PARTNERSHIP ACCOUNTS 8.

49

UNIT 3 : ADMISSION OF A NEW PARTNER

LEARNING OUTCOMES
After studying this unit, you will be able to :
w Understand the reasons for which revaluation of assets and re computation of liabilities is required in
case of admission of a new partner. Also understand the logic of revaluation of assets and re computation
of liabilities at the time of admission of a partner.
w Learn the accounting treatments under two circumstances:
(a) When revalued assets and recomputed liabilities are shown in the Balance Sheet, and
(b) When revalued assets and recomputed liabilities are not shown in the Balance Sheet.
w Learn the technique of treating reserve balance on admission of a partner.
w See the technique of arriving at new profit-sharing ratio.
w Observe the technique of inferring goodwill although figure of goodwill is not mentioned clearly.

UNIT OVERVIEW
Revaluation
Account or Profit and
Loss Adjustment
Account for
revaluation of assets
and liabilities

Reserves lying in
the balance sheet
transferred to the Admission Adjustment of
goodwill amongst
capital accounts of
of partner
the old partners in
old partners in their their sacrificing ratio
old profit sharing
ratio.

Profit/loss on
revaluation account
is ts/f to old partners
in their old profit
sharing ratio

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8.50 PRINCIPLES AND PRACTICE OF ACCOUNTING

3.1 INTRODUCTION
New partners are admitted for the benefit of the partnership firm. New partner is admitted either for
increasing the partnership capital or for strengthening the management of the firm. When a new partner
joins a firm, it is desirable to bring all appreciation or reduction in the value of assets into accounts as on the
date of admission. Similarly, if the books contain any liability which has not been paid or if the books do not
contain a liability which has to be paid, suitable entries should be passed. The purpose of such entries is to
make an updated Balance Sheet on the date of admission. Also, all profits which have accrued but not yet
brought into books and similarly, all losses which have occurred but not recorded, should now be brought
into books so that the Capital Accounts of the old partners reflect the proper figure. As a result of passing of
such entries, any subsequent profits or losses will be automatically shared by the incoming partner along
with old partners.
Also the value of goodwill is to be assessed and proper accounting treatment is required to bring the value
of goodwill into books of accounts. Treatment for goodwill has already been discussed in unit 2 of this
chapter.

3.2 REVALUATION ACCOUNT OR PROFIT AND LOSS ADJUSTMENT

ACCOUNT
When a new partner is admitted into the partnership, assets are revalued and liabilities are reassessed. A
Revaluation Account (or Profit and Loss Adjustment Account) is opened for the purpose. This account is
debited with all reduction in the value of assets and increase in liabilities and credited with increase in the
value of assets and decrease in the value of liabilities. The difference in two sides of the account will show
profit or loss. This is transferred to the Capital Accounts of old partners in the old profit sharing ratio. The
entries to be passed are:

1. Revaluation Account Dr.

To Assets Account with the reduction in the value of the assets
(individually which show a decrease)
To the Liabilities Accounts
(Individually which have to be increased) with the increase in the liabilities.
2. Assets Account (Individually) Dr. with the increase in the value of the of assets.
Liabilities Accounts Dr. with the reduction in the amount liabilities.
To Revaluation Account
3. Revaluation Account Dr. with the profit in the old profit sharing ratio.
To Capital A/cs of the old partners
or
Capital A/cs of the old partners Dr. with the loss in old profit sharing ratio.
To Revaluation Account
As a result of the above entries, the capital account balances of the old partners will change and the assets
and liabilities will have to be adjusted to their proper values. They will now appear in the Balance Sheet at
revised figures.

