulars J.F. Amount Date Particulars J.F. Amount W 45,100 Less: Provision for
2015 (Rs.) 2015 (Rs.) R 33,400 doubtful debits 1,000 19,000
B 30,000 1,08,500 Stock 20,000
Jan. 1 Balance c/d 30,000 Jan. 1 Cash 30,000
Plant & Machinery 40,000
30,000 30,000 Patents 12,000
1,31,500 1,31,500
W’s Capital Account
Dr. Cr.
The new profit sharing ratio will be:
Date Particulars J.F. Amount Date Particulars J.F. Amount
4 3 11 3 33
2015 (Rs.) 2015 (Rs.) W = (1  )   
15 5 15 5 75
Jan.1 Cash 3,300 Jan. 1 Balance b/d 40,000
Balance c/d 45,100 Goodwill 6,600 4 2 11 2 22
R = (1  )   
Revaluation 1,800 15 5 15 5 75
48,400 48,400 4 20
B = 
15 75
R’s Capital Account The new ratio is 33 : 22 : 20.
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount 2.9 Change in Profit Sharing Ratio among the Existing Partners
2015 (Rs.) 2015 (Rs.)
Sometimes, the partners of a firm decide to change their existing profit sharing
Jan. 1 Cash 2,200 Jan. 1 Balance b/d 30,000
ratio without any admission or retirement of a partner. This results in a gain of
Balance c/d 33,400 Goodwill 4,400
Revaluation 1,200
additional share in future profits of the firm for some partners while a loss of a
part thereof for other partners. For example, A, B and C are partners in a firm
35,600 35,600

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94 Accountancy – Partnership Accounts Admission of a Partner 95

sharing profits in the ratios of 8:5:3 It is felt that A will no more be able to 3. The goodwill of the firm at this date be valued at 412 years purchase of the
actively participate in the affairs of the firm. Hence, with effect from average net profits of last, five years which were Rs. 14,000; Rs. 17,000;
April 1, 2007, they decided that, in future they will share the profits in the ratio Rs. 20,000; Rs. 22,000 and Rs. 27,000 respectively.
4. The value of stock be reduced to Rs. 1,12,000.
of 5 : 6 : 5. This results in A losing 3 16   8 − 5  share in profits while B and C
 
5. Goodwill was not to appear in the books. Pass the necessary journal entries
16 16 and prepare the revised Balance sheet of the firm.

gaining 1 16  6 5  2 16  5 — 3  . In such a situation, the loss and

   Solution
—  and
16 16  16 16 Books of Dinesh, Ramesh and Suresh
Journal
gain in the value of goodwill (if any) will have to be adjusted. This is done by
crediting sacrificing partner's and debiting gaining partner's with appropriate 2016
Apr. 01 Fixed Assets A/c Dr. 51,000
amounts, as is explained earlier in the context of the admission of a new partners.
To Revaluation A/c 51,000
Any change, in the profit sharing ratio, like admission of partner, may also (Increase in value of fixed assets)
involve adjustments in respect of revaluation of assets and liabilities, transfer of Revaluation A/c Dr. 11,000
accumulated profit and losses to partners' capital accounts in the old profit To Stock A/c 8,000
sharing ratio and adjustment of partners' capitals, if specified, so as to make To Provisions for 3,000
Doubtful debts A/c
them proportionate to the new profit sharing ratio. All this is done in the same
(Decrease in value of stock and creation
way as in case of admission of a partner. of provision for doubtful debts)
Revaluation A/c Dr. 40,000
Illustration 29 To Dinesh's Capital A/c 15,000
To Ramesh's Capital A/c 15,000
Dinesh, Ramesh and Suresh are partners in a firm sharing profits and losses in To Suresh's Capital A/c 10,000
the ratio of 3:3:2. They decided to share the profits equally w.e.f. April 1, 2015. (Profit on revaluation transferred to partners'
Their Balance Sheet as on March 31, 2016 was as follows : capital accounts in old profit sharing ratio)
General Reserve A/c Dr. 80,000
Liabilities Amount Assets Amount
To Dinesh's Capital A/c 30,000
(Rs.) (Rs.)
To Ramesh's Capital A/c 30,000
Sundry Creditors 1,50,000 Cash at Bank 40,000 To Suresh's Capital A/c 20,000
General Reserve 80,000 Bills Receivable 50,000 (General reserve, transferred to partners'
Partner's Loan : Sundry Debtors 60,000 capital accounts in old ratio)
Dinesh 40,000 Stock 1,20,000
Suresh's Capital A/c Dr. 7,500
Ramesh 30,000 70,000 Fixed Assets 2,80,000
To Dinesh's Capital A/c 3,750
Partners Capital :
To Ramesh's Capital A/c 3,750
Dinesh 1,00,000
(Goodwill adjusted in partners' capital
Ramesh 80,000
accounts in their sacrificing/gaining ratio)
Suresh 70,000 2,50,000
5,50,000 5,50,000 Working Notes:
1. Gain or sacrifice of partners
Dinesh Ramesh Suresh
It was also decide that :
Old Share 3/8 3/8 2/8
1. The fixed assets should be valued at Rs. 3,31,000.
New Share 1/3 1/3 1/3
2. A provisions of 5% on sundry debtors be made doubtful debts.
Difference 1/24 1/24 2/24
(sacrifice) (sacrifice) (gain)

