Financial Accounting Unit 10

Unit 10 Partnership Accounts – Admission of a Partner

Structure:
10.1 Introduction
Objectives
10.2 Partnership - Meaning and Features
10.3 Partnership Deed and Contents
10.4 Admission of a Partner
Calculation of New profit Sharing Ratio
Sacrificing Ratio
10.5 Good will-Meaning
10.6 Accounting Treatment of Goodwill at the Time of Admission
10.7 Revaluation of Assets and Liabilities
10.8 Adjustments of Reserves and Accumulated Profits or Losses
10.9 Summary
10.10 Terminal Questions
10.11 Answers

10.1 Introduction
In the previous unit, we have dealt with bill of exchange. It is a statement
which states the difference between bank balance shown in the firm’s book
of accounts and bank statement issued by the banker of the firm.
Partnership is a form of business where two or more people will be engaged
to start and run the business. The partners agree to share profits in the
agreed ratio. In case of loss, all the partners have to bear it in the same
agreed profit sharing ratio.
As far as accounting systems are concerned, there is no difference between
sole trader and partnership business. The accounting can be done as
similar to that of sole trader like recording of transactions, ledger accounts,
trail balance and final accounts. There are certain issues which are specific
to partnership firm and differ in accounting treatment. This unit highlights the
meaning and definition of partnership and the various accounting treatment
with respect to admission of a new partner in the firm.

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Objectives:
After studying this unit, you should be able to:
 Explain the meaning of partnership firm and features.
 Describe partnership deed and its contents
 Statethe meaning of admission of partner.
 Explain the meaning of goodwill and its accounting treatment;
 Prepare the financial statements of partnership firm after admission.

10.2 Partnerships – Meaning and Features

Partnership is a form of business where two or more people will be engaged
to start and run the business. It is governed by Partnership Act, 1872. All
partners will be having equal ownership in the business and the profits will
be shared among them in the agreed ratio.
According to the Indian Partnership, Act 1932,
“Partnership is relation between persons who have agreed to share
profits of a business carried on by all or any of them acting for all”.

The following are the distinct features of Partnership firm:

1. It is formed by agreement which can be oral or written. It carries the
relationship between the persons, who agreed to run the business. The
agreement which is written for this purpose is called as “Partnership
deed”.
2. There must be at least two partners to form the partnership business.
The minimum number to be ten in case of banking and to be 20 in case
of non-banking business.
3. The partners agree to share profits in the agreed ratio. In case of loss,
all the partners have to bear it in the same agreed profit sharing ratio.
4. All the partners have equal right to carry the business. Every partner is a
principal as well as agent to other partners.
5. No partner can transfer his/her share to anyone including his/her family
member without the consent of all other partners.

10.3 Partnership Deed and Contents

As it is mentioned above, a partnership firm will be formed by a written
agreement between the partners, which is called as “Partnership Deed”. It
contains terms and conditions regarding the conduct of the business. It also
explains relationship amongst the partners.

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Contents of Partnership Deed:

The partnership deed generally contains the following:
a) Name and address of the partnership firm;
b) Nature and objectives of the business;
c) Name and address of each partner;
d) Ratio in which profits are to be shared;
e) Capital contribution by each partner;
f) Rate of Interest on capital if allowed;
g) Salary or any other remuneration to partners, if allowed; etc…
In case, the partnership deed is not written, then there may be certain
issues pertaining to profit sharing ratio, salary, commission, drawings, etc.,
which need to be settled. Partnership Act, 1872 has given the following
points to be followed in the absence of partnership deed.
They are as follows:
i. Partners are entitled to share profits equally.
ii. Interest on capital is not allowed.
iii. No interest on drawing of the partners is to be charged.
iv. A Partner is allowed interest @ 6% per annum on the amount of loan
given to the firm by him/her.
v. A partner is not entitled to any salary or commission or any other
remuneration for managing the business.
Table 10.1: shows the part of the format of Partnership Deed

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Self Assessment Questions:

Fill in the blanks with suitable word/sentence.
1. The number of persons required to form the partnership firms is
____________
2. Partnership firm will be formed by __________
3. All agreements of partnership firm are either __________ or ________
4. The written form of agreement of a partnership is called ____________