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 PARTNERSHIP ACCOUNTS 8.51

When the revised values are not to be Recognised in the books

Sometimes all the partners including the new partner may agree to keep the assets and liabilities at the
old values even when they agree to revalue them. To record these, a Memorandum Revaluation Account is
opened. This account is divided into two parts.
(a) In the first part the entries for the revaluation of assets and liabilities are made in the usual way as
explained earlier. No record for the revaluation of assets and liabilities is made through the respective
ledger accounts. The resultant profit or loss on revaluation in the first part of this account is transferred
to the capital accounts of old partners only in the old profit and loss sharing ratio.
(b) In order to complete the double entry, entries made in the first part of Memorandum Revaluation
Account are reversed in the second part so that the values of the assets and liabilities remain unchanged.
The balance of the second part is transferred to the capital accounts of all the partners including new
partner in their new profit and loss sharing ratio. Thus if there is a profit in the first part there will be a
loss of the same amount in the second part. The only point to be remembered is that the result of the
first part of Memorandum Revaluation Account is shared by old partners in the old profit sharing ratio,
while the result of the second part is shared by all partners including the new one in the new profit
sharing ratio.
Alternatively, the partners may agree that revalued figures will not be shown in the Balance Sheet and
Assets and liabilities would appear in the Balance Sheet at their old values.
In this case, Memorandum Revaluation Account is opened. Any increase in the value of assets and/or
decrease in the liabilities is credited to Memorandum Revaluation Account. The journal entry will be:
Assets Accounts Dr (with increase in the value of individual assets)
Liabilities Accounts Dr. (With decrease in the value of individual liabilities)
To Memorandum Revaluation Account
Similarly, any decrease in the value of assets and/or increase in the liabilities is debited to Memorandum
Revaluation Account. The journal entry will be:
Memorandum Revaluation Account Dr.
To Assets Accounts (with increase in the value of individual assets)
To Liabilities Accounts (with decrease in the value of individual liabilities)
If the credit side of the Memorandum Revaluation Account is more than the debit side, there is a profit. This
profit should be transferred to old Partner’s Capital Accounts in the old profit sharing ratio. The journal entry
will be:
Memorandum Revaluation Account Dr.
To Old Partners’ Capital Accounts
If the debit side of the Memorandum Revaluation Account is more than the credit side, there is a loss which
is transferred to old Partner’s Capital Accounts in the old profit sharing ratio. The journal entry will:
Old Partners’ Capital Accounts Dr.
To Memorandum Revaluation Account

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8.52 PRINCIPLES AND PRACTICE OF ACCOUNTING

After completing the above procedure, reverse entries are made for increase in the values of assets and/
or decrease in the liabilities, and decrease in the values of assets and/or increase in the liabilities) in the
later portion of the Memorandum Revaluation Account. The profit on revaluation is to be transferred to all
Partners’ Capital Accounts in the new profit sharing ratio. The journey entry will be:
Memorandum Revolution Account Dr.
To All Partners’ Capital Accounts (New profit and loss sharing ratio)
The loss on revaluation should be transferred to all Partners’ Capital Accounts in the new profit sharing ratio.
The journal entry will be:
All Partners’ Capital Accounts Dr. (New profit and loss sharing ratio)
To Memorandum Revaluation Account
It should be noted that if there is a profit in the first half of the Memorandum Revaluation Account, the
later half of the Memorandum Revaluation Account must show a loss. Conversely, if the first half of the
Memorandum Revaluation Account shows a loss, the laterhalf of the Memorandum Revaluation Account
must show a profit.
When a Memorandum Revaluation Account is prepared, the book values of assets and liabilities do not
change. In effect, the resultant profit or loss on revaluation is adjusted through the Partners’ Capital Accounts.
In this way, the amount invested as a capital by the incoming partner may be set at a level that reflects the
current fair value of the partnership, even though the book values of assets and liabilities of the existing
partnership remain unchanged in the books of accounts.
In case partners desire to disclose assets and liabilities in the balance sheet at old figures without opening
Revaluation account then the change (i.e. increase or decrease) in the value of assets and liabilities may be
adjusted through Partners’ Capital Accounts directly.
Difference between Revaluation Account and Memorandum Revaluation Account
1. Revaluation account is prepared to find out the profit or loss on revaluation of assets and liabilities which
appear in the new balance sheet at the new or revalued figures. Memorandum revaluation account is
also prepared to record the effect of revaluation of assets and liabilities which of course are recorded at
their old figures in the new balance sheet.
2. Revaluation account is not divided into two parts. But the memorandum revaluation account has two
parts: firstpart for old partners and second part for all partners including the new partner.
3. The net result of revaluation of assets and liabilities in the revaluation account is transferred to old
partners’ capital accounts in the old profit sharing ratio. In the case of memorandum revaluation account
the firstpart is used to record the changes in the values of assets and liabilities due to revaluation and
in the second part the effect of the first part is cancelled. The balance of the first part is transferred to
old partner’s capital accounts in the old profit sharing ratio while the balance of the second part is
transferred to all partners including the new partner in the new profit sharing ratio.

