ACCOUNTS PROJECT

ROUGH DRAFT
By Vansh Ruparelia
TOPIC: -
ADMISSION OF A PARTNER
 MEANING: -
“Partnership” is the relationship between persons who have
agreed to share the profits of the business carried on by all or any
of them acting for all.
Inclusion of a new person as a partner to an existing fir is called
admission of a partner. The new partner who joins the business is
called incoming partner or new partner.

Introduction
Admission of a partner is one of the modes of the reconstitution
of the firm under which old partnership comes to an end and the
new partnership begins between all the partners including the
incoming partner. Indian Partnership Act states that a new partner
can be admitted only when the existing partners give their free
consent for the same. So, when the existing partners of a firm
permit a new person to join as their new partner, is called
admission of the new partner. A new partner is admitted when the
firm needs additional capital or managerial help or both for the
expansion of the business. Reason for the admission of the new
partner: A new partner is admitted in the partnership for the
following reasons: To expand the business. To meet the
requirements for the additional capital. To increase the
managerial capabilities of the firm. To take the advantage of the
reputation of the new partner. To reduce the competition. To avail
the benefit of the technical skills of the new partner.

Partnership Accounts
Admission of a partner Nature of partnership firm:-There are
certain limitations of a sole trader. In a sole trading concern only
one man invest capital, undertakes the risk involved in the
business and controls the whole affairs of the business. But one
man’s capital, skill, controlling and risk taking capacity are
generally limited. Therefore, some persons may combine and
enter into an agreement to form a partnership.

Main features or essential

elements or characteristics
of partnership
1. Two or more persons:-There must be at least two persons to
form a partnership. Partnership Act does not specify the
maximum number of persons, but the Indian Company Act,
1956, restricts the number of partners to 10 for a partnership
carrying on banking business and 20 in case of other kinds of
business. 2. Agreement: - Partnership is the result of an
agreement. It must come into existence by an agreement
and not by the operation of law. On the contrary, a Hindu
undivided family comes into existence by the operation of
law and not by an agreement. Such an agreement can be
either oral or in writing. The agreement forms the basis of
mutual rights and duties of each partners. 3. Existence of
business and Profit motive:- Partnership can be formed for
the purpose of carrying on some business with the intention
of earning profits and such business must be legal. A joint
ownership of some property by itself cannot be called a
 partnership. 4. Sharing of profits:- The agreement between
the partners must be aimed at sharing the profits of the
business. If some persons join hands to run some charitable
activity, it will not be called partnership. Further, if a partner
is derived of his rights to share the profits of business, he
cannot be called a partner. But it is not necessary that all
partners should share the losses also. It may be agreed
between the partners that one or more of them shall not be
liable for losses.5.Relationship of principal and Agent:- Each
partners is an agent as well as a partner of the firm. An
agent, because he can bind the other partners by his acts
and a principal, because he himself can be bound by the
acts of other partners. 6. Business carried on by all or any of
them acting for all:- It means that each partner can
participate in the conduct f business and each partner is
bound by the acts of other partners in respect to the
business. Therefore Partnership cannot come into existence
in the absence of any one of the above mentioned essential
features.

Rights of a partner:
• Every partner has the right to share profits or losses with
other partners in the agreed ratio. • Every partner has the right
to take part in the conduct of the business. • Every partner has
the right to be consulted in the matters related to partnership
business. • Every partner has the right to inspect and have a
copy of the books of accounts. • Every partner has a right to
disallow the admission of a new partner. • Every partner is the
joint owner of the partnership property. • If a partner has given
loan to the firm, he has a right to receive interest at agreed rate.
If the rate of interest is not agreed, it is paid @ 6 % p.a. • If a
partner incurs expenses or make payment on behalf of the
firm, he has a right to be indemnified by the firm. • Every
partner has a right to retire from the firm after giving a proper
notice. Partnership Deed Since partnership is the outcome of
an agreement, it is essential that there must be some terms
and conditions agreed upon by all the partners. Such terms
and conditions may be either oral or written. The law does not
make it compulsory to have a written agreement. However, in
order to avoid all misunderstanding and disputes, it is always
the best to have a written agreement duly signed and registered
under the act. Such a written document which contains the
terms of agreement is called “Partnership Deed.” It is also
called “Articles of Partnership.

