How is Goodwill Adjusted and Profit Sharing Ratio Calculated on Admission of a Partner?
Admission of a partner is a key concept in partnership accounting. It involves bringing a new person into an existing partnership firm and is crucial for Class 12 Accountancy exams and Commerce entrance tests. Knowing how capital, goodwill, profit-sharing, and revaluation are handled is important in both academic and practical business scenarios.
| Step | Purpose | Main Accounting Areas |
|---|---|---|
| Agreement Among Partners | Define the rights and duties of all partners including the new one | Profit-sharing ratio, capital contribution |
| Calculation of Ratios | Determine new profit-sharing, sacrificing, and gaining ratios | Partnership Reconstitution |
| Goodwill Adjustment | Compensate old partners for loss of future profit share | Goodwill valuation, premium payment |
| Revaluation of Assets & Liabilities | Reflect fair market value at the time of admission | Revaluation Account |
| Distribution of Accumulated Profits/Losses | Share reserves and losses before the new partner joins | Profit & Loss Appropriation Account |
| Capital Adjustments | Set capital accounts as per agreed proportions | Capital Account Balances |
What is Admission of a Partner?
Admission of a partner means adding a new partner to an existing partnership firm to increase capital or managerial strength. All current partners must consent, unless otherwise allowed in the partnership deed. Examining this concept helps students understand partnership reconstitution, a common topic in school and competitive exams.
Key Topics in Admission of a Partner
The topic of admission of a partner covers new profit sharing ratio, goodwill treatment, revaluation accounts, and capital adjustments. These are core areas tested in Class 12 Accountancy and Commerce entrance papers. Good command of these topics aids in practical business decisions as well.
Profit-Sharing and Ratio Calculations
With the entry of a new partner, the partners must decide on a new profit-sharing ratio. The old partners may have to sacrifice part of their share, leading to calculation of the sacrificing ratio, while some may gain extra share, forming the gaining ratio. These ratios are key for proper compensation through goodwill.
- New Profit Sharing Ratio: Decided by agreement, it determines each partner’s share after admission.
- Sacrificing Ratio: Old partners’ loss in share, basis for goodwill compensation.
- Gaining Ratio: Rare in admission, but key in retirement/death cases.
Goodwill Adjustment
When a new partner joins, goodwill is adjusted to compensate existing partners for the profit they sacrifice. Methods include premium paid by the new partner, goodwill raised in the books, or hidden goodwill calculation. This ensures fairness among all partners and is a frequently tested concept in exams.
- Goodwill can be brought in cash or adjusted via capital accounts.
- Old partners share premium for goodwill in the sacrificing ratio.
Revaluation of Assets and Liabilities
Admission is an opportunity to reassess the value of firm’s assets and liabilities. Changes are recorded through the Revaluation Account, and any resulting profit or loss is transferred to old partners’ capital accounts in the old profit sharing ratio. Students should understand the rationale and entries for this process.
- Profit/Loss from revaluation belongs only to old partners.
- Assets and liabilities are shown at revised values after revaluation.
- Revaluation of Asset
Multiple Choice Questions on Admission of a Partner
To test your understanding of admission of a partner, try these MCQs. These follow the patterns of Class 12 board exams and competitive tests. Answers are given directly after questions for easier practice and revision.
- When a new partner is admitted, the new profit-sharing ratio is decided by:
(A) Old ratio
(B) Equal ratio
(C) Agreement among all partners
(D) Sacrificing ratio
Answer: (C) Agreement among all partners - Goodwill is shared among old partners in which ratio?
(A) Old profit-sharing ratio
(B) New profit-sharing ratio
(C) Sacrificing ratio
(D) Equal ratio
Answer: (C) Sacrificing ratio - Which account is prepared to record changes in asset values on admission?
(A) Capital Account
(B) Revaluation Account
(C) Partners’ Drawings Account
(D) Memorandum Account
Answer: (B) Revaluation Account - Accumulated profits at the time of admission are distributed among:
(A) Old partners
(B) All partners, including new
(C) Only new partner
(D) New and one old partner
Answer: (A) Old partners - If the new partner brings less cash than required capital, this is called:
(A) Over-subscription
(B) Under-subscription
(C) Excess capital
(D) None of these
Answer: (B) Under-subscription
Common Mistakes in Admission MCQs
Students often miscalculate the sacrificing ratio or mix up the treatment of accumulated profits and goodwill. Avoid directly using the new profit-sharing ratio for goodwill adjustments—always use the sacrificing ratio for old partners. Practice questions regularly to master these distinctions.
Importance in Real Life and Exams
Understanding admission of a partner helps you solve practical business cases where new partners join a firm. This topic is vital for school exams, entrance tests, and for those planning a career in Commerce. At Vedantu, we provide expert explanations to make these topics easy and exam-ready.