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96 Accountancy – Partnership Accounts Admission of a Partner 97

2. Goodwill Terms Introduced in the Chapter

Total Profits : Rs. 14,000 + Rs. 17,000 + Rs. 20,000 + Rs. 22,000 + Rs. 27,000 • Reconstitution of Partnership Firm
= Rs. 1,00,000 • Revaluation of Assets
Average Profits = Rs. 1,00,000/5 • Reassessment of liabilities
= Rs. 20,000 • Undistributed and accumulated profits and losses
1 • Accumulated Losses
Goodwill = Rs. 20,000 × 4
2 • Goodwill
= Rs. 90,000 • Profit Sharing Ratio
Suresh in expected to bring in Rs. 7,500 • Reserves
• Revaluation Account
2 • Sacrificing Ratio
as he gain share in profits.
24 • Change in Profit Sharing Ratio
Dinesh in expected to receive Rs. 3,750
1
as he sacrifices share in profits.
24 Summary
Ramesh is expected to receive Rs. 3,750
1 1. Matters requiring adjustments at the time of admission of a partner: Various
as he sacrifices
24
share in profits. matters which need adjustments in the books of firm at the time of admission
of a new partner are : goodwill, revaluation of assets and liabilities, reserves
3. Capital Accounts and other accumulated profits and losses and the capitals of the old partners’
Date Particulars J.F. Dinesh Ramesh Suresh Date Particulars J.F. Dinesh Ramesh Suresh (if agreed).
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
2. Determining the new profit sharing ratio and calculating sacrificing ratio: The
Dinesh's 3,750 Balance b/d 1,00,000 80,000 70,000 new partner acquires his share in profits from the old partners’. This reduces
Account Profit on
Ramesh's 3,750 Revaluation 15,000 15,000 10,000
the old partners’ share in profits. Hence, the problem of determining the new
Account General profit sharing ratio simply involves the determination of old partners’ new share
Balance c/d 1,48,750 1,28,750 92,500 Reserve 30,000 30,000 20,000 in the profits of the reconstituted firm. Given the new partners’ share in profits
Suresh's 3,750 3,750
and the ratio, in which he acquires it from the old partners, the new share of
Account
each old partner shall be worked out by deducting his share of sacrifice from
1,48,750 1 ,28,750 1,00,000 1,48,750 1,28,750 1,00,000
his old share in profits. The ratio in which the old partners have agreed to
sacrifice their shares in profit in favour of the new partner is called the
sacrificing ratio. It is usually same as the old profit sharing ratio. However,
Balance Sheet as on April 01, 2015
based on the agreement it can be different also.
Liabilities Amount Assets Amount 3. Treatment of Goodwill: Goodwill is an intangible asset and belonges to its owner
(Rs.) (Rs.) at a point of time. On the admission of a new partner the goodwill of the firm
Sundry Creditors 1,50,000 Cash at Bank 40,000 belongs to the old partners. It means that on the admission of a new partner
Partner's Loan : Bills Receivable 50,000 some adjustments must be made into the capital accounts of the old partners
Dinesh 40,000 Sundry Debtors 60,000 for goodwill so that the new partner will not acquire a share in that profit
Ramesh 30,000 70,000 Less Prov. for Doubtful which the firm earns because of its goodwill earned before admission without
Debts 3,000 57,000 making any payment for the same. The amount that the new partner pays for
Capitals: Stock 1,12,000 goodwill is called goodwill. From accounting point of view the firm may have to
Dinesh 1,48,750 Fixed Assets 3,31,000
face different situations for the treatment of goodwill at the time of admission of
Ramesh 1,28,750
a partner. The amount of premium brought in by the new partner is shared by
Suresh 92,500 3,70,000
old partners in the ratio of sacrifice. In case the new partner fails to bring his
5,90,000 5,90,000