10.4 Admission of Partner

Whenever, a new person is joined in the existing partnership firm, it is called
as “Admission of partner”. This is done to increase the business or to have
more capital for more business operations.
According to the Partnership Act 1932, a person can be admitted into
partnership only with the consent of all the existing partners unless
otherwise agreed upon.
On the admission of a new partner, the following adjustments become
necessary:
 Calculation of new profit sharing ratio;
 Accounting treatment of Goodwill;
 Revaluation of assets and reassessment of liabilities;
 Adjustments of Reserves and Accumulated Profits or Losses
These points are explained here under:
Calculation of New profit sharing Ratio:
As the new partner is admitted, he may acquire a share in total profits along
with the existing partners. The old ratio will not be considered and new ratio
will be effective for any future profits/losses. The existing partners sacrifice a
share of their profit in the favour of new partner and hence the calculation of
new profit sharing ratio becomes necessary.
Sacrificing Ratio
As it is already told, at the time of admission of a partner, existing partners
have to surrender some of their share in favour of the new partner enable
him to get a share in total profits of firm. The ratio in which they agree to
sacrifice their share of profits in favour of incoming partner is called as
“Sacrificing ratio”.

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Sacrificing Ratio is calculated as follows:

Sacrificing Ratio = Existing Ratio – New Ratio
Following cases may arise in calculation of new profit sharing ratio and
sacrificing ratio:
(i) When only the new partner’s share is given:
In this case, it is presumed that the existing partners continue to share the
remaining profit in the same ratio in which they were sharing before the
admission of the new partner.
Then, existing partner’s new ratio is calculated by dividing remaining share
of the profit in their existing ratio.
For this purpose, total profits of the firm will be taken as 1.
Sacrificing ratio is calculated by deducting new ratio from the existing ratio.
Illustration 1:
A and B are partners sharing profit in the ratio of 3:2. They admit C as a new
partner for 1/5 share in profit. Calculate the new profit sharing ratio and
sacrificing ratio.
Solution:
Calculation of new profit sharing ratio:
Let total Profit = 1
New partner’s share = 1/5
Remaining share = 1 – 1/5 = 4/5
A’s new share = 3/5 of 4/5 i.e. 12/25
B’s new share = 2/5 of 4/5 i.e. 8/25
C’s Share = 1/5
The new profit sharing ratio of A, B and C is

12/25:8/25:1/5 = 12:8:5/25 = 12:8:5

A Sacrificed = 3/5 – 12/25 = 15 – 12/25 = 3/25;

B Sacrificed = 2/5 – 8/25 = 10 – 8/25 = 2/25;
Sacrificing Ratio = 3:2

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Sacrificing ratio of the existing partners is same as their existing ratio.

i) It is to be noted that, when new partner share is given, the sacrificing
ratio of the existing partners would be always equal to their old profit
sharing ratio.
ii) When the new partner purchases his/her share of the profit from the
existing partner in a particular ratio.
In this case, the new profit sharing ratio of the existing partners is to be
ascertained after deducting the agreed from his share. It means the
incoming partner has purchased some share of profit in a particular ratio
from the existing partners.
Illustration 2:
N and P are partners, sharing profit in the ratio of 5:3. They admit S as a
new partner for 1/6 share in profit. She acquires this share as 1/8 from
N and 1/24 share from P. Calculate the new profit sharing ratio and
sacrificing ratio.
Solution:
N’s and P existing ratio is 5:3
N’s new share = 5/8-1/8 = 4/8 or 12/24
P’s new share = 3/8-1/24 = 8/24
S’s share = 1/8+1/24 =4/24
The new profit sharing ratio of N, P and S is 12/24:8/24:4/24
= 12:8:4 = 3:2:1
Sacrifice ratio = 1/8:1/24 or 3:1
Self Assessment Questions:
5. The sacrificing ratio will be calculated by subtracting ___________
share from __________ share of profits of the existing partners.
6. Whenever a new partner is joined, the partnership firm will be _______
7. The ratio in which partners surrender their profits is known as _______
8. When the new partner share is given, the sacrificing ratio of old
partners will be generally __________ ratio.
9. If Veer and Trisha are partners sharing profits in the ratio of 5:3. What
will be their sacrificing ratio if Rahul is admitted for 1/8 share of profit in
the firm?

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10.5 Goodwill-Meaning
Goodwill generally means the reputation of the firm. When a business is
doing its operations over a number of years, it may develop a good name
and reputation among the customers or society. In accounting parlance, it
can be called as “Goodwill”.
The goodwill of a firm may earn extra profit for the business over a normal
profit, which can be called as “Super Normal Profit”. Thus, goodwill can be
calculated as ….

Goodwill = Super Normal Profit – Normal Profit.

