Lesson 23: Admission of a Partner
Master accounting adjustments required when admitting a new partner into an existing firm. Learn how to calculate New Profit Sharing Ratios and Sacrificing Ratios, value goodwill using various methods, record AS-10 compliant goodwill transactions, prepare Revaluation Accounts, adjust reserves, and balance capital accounts.
Admission Meaning, New Profit Sharing & Sacrificing Ratios
What is Admission of a Partner?
When an existing partnership firm requires additional capital or managerial expertise for expansion, it may admit a new partner. Under the Indian Partnership Act, 1932, a person can be admitted as a partner only with the consent of all existing partners (unless otherwise agreed upon). Upon admission, the old partnership deed comes to an end and a new deed is executed, reconstituting the firm.
Sacrificing Ratio
When a new partner is admitted, existing partners surrender a portion of their profit share in favour of the incoming partner. The ratio in which existing partners surrender their share of profits is called the Sacrificing Ratio.
3 Cases for Calculating New Ratio & Sacrificing Ratio
| Case Type | Calculation Procedure | Textbook Example (NIOS) |
|---|---|---|
| Case 1: Only new partner's share is given | Assume total profit = 1. Remaining share = 1 - New Share. Multiply remaining share by old partners' old ratio. Sacrificing ratio equals Old Ratio. | Deepak & Vivek (3:2), Ashu admitted for 1/5 share. Remaining = 4/5. Deepak = 3/5×4/5=12/25; Vivek = 2/5×4/5=8/25. New Ratio = 12:8:5. Sacrificing = 3:2. |
| Case 2: New partner purchases share in specific fraction | Deduct the agreed acquired fractions directly from respective existing partners' old shares. | Neha & Parteek (5:3). Nisha admitted for 1/6 (acquires 1/8 from Neha, 1/24 from Parteek). Neha new = 5/8 - 1/8 = 12/24. Parteek = 3/8 - 1/24 = 8/24. New = 3:2:1. Sacrificing = 3:1. |
| Case 3: Old partners surrender specific fraction of their shares | Multiply each partner's old share by surrendered fraction to find sacrifice. Deduct sacrifice from old share. New partner share = Sum of sacrifices. | Him & Raj (5:3). Him surrenders 1/5 of his share (1/8); Raj surrenders 1/3 of his share (1/8). Him new = 4/8; Raj new = 2/8; Jolly = 2/8. New Ratio = 2:1:1. Sacrificing = 1:1. |
Goodwill: Meaning, Valuation Methods & AS-10 Accounting Treatment
Goodwill is the capitalized value of extra profits earned by an established firm over and above normal expected profits, built due to reputation, location, and quality.
Average Profit Method
Goodwill = Average Profit × No. of Years Purchase
Weighted Avg = Total Product / Total Weights
Super Profit Method
Normal Profit = Capital Employed × Rate / 100
Super Profit = Actual Profit - Normal Profit
Goodwill = Super Profit × Years Purchase
Capitalisation Method
Cap. Value = Avg Profit × 100 / Rate
Goodwill = Cap. Value - Capital Employed
OR Goodwill = Super Profit × 100 / Rate
Under AS-10, Goodwill should be recorded in the books ONLY when consideration in money or money's worth has been paid for it. Thus, self-raised goodwill cannot be raised as an asset in the books. If the new partner does not bring cash for goodwill, his/her Capital or Current Account is debited and credited to sacrificing partners. Any existing goodwill in the books must be written off in the OLD ratio among OLD partners.
Accounting Treatment of Goodwill on Admission
| Situation | Journal Entry | Explanation |
|---|---|---|
| 1. Paid Privately | NO ENTRY in firm books | Settled outside business between partners. |
| 2. Brought in Cash & Retained | Bank A/c Dr. To Goodwill Premium A/c Goodwill Premium A/c Dr. To Sacrificing Partners Capital A/c |
Goodwill credited to existing partners in SACRIFICING ratio. |
| 3. Brought in Cash & Withdrawn | Sacrificing Partners Capital A/c Dr. To Bank A/c |
Additional entry passed for cash withdrawal by old partners. |
| 4. Not brought in Cash | New Partner Capital/Current A/c Dr. To Sacrificing Partners Capital A/c |
Debited to new partner's account, credited to old partners in sacrificing ratio. |
Revaluation of Assets & Reassessment of Liabilities
Upon admission of a partner, a Revaluation Account (a nominal account, also called Profit & Loss Adjustment Account) is prepared to ensure assets and liabilities are shown at true values so that incoming partners neither gain nor suffer from pre-admission changes.