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98 Accountancy – Partnership Accounts Admission of a Partner 99

share of premium for goodwill in cash than the capital account of the new Long Answer Questions
partner is debited for his share of premium of goodwill and the old partners
capital accounts are credited in their sacrificing ratio. 1. Do you advise that assets and liabilities must be revalued at the time of
admission of a partner? If so, why? Also describe how is this treated in the book
4. Adjustments for Revaluation of Assets and Reassessment of Liabilities: If, at of account?
the time of admission of a partner, the assets and liabilities are revalued or 2. What is goodwill? What factors affect goodwill?
some asset or liability is found unrecorded, necessary adjustments are made 3. Explain various methods of valuation of goodwill.
through the Revaluatiion Account. Any gain or loss arising from such exercise 4. If it is agreed that the capital of all the partners should be proportionate to the
shall be distributed among the old partner’s in their old profit sharing ratio. new profit sharing ratio, how will you work out the new capital of each partner?
5. Adjustment for reserves and accumulated profits/losses: If, at the time of Give examples and state how necessary adjustments will be made.
admission of a partner, any reserve and accumulated profits or losses exist in 5. Explain how will you deal with goodwill when new partner is not in a position to
books of the firm, these should be transferred to old partner’s capital/current bring his share of goodwill in cash.
accounts in their old profit sharing ratio. 6. Explain various methods for the treatment of goodwill on the admission of a
new partner?
6. Determining/Adjusting partners’ capital: If agreed, the partner’s capital may 7. How will you deal with the accumulated profits and losses and reserves on the
be adjusted so as to be proportionate to their new profit sharing ratio. In that admission of a new partner?
case, the new partner’s capital is normally used as a base for determining the 8. At what figures the value of assets and liabilities appear in the books of the
new capitals of the old partners and necessary adjustment made through case firm after revaluation has been due. Show with the help of an imaginary
or by transfer to partner’s current accounts. Other basis also may be available balance sheet.
for determining capitals of the partners after admissioin of the new partner
like sharing the total capital to be in the firm immeidately after admission of
the new partner.
7. Change in profit sharing ratio: Sometimes the partners of a firm may agree to Numerical Questions
change their existing profit sharing ratio. With a result, some partners will
1. A and B were partners in a firm sharing profits and losses in the ratio of 3:2.
gain in future profits while others will lose. In such a situation, the partner
They admit C into the partnership with 1/6 share in the profits. Calculate the
who gain by change in profit effecting amounts to one partner buying the share
new profit sharing ratio?
of profit from another partner. Apart from the payment for compensation, the
change in profit sharing ratio also necessitates adjustment in partners’ capital (Ans : 3:2:1)
accounts with respect to undistributed profits and reserves, revaluation of 2. A,B,C were partners in a firm sharing profits in 3:2:1 ratio. They admitted D for
assets and reassessment of liabilities. 10% profits. Calculate the new profit sharing ratio?
(Ans : 9:6:3:2)
3. X and Y are partners sharing profits in 5:3 ratio admitted Z for 1/10 share
Questions for Practice which he acquired equally for X and Y. Calculate new profit sharing ratio?
(Ans : 23:13:4)
Short Answer Questions
4. A, B and C are partners sharing profits in 2:2:1 ratio admitted D for 1/8 share
1. Identify various matters that need adjustments at the time of admission of a which he acquired entirely from A. Calculate new profit sharing ratio?
new partner. (Ans : 11:16:8:5)
2. Why it is necessary to ascertain new profit sharing ratio even for old partners 5. P and Q are partners sharing profits in 2:1 ratio. They admitted R into
when a new partner is admitted? partnership giving him 1/5 share which he acquired from P and Q in 1:2 ratio.
3. What is sacrificing ratio? Why is it calculated? Calculate new profit sharing ratio?
4. On what occasions sacrificing ratio is used? (Ans : 3:1:1)
5. If some goodwill already exists in the books and the new partner brings in his
share of goodwill in cash, how will you deal with existing amount of goodwill? 6. A, B and C are partners sharing profits in 3:2:2 ratio. They admitted D as a
6. Why there is need for the revaluation of assets and liabilities on the admission new partner for 1/5 share which he acquired from A, B and C in 2:2:1 ratio
of a partner? respectively. Calculate new profit sharing ratio?
(Ans : 61:36:43:35)