10.6 Accounting Treatment of Goodwill at the time of Admission

When a new partner is admitted, he will get a share in profits and the
existing partner’s shares getting reduced. So, he needs to compensate them
for the sacrifice they have done. In addition to the capital he brought, he
needs to pay this compensation which may be equal to his share of
profits/losses of firm. He can make this payment either in cash or in kind in
the form of goodwill.
As per Accounting Standard 10 (AS-10), goodwill should be recorded in
the books only when some consideration in money has been paid for it.
Thus, if a new partner does not bring necessary cash for goodwill, no
goodwill account can be raised in the books. He/she should pay for goodwill
in addition to his/her contribution for capital.
The following points should be noted for this purpose:
1. The amount brought by the new partner as goodwill will be shared by
the existing partners in the sacrificing ratio.
2. In case, if any goodwill account appears in the books, at the time of
admission, it will be written off among the existing partners in the
existing ratio.
3. Amount of goodwill withdrawn by existing partners to be divided in the
sacrificing ratio.
4. Goodwill account not to be raised in the books, unless otherwise
expressly agreed.

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There are different situations relating to the treatment of goodwill at the time
of admission of a new partner. These are discussed as under:
A. When the amount of goodwill is paid privately by the new partner.
B. When the new partner brings his/her share of goodwill in cash.
C. When the new partner does not bring his/her share of goodwill in cash.
A. The amount of goodwill is paid privately by the new partner
If the amount of goodwill is paid by the new partner to the existing partner
privately, no journal entries are made in the books of the firm.
B. The new partner brings his share of goodwill in cash and the
amount of goodwill is retained in the Business:
When, the new partner brings his/her share of goodwill in cash. The amount
brought in by the new partner is transferred to the existing partner in the
sacrificing ratio. If there is any goodwill account in the balance sheet of
existing partner, it will be written off immediately in existing ratio among the
partners. The journal entries are as follows:
(i) The existing goodwill in the books of the firm will be written off in
existing profit ratio as:

Existing Partners Capital A/c Dr. [individually]

To Goodwill A/c
(Existing goodwill written off)

(ii) For bringing cash for Capital and goodwill

Cash/Bank A/c Dr.

To Goodwill A/c
To New partner’s Capital A/c
(Cash brought in for capital and goodwill)

(iii) For amount of goodwill transferred to existing partner capital

account:

Goodwill A/c Dr.

To Existing Partner’s Capital A/c [individually]
(The amount of goodwill credited to existing partner’s capitals in
sacrificing ratio)

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(iv) The amount of goodwill is withdrawn by the existing partners

Existing Partners Capital A/c Dr. [individually]

To Cash/Bank A/c
(The amount of goodwill withdrawn by the existing partners)

Illustration 3:
T and S are partners in a firm sharing profit in the ratio 5:3. They admitted G
as a new partner for 1/4th share in the profit. G brings Rs.45,000 for her
share of goodwill and Rs.1,20,000 for capital. They have withdrawn the
goodwill from the firm. Make journal entries in the books of the firm after the
admission of G. The new profit sharing ratio will be 2:1:1.
Solution:
Working Note:
Existing Ratio: T- 5/8 and S – 3/8
New Ratio: T- 2/4, S- 1/4 and G – 1/4
Sacrificing Ratio = T- 5/8-2/4 = 1/8; S – 3/8 – ¼ = 1/8
Sacrificing Ratio = 1:1
Books of T, S and G
Bank A/c Dr. 1,65,000
To Goodwill A/c 45,000
To G’s Capital A/c 1,20,000
(Cash brought by G for her share of goodwill and capital)
Goodwill A/c Dr. 45,000
To T’s Capital A/c 30,000
To S’s Capital A/c 15,000
(Goodwill transferred to existing partners’ capital account in their profit
sharing ratio)
T’s Capital A/c Dr. 27,500
S’s Capital A/c Dr. 27,500
To Bank A/c 45,000
(Amount of Goodwill is withdrawn by them in the sacrificing ratio)

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C. When a new partner does not bring his/her share of goodwill in

cash:
When the goodwill of the firm is calculated and the new partner is not able to
bring his/her share of goodwill in cash, goodwill will be adjusted through new
partner’s capital accounts.
In this case new partner’s capital account is debited for his share of goodwill
and the existing partner’s capital accounts are credited in their sacrificing
ratio.
The journal entry is as under:

New Partner’s Capital A/c Dr.