The partnership deed should contain

the following points:-
 The name and addresses of the firm.  Name and addresses
of the partners.  The type and nature of the business the firm
purposes to do.  Amount of capital to be contributed by each
partners and whether the capital accounts will be fixed or
fluctuating.  Interest on capitals: - Whether interest to be
allowed on capitals. If so, the rate of interest.  Drawings: -
How much amount the partners are entitled to withdraw for
personal use.  Interest on drawings: - Whether interest will be
charged on partner’s drawings. If so, the rate of interest. 
Profit sharing ratio:- The ratio in which profits or losses are to
be divided among the partners.  Salary:-Whether any partner
will be paid salary for the work done by him. If so, how much? 
Goodwill:-Method of valuation of goodwill in case of admission
or retirement of a partner.  Accounting period of the firm:-The
period after which the final account the firm are to be
prepared. Whether yearly or half-yearly and the date on which
accounts are to be closed every year.  Method of recording of
firm’s accounts and the safe custody of the books of accounts
and other documents of the firm.  Auditing: - Whether the
firm’s books will be audited or not? If so, the mode of auditor’s
appointment .  Date of commencement of partnership. 
Duration of partnership: - The period for which the partnership
has been established and the mode of dissolution of
partnership.  Bank accounts: - Whether the account in the
bank will be opened in firm’s name or in some partner’s name?
Who will have the right to sign the cheques?  Rules to be
followed in case of admission of a partner.  Rules to be
followed while settling the accounts on retirement: - The
manner in which the amount due on the retirement or death of
a partner will be calculated and the manner in which it will be
paid.  Settlement of disputes: - In case of dispute among the
partners, how the disputes will be solved, whether arbitrator
will be appointed?

[Importance of Partnership Deed]

Though, the law does not make it necessary for every firm to
have a partnership deed, it is desirable to have it due to
following reasons:-  It regulates the rights, duties and
liabilities of each partners.  It helps to avoid any
misunderstanding amongst the partners because all the terms
and conditions of partnership have been laid down before hand
in the deed.  Any dispute amongst the partners may be settled
easily as the partnership deed may be readily referred to.
Admission of a new partner
Sometimes a new partner is needed into the business due to
the following reasons: 1. When more capital is needed for the
expansion of the business; 2. When a competent and
experienced person is needed for the efficient running of the
business; 3. To increase the goodwill and reputation of the
business by taking a reputed and renowned person into the
partnership; 4. To encourage a capital employee by taking him
into the partnership. Admission of a partner is one of the
modes of reconstitution of a partnership firm, under which
existing agreement comes to an end and a new one comes into
existence. A new partnership deed is prepared at the time of
admission of a new partner, as the old partnership deed comes
to an end. According to section 31 (1) of the Indian Partnership
Act, a new partner can be admitted only with the consent of all
the existing partners. At the time of admission, the new partner
brings his share of goodwill and capital. Old partners sacrifice
a share of their profits in his favour and thus he gets a share in
the future profits of the firm. Following adjustments are needed
at the time of the admission of new partners:  Calculation of
new profit sharing ratios;  Accounting treatment of Goodwill;
 Accounting treatment for revaluation of assets and liabilities;
 Accounting treatment of reserves and accumulated profits;
 Adjustment of capitals on the basis of new profit sharing
ratio.
New profit sharing ratio : When a new partner is
admitted, old partners sacrifice a share of their profit to the
new partner. So their share of profit reduces. Hence the need
of calculating new profit sharing ratio arises. The ratio in which
all the partners (including the new partner) will share the profits
and losses is called new profit sharing ratio. New Profit Sharing
Ratio = Old Profit Sharing Ratio – Sacrificing Ratio Sacrificing
Ratio : It is the ratio in which existing partners sacrifice their
share to a new or gaining partner. Sacrificing Ratio = Old Share
of Profit Ratio – New Share of Profit Ratio