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100 Accountancy – Partnership Accounts Admission of a Partner 101

7. A and B were partners in a firm sharing profits in 3:2 ratio. They admitted C for the value of goodwill on the basis of 3 years purchase of the average super
3/7 share which he took 2/7 from A and 1/7 from B. Calculate new profit profits of the last 5 years assuming that the normal rate of return is 10%?
sharing ratio?
(Ans : Rs. 30,000)
(Ans : 11:9:15)
16. Rajan and Rajani are partners in a firm. Their capitals were Rajan Rs. 3,00,000;
8. A, B and C were partners in a firm sharing profits in 3:3:2 ratio. They admitted Rajani Rs. 2,00,000. During the year 2015 the firm earned a profit of Rs.
D as a new partner for 4/7 profit. D acquired his share 2/7 from A. 1/7 from B
1,50,000. Calculate the value of goodwill of the firm by capitalisation method
and 1/7 from C. Calculate new profit sharing ratio?
assuming that the normal rate of return is 20%?
(Ans : 5:13:6:32)
(Ans : Rs. 2,50,000)
9. Radha and Rukmani are partners in a firm sharing profits in 3:2 ratio. They
admitted Gopi as a new partner. Radha surrendered 1/3 of her share in favour 17. A business has earned average profits of Rs. 1,00,000 during the last few years.
of Gopi and Rukmani surrendered 1/4 of her share in favour of Gopi. Calculate Find out the value of goodwill by capitalisation method, given that the assets of
new profit sharing ratio? the business are Rs. 10,00,000 and its external liabilities are Rs. 1,80,000. The
(Ans : 4:3:3) normal rate of return is 10%?
10. Singh, Gupta and Khan are partners in a firm sharing profits in 3:2:3 ratio. (Ans : Rs. 1,80,000)
They admitted Jain as a new partner. Singh surrendered 1/3 of his share in 18. Verma and Sharma are partners in a firm sharing profits and losses in the
favour of Jain: Gupta surrendered 1/4 of his share in favour of Jain and Khan ratio of 5:3. They admitted Ghosh as a new partner for 1/5 share of profits.
surrendered 1/5 in favour of Jain. Calculate new profit sharing ratio? Ghosh is to bring in Rs. 20,000 as capital and Rs. 4,000 as his share of goodwill
(Ans : 20:15:24:21) premium. Give the necessary journal entries:
11. Sandeep and Navdeep are partners in a firm sharing profits in 5:3 ratio. They a) When the amount of goodwill is retained in the business.
admit C into the firm and the new profit sharing ratio was agreed at 4:2:1. b) When the amount of goodwill is fully withdrawn.
Calculate the sacrificing ratio? c) When 50% of the amount of goodwill is withdrawn.
(Ans : 3:5) d) When goodwill is paid privately.
12. Rao and Swami are partners in a firm sharing profits and losses in 3:2 ratio. 19. A and B are partners in a firm sharing profits and losses in the ratio of 3:2.
They admit Ravi as a new partner for 1/8 share in the profits. The new profit They decide to admit C into partnership with 1/4 share in profits. C will bring
sharing ratio between Rao and Swami is 4:3. Calculate new profit sharing ratio in Rs. 30,000 for capital and the requisite amount of goodwill premium in cash.
and sacrificing ratio? The goodwill of the firm is valued at Rs, 20,000. The new profit sharing ratio is
(Ans : New Profit Ratio 4:3:1 and Sacrificing Ratio 4:1) 2:1:1. A and B withdraw their share of goodwill. Give necessary journal entries?
13. Compute the value of goodwill on the basis of four years’ purchase of the average 20. Arti and Bharti are partners in a firm sharing profits in 3:2 ratio, They admitted
profits based on the last five years? The profits for the last five years were as follows: Sarthi for 1/4 share in the profits of the firm. Sarthi brings Rs. 50,000 for his
Rs.
capital and Rs. 10,000 for his 1/4 share of goodwill. Goodwill already appears
2015 40,000
2016 50,000
in the books of Arti and Bharti at Rs. 5,000. the new profit sharing ratio between
2017 60,000 Arti, Bharti and Sarthi will be 2:1:1. Record the necessary journal entries in
2018 50,000 the books of the new firm?
2019 60,000 [Hint: Existing goodwill written-off in old profit sharing ratio]
(Ans : Rs. 2,08,000) 21. X and Y are partners in a firm sharing profits and losses in 4:3 ratio. They
14. Firm’s Capital in a business is Rs. 2,00,000. The normal rate of return on admitted Z for 1/8 share. Z brought Rs. 20,000 for his capital and Rs. 7,000 for
firm’s capital is 15%. During the year 2015 the firm earned a profit of Rs. his 1/8 share of goodwill. Goodwill already appears in the books at Rs. 40,000.
48,000. Calculate goodwill on the basis of 3 years purchase of super profit? Show necessary journal entries in the books of X, Y and Z?
(Ans : Rs. 54,000) 22. Aditya and Balan are partners sharing profits and losses in 3:2 ratio. They
15. The books of Ram and Bharat showed that the firm’s capital on 31.12.2016 admitted Christopher for 1/4 share in the profits. The new profit sharing ratio
was Rs. 5,00,000 and the profits for the last 5 years : 2015 Rs. 40,000; 2014 agreed was 2:1:1. Christopher brought Rs. 50,000 for his capital. His share of
goodwill was agreed to at Rs. 15,000. Christopher could bring only Rs. 10,000
Rs. 50,000; 2013 Rs. 55,000; 2012 Rs. 70,000 and 2011 Rs. 85,000. Calculate