To Existing Partner’s Capital A/c [individually in sacrificing ratio]
(New partner’s share in goodwill credited to existing partner’s in
sacrificing ratio)

Note: If the goodwill account appears in the books of the firm, and the new
partner is not able to bring goodwill in cash then the amount of goodwill
existing in the books is written off by debiting the capital account of existing
partners in their existing profit sharing ratio.
Illustration 4:
X and Y are partners sharing profit in the ratio of 3:2. They agree to admit C
for 1/5 share in future profit. C brings Rs.2,50,000 as capital and enable to
bring her share of goodwill in cash, the goodwill of the firm to be valued at
Rs.1,80,000. At the time of admission goodwill existed in the books of the
firm at Rs.80,000. Make necessary journal entries in the books of the firm.
Solution:
Bank A/c Dr. 2,50,000
To C’s Capital A/c 2,50,000
[Cash brought by C for her capital]
X’s Capital A/c Dr. 48,000
Y’s Capital A/c Dr. 32,000
To Goodwill A/c 80,000
[Goodwill written off before C’s admission]
C’s Capital A/c Dr. 36,000
To X’s Capital A/c 21,600
To Y’s Capital A/c 14,400
[Existing partners’ capital a/c credited for goodwill on C’s admission in
sacrificing ratio]

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Working Note :
X and Y sacrifice their profit in favour of C in their existing profit sharing ratio
i.e. 3:2. Therefore, the sacrificing ratio is 3:2.
Value of Goodwill = Rs.1,80,000
C’s share in Profit = 1/5
C’s share of Goodwill = Rs.1,80,000 × 1/5 = Rs.36,000
Self Assessment Questions:
Fill in the blanks with appropriate word/words
10. What entry to be made when goodwill is paid privately?
11. The amount of goodwill brought by the new partner will be __________
to the goodwill account.
12. Amount of goodwill brought by the new partner will be transferred to the
existing partners in ___________ ratio.
13. If the new partner is unable to bring his share of goodwill, his account
will be __________ and the existing partners’ capital accounts will be
____________.

10.7 Revaluation of Assets and Liabilities

When a new partner is admitted, the firm stands reconstituted and all the
assets and liabilities are required to be re-valued. This is because, it is
necessary to show the true position of the firm at the time of admission.
In the process of revaluating the assets and liabilities, there could be some
profit or loss which is to be shared by the existing partners in their old profit
sharing ratio. For this purpose, “Revaluation Account” is opened. If there
is an increase in value of asset revaluation account is credited, and when
there is decrease in the value of liabilities revaluation account is debited.
Vice-a-verse decrease in the value of assets and increase in the value of
liabilities revaluation account is debited.

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Figure 10.1

Fig. 10.1

The difference being the profit or loss on account of revaluation is

shared by the old partners in their old ratio only.

The following journal entries made for this purpose are:

For increase in the value of assets:
Asset A/c Dr. (individually)
To Revaluation A/c
(Increase in the value of assets)
For decrease in the value of Asset:
Revaluation A/c Dr. (individually)
To Asset A/c
[Decrease in the value of assets]
For increase in the value of Liabilities:
Revaluation A/c Dr. (individually)
To Liabilities A/c
[Increase in the value of Liabilities]
For decrease in the value of Liabilities:
Liabilities A/c Dr.
To Revaluation A/c
[Decrease in the value of Liabilities]

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For unrecorded Assets:

Asset A/c [unrecorded] Dr.
To Revaluation A/c
[Unrecorded asset recorded at actual value]
For unrecorded Liability:
Revaluation A/c Dr.
To Liability A/c [unrecorded]
[Unrecorded Liability recorded at actual value]
For transfer of gain on revaluation:
Revaluation A/c Dr.
To Existing Partner’s Capital A/c
[Profit on revaluation transferred to capital account in existing ratio]
For transfer of loss on revaluation:
Existing Partner’s Capital A/c Dr.
To Revaluation A/c
[Loss on revaluation transferred to capital account in existing ratio]
Illustration 5:
Mayur and Veer are partners sharing profit and losses in the ratio of 2:1.
Their Balance Sheet was as follows:
Balance Sheet of Mayur and Veer as on December 31, 2008
Liabilities Asset
Creditors 10,000 Cash in hand 7,000
Bill payable 7,000 Debtors 26,000
Capitals: Building 20,000
Mayur 40,000 Investment 15,000
Veer 30,000 Machinery 13,000
Stock 6,000
Total 87,000 Total 87,000
Shyam is admitted as a partner and assets are revalued and liabilities
reassessed as follows:
i) Create a Provision for doubtful debt on debtors at Rs.800.
ii) Building and investment are appreciated by 10%.
iii) Machinery is deprecated at 5%
iv) Creditors’ were overestimated by Rs.500.
Prepare journal entries and revaluation account before the admission of
Shyam in the books.

