Class 12 Reconstitution of a Partnership Firm – Admission of a Partner

Admitting a partner: new and sacrificing ratios, goodwill by average, super profit and capitalisation, premium and hidden goodwill, revaluation, reserves and capitals.

Key ideas

The old partners give up part of their shares to the new partner: each one’s sacrifice is old share − new share.

If the new partner takes the share from the old partners in their old ratio, the sacrificing ratio is the old ratio.

Goodwill is the value of a firm’s reputation, which lets it earn more than normal profits.

Premium for goodwill brought in cash is the new partner’s share of the firm’s goodwill and is credited to the old partners in the sacrificing ratio.

Hidden goodwill is found when no premium is brought: the capital the new partner’s amount implies for the whole firm, less the capitals actually there.

Revaluation profit or loss, reserves and accumulated profits belong to the old partners and are shared in the old ratio.

For capitals in the new ratio, the new partner’s capital fixes the total; old partners bring in or withdraw the difference.

Remember

New share (1/n taken in the old ratio)

old share × (1 − 1/n)

Goodwill, average profit

average profit × years’ purchase

Weighted average (weights 1, 2, 3)

(P₁ × 1 + P₂ × 2 + P₃ × 3) ÷ 6

Super profit

average profit − capital employed × normal rate ÷ 100

Goodwill, super profit

super profit × years’ purchase, or super profit × 100 ÷ normal rate

Capitalising the average profit

average profit × 100 ÷ normal rate − capital employed

Premium for goodwill

firm’s goodwill × new partner’s share

Hidden goodwill

new partner’s capital × n − (old capitals + new partner’s capital), for a 1/n share

Worked example

Ananya and Vikram share profits 2 : 3, and their balance sheet shows a general reserve of ₹35,000. Zoya is admitted for a 1/5 share (taken in the old ratio), bringing ₹70,000 as capital and the share of goodwill in cash. Goodwill is valued at ₹50,000. Pass the journal entries.

Working: premium ₹50,000 × 1/5; premium shared in the sacrificing ratio and the reserve in the old ratio, 2 : 3

Answer: (i) Bank A/c Dr. ₹80,000
To Zoya’s Capital A/c ₹70,000
To Premium for Goodwill A/c ₹10,000
(ii) Premium for Goodwill A/c Dr. ₹10,000
To Ananya’s Capital A/c ₹4,000
To Vikram’s Capital A/c ₹6,000
(iii) General Reserve A/c Dr. ₹35,000
To Ananya’s Capital A/c ₹14,000
To Vikram’s Capital A/c ₹21,000

Reconstitution of a Partnership Firm – Admission of a Partner

Key ideas

Remember

Watch out

Worked example