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102 Accountancy – Partnership Accounts Admission of a Partner 103

out of his share of goodwill. Record necessary journal entries in the books of C is admitted as a partner on the date of the balance sheet on the following terms:
the firm? (i) C will bring in Rs. 1,00,000 as his capital and Rs. 60,000 as his share of
23. Amar and Samar were partners in a firm sharing profits and losses in 3:1 goodwill for 1/4 share in the profits.
ratio. They admitted Kanwar for 1/4 share of profits. Kanwar could not bring (ii) Plant is to be appreciated to Rs. 1,20,000 and the value of buildings is to be
his share of goodwill premium in cash. The Goodwill of the firm was valued at Rs. appreciated by 10%.
80,000 on Kanwar’s admission. Record necessary journal entry for goodwill on (iii) Stock is found over valued by Rs. 4,000.
Kanwar’s admission. (iv) A provision for bad and doubtful debts is to be created at 5% of debtors.
(v) Creditors were unrecorded to the extent of Rs. 1,000.
24. Mohan Lal and Sohan Lal were partners in a firm sharing profits and losses in
Pass the necessary journal entries, prepare the revaluation account and partners’
3:2 ratio. They admitted Ram Lal for 1/4 share on 1.1.2013. It was agreed that
capital accounts, and show the Balance Sheet after the admission of C.
goodwill of the firm will be valued at 3 years purchase of the average profits of
last 4 years which were Rs. 50,000 for 2013, Rs. 60,000 for 2014, Rs. 90,000 for (Ans : Gain of Revaluation Rs. 27,000. Balance Sheet Rs. 5,88,000)
2015 and Rs. 70,000 for 2016. Ram Lal did not bring his share of goodwill 28. Leela and Meeta were partners in a firm sharing profits and losses in the ratio
premium in cash. Record the necessary journal entries in the books of the firm of 5:3. In April 2017 they admitted Om as a new partner. On the date of Om’s
on Ram Lal’s admission when: admission the balance sheet of Leela and Meeta showed a balance of Rs. 16,000
a) Goodwill already appears in the books at Rs. 2,02,500. in general reserve and Rs. 24,000 (Cr) in Profit and Loss Account. Record
b) Goodwill appears in the books at Rs. 2,500. necessary journal entries for the treatment of these items on Om’s admission.
c) Goodwill appears in the books at Rs. 2,05,000. The new profit sharing ratio between Leela, Meeta and Om was 5:3:2.
25. Rajesh and Mukesh are equal partners in a firm. They admit Hari into 29. Amit and Viney are partners in a firm sharing profits and losses in 3:1 ratio.
partnership and the new profit sharing ratio between Rajesh, Mukesh and On 1.1.2017 they admitted Ranjan as a partner. On Ranjan’s admission the
Hari is 4:3:2. On Hari’s admission goodwill of the firm is valued at Rs. 36,000. profit and loss account of Amit and Viney showed a debit balance of Rs. 40,000.
Hari is unable to bring his share of goodwill premium in cash. Rajesh, Mukesh Record necessary journal entry for the treatment of the same.
and Hari decided not to show goodwill in their balance sheet. Record necessary 30. A and B share profits in the proportions of 3/4 and 1/4. Their Balance Sheet
journal entries for the treatment of goodwill on Hari’s admission. on March 31, 2016 was as follows:
26. Amar and Akbar are equal partners in a firm. They admitted Anthony as a new Balance Sheet of A and B as at March 31, 2016
partner and the new profit sharing ratio is 4:3:2. Anthony could not bring this
share of goodwill Rs. 45,000 in cash. It is decided to do adjustment for goodwill Liabilities Amount Assets Amount
without opening goodwill account. Pass the necessary journal entry for the (Rs.) (Rs.)
treatment of goodwill? Sundry creditors 41,500 Cash at Bank 26,500
27. Given below is the Balance Sheet of A and B, who are carrying on partnership Reserve fund 4,000 Bills Receivable 3,000
business on 31.12.2016. A and B share profits and losses in the ratio of 2:1. Capital Accounts Debtors 16,000
A 30,000 Stock 20,000
Balance Sheet of A and B as at March 31, 2016 B 16,000 Fixtures 1,000
Land & Building 25,000
Liabilites Amount Assets Amount 91,500 91,500
(Rs.) (Rs.)
Bills Payable 10,000 Cash in Hand 10,000 On April 1, 2017, C was admitted into partnership on the following terms:
Creditors 58,000 Cash at Bank 40,000 (a) That C pays Rs. 10,000 as his capital.
Outstanding 2,000 Sundry Debtors 60,000 (b) That C pays Rs. 5,000 for goodwill. Half of this sum is to be withdrawn by A
Expenses Stock 40,000
and B.
Capitals: Plant 1,00,000
(c) That stock and fixtures be reduced by 10% and a 5%, provision for doubtful
A 1,80,000 Buildings 1,50,000
debts be created on Sundry Debtors and Bills Receivable.
B 1,50,000 3,30,000
(d) That the value of land and buildings be appreciated by 20%.
4,00,000 4,00,000 (e) There being a claim against the firm for damages, a liability to the extent of
Rs. 1,000 should be created.