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Solution:
Journal entries in the books of Mayur and Veer for the year ended
31st December, 2008
Revaluation A/c Dr. 800
To Provision for Doubtful Debts 800
[Provision made for doubtful debts]
Building A/c Dr. 2,000
Investment A/c Dr. 1,500
To Revaluation A/c 3,500
[Increase in the value of Building & Investment]
Revaluation A/c Dr. 650
To Machinery A/c 650
[Decrease in the value of machinery]
Creditor A/c Dr. 500
To Revaluation A/c 500
[Value of creditors reduced by Rs.500]
Revaluation a/c Dr 2550
To Mayur Capital Account 1,700
To Veer Capital Account 850
[Profit on revaluation is transferred to Capital account]

Revaluation Account
Particulars Amount Particulars Amount
To Provision for bad debts 800 By Building a/c 2,000
To Machinery a/c 650 By Investment a/c 1,500
To Mayur’s capital a/c 1700 By Creditor a/c 500
To Veer’s capital a/c 850 2550
Total 4000 Total 4000

Working note: Profit of Rs.2,550 to be shared by old partners in the ratio

of 2:1 (Old Ratio) Mayor’s share – 2550*2/3 = Rs.1,700 and Veer’s
share = 2,550* 1/3 = Rs.850

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10.8 Adjustments of Reserves and Accumulated Profit or Losses

Any accumulated profit or reserve (like General Reserve) appearing in the
balance sheet at the time of admission of a new partner, is credited in the
existing partner’s capital account in existing profit sharing ratio.
If there is any loss, the same will be debited to the existing partner in the
existing ratio.
For this purpose the following journal entries are made as:
For distribution of undistributed profit and reserves

Reserves A/c Dr
Profit & Loss A/c (Profit) Dr.
To Partner’s Capital A/c [individually]
[Reserves and Profit & Loss (Profit) transferred toall partners capitals
A/c in existing profit sharing ratio]

For distribution of loss:

Partner’s Capital A/c Dr. [individually]

ToProfit and Loss A/c [Loss]
[Profit & Loss (loss) transferred to all partners Capitals A/c in existing
profit sharing ratio]

Illustration 6:
Vamshi and Sagar are partners sharing profit in the ratio of 4:3. On 1st April,
2008 they admit Sandeep as a new partner for 1/4 shares in profits. On that
date the balance sheet of the firm shows a balance of Rs.70,000 in general
reserve and debit balance of Profit and Loss A/c of Rs.21,000. Make the
necessary journal entries.
Solution:
General Reserve Dr 70,000
To Vamshi’s Capital A/c 40,000
To Sagar’s Capital A/c 30,000
[Transfer of general reserve to the existing partner’s capital accounts]

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Vamshi’s Capital A/c Dr. 12,000

Sagar’s Capital A/c Dr. 9,000
To Profit & Loss A/c 21000
[Transfer of accumulated Loss to existing partner’s capital A/c]
Illustration 7:
Vivek and Abhimanyu are partners sharing profit and losses in the ratio
of 3:2 respectively. Their Balance Sheet as on March 31, 2008 was as
under:
Balance Sheet of Vivek and Etika as on December 31,2006
Liabilities Asset
Creditors 28000 Cash in hand 3000
Cash at bank 23000
Debtors 19000
Capitals: Building 65000
Vivek 70000 Furniture 15000
Abhimanyu 70000 Machinery 13000
Stock 30000
Total 168000 Total 168000

On that date, they admit Ajith into partnership for 1/3 share in future profit on
the following terms:
i) Furniture and stock are to be depreciated by 10%.
ii) Building is appreciated by Rs.20,000.
iii) 5% provision is to be created on Debtors for doubtful debts.
iv) Ajith is to bring in Rs.50,000 as his capital and Rs.30,000 as goodwill.
Prepare necessary ledger accounts and the balance sheet of the new firm.
Solution:
Revaluation Account
Particulars Amount Particulars Amount
To Furniture 1500 By Building a/c 20000
To Stock 3000 By Investment a/c
To Provision for bad debts 950 By Creditor a/c
To Profit on revaluation 14550
Vivek’s capital 8730
Abhimanyu’s capital 5820
Total 20000 Total 20000