Gaining ratio : Gaining ratio is the ratio in which continuing

partners take the outgoing (retire or deceased) partner's share.
This ratio is also applicable when there is a change in the
existing profit sharing ratio of the partners. Gaining ratio = New
Profit Sharing Ratio – Old Profit Sharing Ratio  Accounting
treatment of Goodwill : At the time of admission of a partner,
there are three ways adopted by the firm for the treatment of
goodwill. (1) When Premium for goodwill is paid privately : If a
new partner is paying amount of goodwill directly to the old
partners, outside the business, no entry will be passed for this
purpose. (2) When new partner brings his share of goodwill in
cash : In this method, there are two alternatives : (i) When the
amount of goodwill brought in by new partner is retained in the
business : Following two entries will be passed for this purpose
: (a) Cash/Bank A/c Dr. To Premium for Goodwill A/c
(Individually) (Being amount of Goodwill brought in by new
partner) (b) Premium for Goodwill A/c (Individually) Dr. To
Sacrificing Partners’ Capital/Current A/cs (Being amount of
Goodwill distributed to the old partners in their sacrificing
ratio) (ii) When goodwill brought in by new partner is withdrawn
by the sacrificing partners : Cash/Bank A/c Dr. To Sacrificing
Partner's Capital A/c (Individually) (Being amount of Goodwill
brought in by new partner in cash) Sacrificing Partners’ Capital
A/cs (Individually) Dr. To Cash/Bank A/c (Being amount of
goodwill withdrawn by the old partners) (3) When new partner
does not bring his share of goodwill in cash : New Partner’s
Capital/Current A/c Dr. To Sacrificing Partners’ Capital/Current
A/cs (Being current A/c of new partner debited for his share of
goodwill and Current A/c of old partners credited in sacrificing
ratio.) (4) When a new partner brings only a part of premium of
goodwill in cash : (a) Bank A/c Dr. To Premium for Goodwill A/c
(Being part of his share of goodwill brought in by new partner)
(b) Premium for Goodwill A/c Dr. New Partner’s Capital/Current
A/c Dr. To Sacrificing Partners' Capital/Current A/cs (Being
goodwill credited in sacrificing ratio)  Writing off goodwill
already appearing in the books : If any goodwill is already
existing in the balance sheet at the time of admission of a new
partner, it should be written off by all old partners in their old
profit sharing ratio by passing this entry : Old Partners’
Capital/Current A/cs Dr. To Premium for Goodwill A/c (Being
goodwill already appearing in books now written off)  Hidden
Goodwill : Hidden or inferred goodwill is the excess of desired
total capital of the firm over the actual combined capital of all
partners. The following steps are taken for calculating hidden
goodwill : l Find out the total capital of new firm on the basis of
capital contributed by the new partner. l Find out the existing
capital of new firm by adding all partners capital (including new
one). l Goodwill is assumed to be the excess of the total capital
of the new firm over the existing total capital of all the partners.
Gaining ratio : Gaining ratio is the ratio in which continuing
partners take the outgoing (retire or deceased) partner's share.
This ratio is also applicable when there is a change in the
existing profit sharing ratio of the partners. Gaining ratio = New
Profit Sharing Ratio – Old Profit Sharing Ratio  Accounting
treatment of Goodwill : At the time of admission of a partner,
there are three ways adopted by the firm for the treatment of
goodwill. (1) When Premium for goodwill is paid privately : If a
new partner is paying amount of goodwill directly to the old
partners, outside the business, no entry will be passed for this
purpose. (2) When new partner brings his share of goodwill in
cash : In this method, there are two alternatives : (i) When the
amount of goodwill brought in by new partner is retained in the
business : Following two entries will be passed for this purpose
: (a) Cash/Bank A/c Dr. To Premium for Goodwill A/c
(Individually) (Being amount of Goodwill brought in by new
partner) (b) Premium for Goodwill A/c (Individually) Dr. To
Sacrificing Partners’ Capital/Current A/cs (Being amount of
Goodwill distributed to the old partners in their sacrificing
ratio) (ii) When goodwill brought in by new partner is withdrawn
by the sacrificing partners : Cash/Bank A/c Dr. To Sacrificing
Partner's Capital A/c (Individually) (Being amount of Goodwill
brought in by new partner in cash) Sacrificing Partners’ Capital
A/cs (Individually) Dr. To Cash/Bank A/c (Being amount of
goodwill withdrawn by the old partners) (3) When new partner
does not bring his share of goodwill in cash : New Partner’s
Capital/Current A/c Dr. To Sacrificing Partners’ Capital/Current
A/cs (Being current A/c of new partner debited for his share of
goodwill and Current A/c of old partners credited in sacrificing
ratio.) (4) When a new partner brings only a part of premium of
goodwill in cash : (a) Bank A/c Dr. To Premium for Goodwill A/c
(Being part of his share of goodwill brought in by new partner)
(b) Premium for Goodwill A/c Dr. New Partner’s Capital/Current
A/c Dr. To Sacrificing Partners' Capital/Current A/cs (Being
goodwill credited in sacrificing ratio)  Writing off goodwill
already appearing in the books : If any goodwill is already
existing in the balance sheet at the time of admission of a new
partner, it should be written off by all old partners in their old
profit sharing ratio by passing this entry : Old Partners’
Capital/Current A/cs Dr. To Premium for Goodwill A/c (Being
goodwill already appearing in books now written off)  Hidden
Goodwill : Hidden or inferred goodwill is the excess of desired
total capital of the firm over the actual combined capital of all
partners. The following steps are taken for calculating hidden
goodwill : l Find out the total capital of new firm on the basis of
capital contributed by the new partner. l Find out the existing
capital of new firm by adding all partners capital (including new
one). l Goodwill is assumed to be the excess of the total capital
of the new firm over the existing total capital of all the partners.
Following steps are taken to make adjustment in capital on the
basis of new partner's capital : Step 1 : Find out total capital of
the firm on the basis of new partner's capital. Total capital of
the firm = Capital of new partner × Reciprocal of his share Step
2 : On the basis of total capital of the firm, find out new capital
of each partner in new profit sharing ratio. Step 3 : Find out the
present capital of the old partners. (after all adjustments like
reserves, profit, etc.) Step 4 : Find out the surplus/deficit by
comparing new capital and present capital. If any partner’s
capital is less than new capital he/she has to bring the capital
to make it proportionate. If any partner's present capital is
more than new capital then he/she has to withdraw the excess
in order to make the capital proportionate.  Journal Entry : (1)
When present capital is less and fresh capital is introduced :
Bank / Cash A/c Dr. To Partner’s Capital A/c (2) When excess
capital is withdrawn permanently : Partner’s Capital A/c Dr. To
Cash /Bank A/c