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104 Accountancy – Partnership Accounts Admission of a Partner 105

(f) An item of Rs. 650 included in sundry creditors is not likely to be claimed debts: (e) that the value of land and buildings having appreciated be brought
and hence should be written back. upto Rs. 31,000 ;(f) that after making the adjustments the capital accounts of
Record the above transactions (journal entries) in the books of the firm assuming the old partners (who continue to share in the same proportion as before) be
that the profit sharing ratio between A and B has not changed. Prepare the adjusted on the basis of the proportion of Deepak’s Capital to his share in the
new Balance Sheet on the admission of C. business, i.e., actual cash to be paid off to, or brought in by the old partners as
(Ans : Gain on Revaluation Rs. 1600. Balance Sheet Total Rs. 1,05,950). the case may be.
31. A and B are partners sharing profits and losses in the ratio of 3:1. On Ist April. Prepare Cash Account, Profit and Loss Adjustment Account (Revaluation
2017 they admitted C as a new partner for 1/4 share in the profits of the firm. Account) and the Opening Balance Sheet of the new firm.
C brings Rs. 20,000 as for his 1/4 share in the profits of the firm. The capitals of (Ans : Gain on revaluation Rs. 4,550. Balance Sheet Total Rs. 68,000))
A and B after all adjustments in respect of goodwill, revaluation of assets and
34. Azad and Babli are partners in a firm sharing profits and losses in the ratio of
liabilities, etc. has been worked out at Rs. 50,000 for A and Rs. 12,000 for B. It is
2:1. Chintan is admitted into the firm with 1/4 share in profits. Chintan will
agreed that partner’s capitals will be according to new profit sharing ratio.
bring in Rs. 30,000 as his capital and the capitals of Azad and Babli are to be
Calculate the new capitals of A and B and pass the necessary journal entries
assuming that A and B brought in or withdrew the necessary cash as the case adjusted in the profit sharing ratio. The Balance Sheet of Azad and Babli as on
may be for making their capitals in proportion to their profit sharing ratio? March 31, 2016 (before Chintan’s admission) was as follows:
32. Pinky, Qumar and Roopa partners in a firm sharing profits and losses in the Balance Sheet of A and B as on 31.03.2016
ratio of 3:2:1. S is admitted as a new partner for 1/4 share in the profits of the
firm, whichs he gets 1/8 from Pinky, and 1/16 each from Qmar and Roopa. Liabilities Amount Assets Amount
The total capital of the new firm after Seema’s admission will be Rs. 2,40,000. (Rs.) (Rs.)
Seema is required to bring in cash equal to 1/4 of the total capital of the new firm. Creditors 8,000 Cash in hand 2,000
The capitals of the old partners also have to be adjusted in proportion of their Bills payable 4,000 Cash at bank 10,000
profit sharing ratio. The capitals of Pinky, Qumar and Roopa after all adjustments General reserve 6,000 Sundry debtors 8,000