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Partner’s Capital Accounts

Abhi Abhi
Particulars Vivek Ajith Particulars Vivek Ajith
manyu manyu
By Bal b/d 70,000 70,000
To Vivek’sCapital 18,000 By Cash a/c 50,000
To Abhimanyu’s 12,000 By Ajith capital a/c- 18,000 12,000
Capital Goodwill
To Balance c/d 96,730 87,820 20,000 By Revaluation a/c 8730 5820
96,730 87,820 50,000 96,730 87,820 50,000

Cash account
Particulars Amount Particulars Amount
To Balance b/d 3,000 By balance c/d 53,000
To Ajith’s Capital a./c 50,000
53,000 53,000
st
Balance sheet of Vivek, Abhimanyu and Ajith as on 31 December 2006
Liabilities Amount Assets Amount
Capitals Cash in hand 53,000
Vivek 96,730 Cash at bank 23,000
Abhimanyu 87,820 Debtors 19000
Less: Provision 950 18,050
Ajith 20,000 2,04,550 Buildings 85,000
Creditors 28,000 Furniture 15000
Less:Depreciation1500 13,500
Machinery 13,000
Stock 30,000
Less: depreciation 3,000 27,000
2,32,550 2,32,550

Working Note:
1. The share of Goodwill Rs.30,000 will be shared by Vivek and
Abhimanyu in the sacrificing ratio of 3:2
2. Vivek’s Share of goodwill = Rs.18,000 (30,000*3/5)
3. Abhimanyu’s share of Goodwill = Rs.12,000 (30,000*2/5)
Illustration 8:
Anand and Bhargav are partners in the firm sharing profits and losses in the
ratio of 2:1. Chetan is admitted into firm for a share of 1/4th of Profits. He will

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bring Rs.60,000 as his capital. He also brings Rs.48,000 as his share of

Goodwill. The balance sheet of Anand and Bhargav as of 31st March, 2009
is as follows:

Liabilities Amount (Rs) Assets Amount (Rs)

Capitals: Cash 44,000
Anand1,00,000
Bhargav 64,000 1,64,000
Debtors 36,000
Sundry Creditors 60,000 Property 34,000
Bills Payable 18,000 Furniture 20,000
General Reserve 42,000 Machinery 1,50,000
2,84,000 2,84,000

Other terms are as follows:

a) Machinery is valued at Rs.1,40,000
b) Provision for Bad debts to be created at 5% on debtors.
c) There was an unrecorded liability of Rs.10,000
d) Depreciate furniture by 10% and appreciate property by 10%
Prepare necessary ledger accounts for the above effects.
Solution:
Revaluation Account
Particulars Amount Particulars Amount
To Machinery 10,000 By Property 3,400
To Provision for Bad debts 1,800 By Loss on Revaluation 20,400
Anand’s Capital- 13,600
Bhargav’s Capital- 6,800
To Unrecorded liability 10,000
To Furniture 2,000
23,800 23,800

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Capital Accounts
Particulars Anand Bhargav Chetan Particulars Anand Bhargav Chetan
By Balance B/d 1,00,000 64,000
By Cash a/c- Capital 60,000
To Revaluation 13,600 6,800 By General Reserve 28,000 14,000
A/c-Loss
To Balance c/d 1,46,400 87,200 60,000 By Goodwill a/c 32,000 16,000

1,60,000 94,000 60,000 1,60,000 94,000 60,000

st
Balance sheet of Anand, Bhargav and Chetan as on 31 March, 2009
Liabilities Amount Assets Amount
Anand’s Capital 1,46,400 Cash (44,000+60,000+48,000) 1,52,000
Bhargav’s Capital 87,200 Debtors 36,000
Less Provision 1,800 34,200
Chetan’s Capital 60,000 Property (34,000+3,400) 37,400
Unrecorded Liability 10,000 Furniture (20,000-2000) 18,000
Sundry Creditors 60,000 Machinery 1,40,000
Bills Payable 18,000
3,81,600 3,81,600

Working Note:
1. General Reserve is to be shared among the old partners in the old ratio
of 2:1
2. Total Cash balance is Rs. 44,000 + Goodwill Rs.48,000 + Capital from
Chetan Rs.60,000 = Rs.1,52,000.
Self Assessment Questions:
Fill in the blanks with suitable word/words:
14. Whenever assets are increased due to reassessment, Revaluation
account will be ___________.
15. Whenever the liabilities are decreased, Revaluation account will be
_________.
16. Revaluation account will be debited for the decrease in the value of
_________.
17. Unrecorded assets will be ___________ to Revaluation account.
18. Unrecorded liabilities will be___________ to Revaluation account.
19. Revaluation account is debited for an increase in the value of
____________.