- Key for scoring high in accountancy exams
- Builds strong business foundation
- Prepares students for future professional courses
Explore Related Concepts
To learn more on related partnership concepts, visit:
- Admission of a Partner - Vedantu
- Classification of Goodwill
- Accounting for Partnership Firm
- DK Goel Solutions Class 12 Admission of a Partner
- TS Grewal Solutions Class 12 Admission of a Partner
In summary, admission of a partner is a foundation topic for partnership accounting, involving changes to capital, profit-sharing, goodwill, and asset values. Use practice MCQs, master the rules, and refer to Vedantu for a clear, exam-focused learning experience.
FAQs on Admission of a Partner: MCQs with Detailed Answers
1. What does the admission of a partner mean in a partnership firm?
The admission of a partner is a form of reconstitution of a partnership firm where a new person joins an existing partnership. As per the Indian Partnership Act, 1932, a new partner can be admitted only with the consent of all existing partners, unless otherwise stated in the partnership deed. This is typically done to increase the firm's capital or enhance its managerial skills.
2. What is the difference between the New Profit Sharing Ratio and the Sacrificing Ratio?
The New Profit Sharing Ratio is the proportion in which all partners, including the new one, agree to share future profits and losses. The Sacrificing Ratio, however, is the proportion in which the old partners agree to surrender their share of profit in favour of the new partner. It is calculated as Old Ratio - New Ratio and is crucial for distributing the premium for goodwill.
3. Why is a Revaluation Account prepared on the admission of a partner, and who gets the profit or loss?
A Revaluation Account is prepared to record the changes in the value of the firm's assets and liabilities at the time of admission. This ensures that assets are shown at their current market value. The resulting profit or loss from this revaluation is a reflection of performance before the new partner's entry and therefore belongs exclusively to the old partners. It is distributed among them in their old profit-sharing ratio.
4. What are the common methods for treating goodwill when a new partner is admitted?
According to the CBSE Class 12 Accountancy syllabus, the primary methods for treating goodwill are:
- Premium Method: The new partner brings their share of goodwill in cash. This amount is then distributed among the old partners in their sacrificing ratio.
- Revaluation Method: Goodwill is raised in the books by debiting the Goodwill account and crediting the old partners' capital accounts in the old ratio. It is then immediately written off by debiting all partners (including the new one) in the new ratio.
5. How is 'hidden' or 'inferred' goodwill calculated during a partner's admission?
Hidden goodwill is not explicitly stated but is inferred from the arrangement. It is calculated based on the new partner's capital contribution and their profit share. For example, if a new partner contributes ₹60,000 for a 1/4th share, the firm's total capital should be ₹2,40,000 (₹60,000 x 4). If the combined adjusted capital of all partners is only ₹2,00,000, the shortfall of ₹40,000 is treated as hidden goodwill.
6. Does the admission of a new partner lead to the dissolution of the partnership firm?
No, this is a common misconception. The admission of a partner leads to the dissolution of the old partnership agreement, but not the dissolution of the firm itself. The business continues under a new agreement, a process known as the reconstitution of the partnership firm. The firm's legal existence is not terminated.
7. Why are accumulated profits, reserves, and losses distributed only among old partners before a new partner is admitted?
Accumulated profits, reserves (like General Reserve), and losses belong to the period before the new partner's admission. They are distributed among the old partners in their old profit-sharing ratio to ensure fairness. This prevents the new partner from gaining a share of past profits they did not help earn or being penalised for past losses they did not incur. It effectively clears the accounts before the new partnership begins.
8. How does the calculation of the sacrificing ratio on admission differ from the gaining ratio on retirement?
The core difference lies in the direction of the share transfer. On admission, old partners give up a share, so the Sacrificing Ratio is calculated as `Old Ratio - New Ratio`. On retirement, the remaining partners acquire the outgoing partner's share, so the Gaining Ratio is calculated as `New Ratio - Old Ratio`. One reflects a loss in share, while the other reflects a gain.
9. What is the purpose of adjusting the capital accounts of partners on admission?
The main purpose of capital adjustment is to make the capital balances of all partners proportionate to their new profit-sharing ratio. This is often the final step after all adjustments for goodwill, revaluation, and accumulated profits are made. It may require existing partners to bring in additional capital or withdraw excess capital to align with the agreed-upon structure of the new firm.
10. How is the topic 'Admission of a Partner' important for competitive exams like CUET?
This is a foundational topic in Accountancy and is frequently tested in exams like the Common University Entrance Test (CUET). Questions often focus on the practical application of concepts, such as:
- Calculating the sacrificing ratio and new profit-sharing ratio in different scenarios.
- Passing correct journal entries for goodwill and revaluation.
- Understanding the treatment of hidden goodwill and accumulated profits.