in respect of goodwill and revaluation of assets and liabilities have been Capital accounts: Stock 10,000
made are Pinky Rs. 80,000, Qumar Rs. 30,000 and Roopa Rs. 20,000. Calculate Azad 50,000 Furniture 5,000
the capitals of all the partners and record the necessary journal entries for Babli 32,000 82,000 Machinery 25,000
doing adjustments in respect of capitals according to the agreement between Buildings 40,000
the partners?
1,00,000 1,00,000
33. The following was the Balance Sheet of Arun, Bablu and Chetan sharing profits
6 5 3
and losses in the ratio of : : respectively. It was agreed that:
14 14 14 i) Chintan will bring in Rs. 12,000 as his share of goodwill premium.
ii) Buildings were valued at Rs. 45,000 and Machinery at Rs. 23,000.
Liabilities Amount Assets Amount
iii) A provision for doubtful debts is to be created @ 6% on debtors.
(Rs.) (Rs.)
iv) The capital accounts of Azad and Babli are to be adjusted by opening current
Capital Accounts: 9,000 Land and Buildings 24,000 accounts.
Arun 19,000 3,000 Furniture 3,500 Record necessary journal entries, show necessary ledger accounts and
Bablu 16,000 Stock 14,000 prepare the Balance Sheet after admission.
Chetan 8,000 43,000 Debtors 12,600
Creditors Cash 900
(Ans : Gain or Revaluation Rs. 2,520. Balance Sheet Rs. 1,44,520).
Bills Payable 35. Ashish and Dutta were partners in a firm sharing profits in 3:2 ratio. On Jan.
55,000 55,000
01, 2015 they admitted Vimal for 1/5 share in the profits. The Balance Sheet of
Ashish and Dutta as on March 31, 2016 was as follows:
They agreed to take Deepak into partnership and give him a share of 1/8
on the following terms: a) that Deepak should bring in Rs. 4,200 as goodwill
and Rs. 7,000 as his Capital; (b) that furniture be depreciated by 12%; (c) that
stock be depreciated by 10% (d) that a Reserve of 5% be created for doubtful

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106 Accountancy – Partnership Accounts

Balance Sheet of A and B as on 1.03.2016

Liabilities Amount Assets Amount
(Rs.) (Rs.)
Ashish Capital 80,000 Land & Building 35,000
Dutta’s Capital 35,000 Plant 45,000
Creditors 15,000 Debtors 22,000
Bills Payable 10,000 Less : Provision 2,000 20,000
Stock 35,000
Cash 5,000
1,40,000 1,40,000

It was agreed that:

i) The value of Land and Building be increased by Rs. 15,000.
ii) The value of plant be increased by 10,000.
iii) Goodwill of the firm be valued at Rs. 20,000.
iv) Vimal to bring in capital to the extent of 1/5th of the total capital of the
new firm.
Record the necessary journal entries and prepare the Balance Sheet of the
firm after Vimal’s admission.
(Ans : Gain on Revaluation Rs. 25,000. Balance Sheet Total Rs. 2,05,000).

Checklist to Check your Understanding

Test your Understanding – I
1. (a), 2 (a), 3. (b).
Test your Understanding – II
1. (c), 2. (b), 3. (c), 4. (b), 5. (b).

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