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20. Profit on revaluation is transferred to the _______________ of the

partners’ capital account.
21. Reserve should be distributed amongst the existing partners
in _____________.
22. Accumulated Losses are ____________ in the existing partner’s capital
account in the existing profit sharing ratio.

10.9 Summary
 A partnership can be defined as relation between persons who have
agreed to share profits of a business carried on by all or any of them
acting for all.
 The agreement between the partners about the terms and conditions is
called as “Partnership Deed”. It contains various contents like names of
partners, profit sharing ratio, salary to be paid, interest on capital etc.
 In the absence of partnership deed, profits to be distributed equally and
no interest on drawings, capital is allowed. However, for any loan Ajith
will be charged @ 6% per annum.
 According to Partnership Act, 1932, a person can be admitted as partner
only when the other partners had consented to admit.
 On the admission of a new partner, the following adjustments become
necessary:
i) Adjustment in profit sharing ratio;
ii) Adjustment of Goodwill;
iii) Adjustment for revaluation of assets and reassessment of liabilities;
iv) Distribution of accumulated profits and reserves; and
 Sacrificing ratio is the difference between old ratio and new ratio.
 Goodwill is the capitalized value of extra profit over the normal profit for
a business having good name and fame.
 A new partner may bring goodwill in cash or pay privately. He many not
bring goodwill sometimes also.
 The amount of existing goodwill has to be shared between the old
partners in old profit sharing ratio.
 When a new partner is admitted, assets and liabilities of firm are to be
revalued and accordingly, revaluation account has to be prepared.

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 The profit or loss on revaluation has to be shared by old partners in the

old profit sharing ratio.
 Any accumulated profits/losses are to be shared by old partners in the
old profit sharing ratio.

10.10 Terminal Questions

1. How do you define the term “Partnership”.
2. What do you understand about “Partnership Deed” and list the various
contents in partnership deed.
3. State the meaning of Sacrificing Ratio.
4. Discuss the meaning of Goodwill.
5. Explain ‘Revaluation Account’. Also explain why revaluation account is
prepared?
6. Explain the treatment of accumulated profit or losses and Reserves at
the time of admission of a new partner.
7. A and B are partners sharing profit in the ratio of 5:3 is admitted to the
partnership for 1/4 share of future profit. Calculate the new profit
sharing ratio and sacrificing ratio.
8. The following is the balance sheet of Veer and Ashima sharing profits
and losses in the ratio of 2:1.
Liabilities Amount Assets Amount
Capitals: Cash 12,000
Veer 50,000
Ashima 40,000 90,000
Debtors 60,000
Sundry Creditors 20,000 Stock 12,000
Furniture 6,000
Building 20,000
1,10,000 1,10,000

They agreed to admit Sunita into partnership on the following terms:

i. Sunita to pay Rs.9,000 as Goodwill and Rs 11,000 as her share of
capital.
ii. Buildings and Furniture to be depreciated by 5%

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iii. Stock is appreciated by 20%

iv. Bad Debt reserve of Rs.500 to be provided for.
Prepare necessary ledger accounts and Balance sheet of firm after
admission.
9. A and B are partners in the firm sharing profits and losses in the ratio
of 2:1. C is admitted into firm for a share of 1/4 th of Profits. He will bring
Rs 60,000 as his capital. He also brings Rs 24,000 as his share of
Goodwill. The balance sheet of A and B as of 31st March, 2008 is as
follows:

Liabilities Amount (Rs) Assets Amount(Rs)

Capitals: Cash 24,000
A 1,00,000
B 64,000 1,64,000
Debtors 16,000
Sundry Creditors 20,000 Property 24,000
Bills Payable 8,000 Furniture 10,000
General Reserve 12,000 Machinery 1,30,000
2,04,000 2,04,000

Other terms are as follows:

a. Machinery is valued at Rs 1,36,100
b. Provision for Bad debts to be created at 5% on debtors.
c. There was an unrecorded liability of Rs 5,000
10. The Balance sheet of Sridhar and Ghanasyam as on 31st December,
2009 is set out below; They share profits and losses in the ratio of 2:1

Liabilities Amount Assets Amount

Sridhar’s Capital 60,000 Freehold Property 20,000
Ghanashyam’s Capital 30,000 Furniture 6,000
General Reserve 24,000 Stock 12,000
Creditors 16,000 Debtors 80,000
Cash 12,000
1,30,000 1,30,000

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They agreed to admit Prem subject to the following conditions:

1. Prem will bring Rs 21000 as capital for his ¼ th share out of which
Rs 9000 as Goodwill which will be retained in the business.
2. Provision for Bad debts @ 5%
3. Depreciation to be provided for furniture @ 5%
4. Stock is to be re-valued at Rs.11,500
Draft necessary Journal Entries and Prepare ledger accounts for the
effect of above. Also prepare the Balance sheet of the firm after new
admission.
11. Mr X and Mr Y are partners sharing profits and losses in the ratio
of 3:1. Their Balance sheet as at 31st March,2008 as follows.