- Decrease in value of Assets
- Increase in value of Liabilities
- Unrecorded Liabilities created
- Creation of Provision for Doubtful Debts
- Increase in value of Assets
- Decrease in value of Liabilities
- Unrecorded Assets brought into books
- Reduction in Creditors / Provisions
The net balance of Revaluation Account represents Gain or Loss and is transferred ONLY to Existing Partners' Capital Accounts in their OLD Profit Sharing Ratio.
Undistributed Reserves & Capital Adjustments
Treatment of Reserves & Accumulated Profits
Reserves, General Reserves, Workmen Compensation Reserve (excess over claim), and Profit & Loss credit balances existing on the admission date belong to existing partners.
Profit & Loss A/c Dr.
To Old Partners Capital A/c (in OLD Ratio)
Adjustment of Partners' Capitals
Partners may agree to maintain capital accounts in their new profit sharing ratio:
- Method A: Total Firm Capital = New Partner Capital × Reciprocal of Share. Adjust old partners' balances via Cash/Current A/c.
- Method B: New partner brings proportionate capital based on adjusted combined capitals of existing partners.
Interactive Process Flows & Sacrificing Calculator
Explore visual process models for partnership reconstitution and use the live Sacrificing Ratio & Goodwill Allocation Calculator.
5-Step Admission Accounting Pipeline
Sequential flow of accounting steps executed upon the admission of a partner.
New & Sacrificing Ratio
Calculate PSR & Sacrificing ratio (Old - New).
Valuation & AS-10
Value goodwill; credit sacrificing partners.
Revaluation A/c
Revalue assets/liabilities; gain/loss to Old partners in Old ratio.
Reserves Transfer
Transfer accumulated profits/reserves to Old partners.
Capital Balance
Adjust partner capitals and draft Balance Sheet.
Interactive Sacrificing Ratio & Goodwill Premium Calculator
Input partner shares and firm goodwill to automatically compute Sacrificing Ratio and Goodwill Distribution (Case 1 standard).
5 Golden Rules for NIOS Board Exam Partnership Problems
Memorize these 5 mandatory rules for solving Admission of Partner numericals in NIOS exams.
Sacrificing Ratio for Goodwill Distribution
Goodwill Premium AllocationGoodwill premium brought in by the new partner is ALWAYS credited to existing partners in their Sacrificing Ratio (NOT in old ratio or new ratio). In Case 1 (where only new share is given), Sacrificing Ratio equals the Old Ratio.
Revaluation Profit/Loss to Old Partners in Old Ratio
Pre-Admission Revaluation RuleRevaluation Account gain or loss belongs entirely to pre-admission operations. Hence, it is credited/debited ONLY to Existing (Old) Partners in their OLD Profit Sharing Ratio. The new partner has no share in revaluation profit/loss.
AS-10 Strict Goodwill Rule
No Self-Raised Goodwill AssetNever raise a Goodwill Account on the Asset side unless paid for in cash. If new partner fails to bring goodwill in cash, debit New Partner's Capital/Current A/c and credit Sacrificing Partners. Write off any old goodwill appearing in Balance Sheet in OLD ratio among OLD partners.
Accumulated Reserves & Profits Ownership
Pre-Admission ReservesGeneral Reserve, Profit & Loss credit balance, and Workmen Compensation Reserve (net of actual liability) appearing on the admission date must be transferred to Old Partners' Capital Accounts in OLD Ratio.
Capital Adjustment Formula Shortcut
Proportionate Capital ComputationWhen capitals are adjusted on the basis of new partner's capital: Total Capital of New Firm = New Partner Capital × Reciprocal of New Partner Share. Calculate each partner's target capital by multiplying total capital by their new share. Surplus is withdrawn/credited to current A/c; deficit is brought in cash/debited to current A/c.
10 MCQ Practice Quiz
Test your knowledge of admission accounting entries, sacrificing ratios, AS-10 goodwill rules, and revaluation principles.
10 Interactive 3D Flashcards
Click or tap the card to flip between admission accounting terms/concepts and treatments.
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