Liabilities Amount Assets Amount

Sundry Creditors 40,000 Cash at Bank 25,000
X’s Capital 30,000 Debtors 9,000
Y’s Capital 10,000 Stock 20,000
Furniture 6,000
Premises 20,000
80,000 80,000

They decide to Ajithe Mr. Z on the following terms:

a. Goodwill of Rs.30,000 to be created.
b. Depreciate Furniture by 10%
c. Stock has to be re-valued at Rs.18,000
d. Provision for bad debts to be created on debtors @ 10%
e. Premises are to be appreciated by 25%
f. Mr. Z will bring Rs.10,000 as his share of capital for 1/4th share of
profits.
Prepare Revaluation a/c, Capital accounts and Balance sheet of new
firm after such admission.

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12. Rajat and Ravi are partners in a firm sharing profits and losses in the
ratio of 7:3. Their
Balance Sheet as at 31st March, 2007 is as follows :
Liabilities Amount Assets Amount
Creditors 60,000 Cash in hand 36,000
Reserve 10,000 Cash at bank 90,000
Rajat’s capital 1,00,000 Debtors 44,000
Ravi’s capital 80,000 Stock 50,000
Furniture 30,000
2,50,000 2,50,000

On 1st April, 2007, they admit Rohan on the following terms:

1. Goodwill is valued at Rs.40,000 and Rohan is to bring in the
necessary amount in cash as premium for goodwill and Rs.60,000
as Capital for 1/4 share in profits.
2. Stock is to be reduced by 40% and furniture is to be reduced
to 40%.
3. Provision for bad debts @ 10% on debtors to be maintained.
Prepare Revaluation Account, Partners’ Capital Accounts and Cash
Account.

10.11 Answers
Self Assessment Questions
1. Two
2. Agreement
3. Written, Oral
4. Partnership Deed
5. New, Old
6. Reconstituted
7. Sacrifice
8. Existing
9. 5:3
10. No entry
11. Credited
12. Sacrificing
13. Debited and credited

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Financial Accounting Unit 10

14. Credited
15. Credited
16. Assets
17. Credited
18. Debited
19. Liabilities
20. Existing partners
21. Existing ratio.
22. Debited

Terminal Questions:
1. Partnership is an agreement between two or more persons to carry a
business and to share the profits and losses arising out of the
business. For more explanation, please refer 10.2.
2. A partnership deed is a written agreement among the partners to
describe the various terms and conditions in the newly registered firm.
For more explanation, please refer 10.3.
3. When a new partner is admitted, the existing partners have to forego
their share to accommodate the new partner share. The share they are
sacrificing is called as “Sacrificing Ratio”. For more details, please refer
sacrificing ratio in 10.4.
4. Goodwill is the name and fame earned by business over a period of
time. It is the extra profit over the normal profits of the business. For
more explanation, please refer 10.6.
5. Revaluation account is prepared for adjusting the increase and
decrease in the value of assets and liabilities of the firm due to
admission of new partner. Please refer 10.7 for more details.
6. Accumulated profits and losses are to be shared between the existing
partners in their old profit sharing ratio. Please refer 10.8 for more
details.
7. New profit sharing ratio is 5:3:2 and the sacrificing ratio is 5:3.
8. Revaluation Account Profit – Rs.600; Balance sheet total – Rs.1,30,600
9. Revaluation Account Profit- Rs.300;Balance sheet total- Rs.2,93,300.
10. Revaluation Account Loss – Rs.4,800; Balance Sheet total-
Rs.1,46,200.

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11. Revaluation account profit – Rs.1,500; Balance sheet total-

Rs.1,21,500.
12. Revaluation account Profit – Rs.42,400; Balance sheet total -
Rs.3,07,600.

References:
 S N. Maheshwari, S. K. Maheshwari (2005), Financial Accounting, Vikas
Publishing House Pvt Ltd, New Delhi.
 R. L. Gupta, Radhaswamy (2010). Financial Accounting. S. Chand and
Company
 M. C. Shukla (2010). Advanced Accountancy. S. Chand and Company
 Jain and Narang (2009). Financial Accounting, S. Chand and Company

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