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 PARTNERSHIP ACCOUNTS 8.53

? ILLUSTRATION 1
The following is the Balance Sheet of Ram and Mohan, who share profits in the ratio of 3:2 as on 1st January,
2016:

Liabilities ` Assets `
Trade payables 15,000 Buildings 18,000
Ram’s Capital 20,000 Plant and Machinery 15,000
Mohan’s Capital 25,000 Inventories 12,000
Trade receivables 10,000
Bank 5,000
60,000 60,000

On this date Shyam was admitted on the following:

1. He is to pay ` 25,000 as his capital and ` 10,000 as his share of goodwill for one fifth share in profits.
2. The new profits sharing ratio will be 5:3:2.
3. The assets are to be revalued as under:

`
Building 25,000
Plant and Machinery 12,000
Inventories 12,000
Trade receivables (because of doubtful debts) 9,500

4. It was found that there was a liability for `1,500 for goods received but not recorded in books.
Give journal entries to record the above. Also, give the Balance Sheet of the partnership firm after Shyam’s
admission.

 SOLUTION
Journal Entries
2016 Dr. (`) Cr. (`)
Jan. 1 Bank Account Dr. 35,000
To Shyam’s Capital Account 35,000
(Being amount brought in by Shyam for capital and goodwill)
Shyam’s Capital Account Dr. 10,000
To Ram’s Capital Account 5,000
To Mohan’s Capital Account 5,000
(Being Shyam’s share of goodwill adjusted to existing partners’
capitalaccounts in the profit sacrificing ratio 1:1)
Revaluation Account Dr. 5,000

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8.54 PRINCIPLES AND PRACTICE OF ACCOUNTING

To Plant and Machinery Account 3,000

To Provisions for Doubtful Debts Account 500
To Trade payables Account 1,500
(Being recording of the reduction in the value of assets and the liability
which had been previously omitted)
Building Account Dr. 7,000
To Revaluation Account 7,000
(Being increase in the value of building brought into account)
Revaluation Account Dr. 2,000
To Ram’s Capital Account 1,200
To Mohan’s Capital Account 800
(Being profit on revaluation credited to Ram and Mohan in the old
profit sharing ratio)
Working Note:
Profit sacrificing ratio:
Ram = 3/5 less 1/2 = 1/10
Mohan = 2/5 less 3/10 = 1/10
Balance Sheet of Ram, Mohan and Shyam as at January 1, 2016
Liabilities ` ` Assets ` `
Trade payables 16,500 Buildings 25,000
Capital Accounts : Plant and Machinery 12,000
Ram 26,200 Inventories 12,000
Mohan 30,800 Trade receivables 10,000
Shyam 25,000 82,000 Less : Provision for
Doubtful Debts (500) 9,500
Bank 40,000
98,500 98,500

? ILLUSTRATION 2
A and B are partners sharing profits and losses in the ratio of 3:2. Their Balance Sheet as on 31.3.2016 is given
below:
Liabilities ` Assets `
Trade payables 50,000 Freehold premises 2,00,000
Capital Accounts: Plant 40,000
A 2,00,000 Furniture 20,000
B 1,00,000 Office equipment 25,000
Inventories 30,000
Trade receivables 25,000
Bank 10,000
3,50,000 3,50,000
© The Institute of Chartered Accountants of India
 PARTNERSHIP ACCOUNTS 8.55

On 1.4.2016 they admit C on the following terms:

(1) C will bring ` 50,000 as a capital and ` 10,000 for goodwill for 1/5 share;
(2) Provision for doubtful debts is to be made on Trade receivables @ 2%
(3) Inventory to be written down by 10%.
(4) Freehold premises is to be revalued at `2,40,000, plant at ` 35,000, furniture
` 25,000 and office equipment ` 27,500.
(5) Partners agreed that the values of the assets and liabilities remain the same and, as such, there should not be
any change in their book values as a result of the above mentioned adjustments.
You are required to make necessary adjustment in the Capital Accounts of the partners and show the Balance
Sheet of the New Firm.

 SOLUTION
Memorandum Revaluation Account
Particulars ` Particulars `
To Provision for Bad Debts A/c 500 By Freehold premises A/c 40,000
To Inventory A/c 3,000 By Furniture A/c 5,000
To Plant A/c 5,000 By Office equipment A/c 2,500
To Profit on Revaluation A/c
A’s Capital-3/5 23,400
B’s Capital-2/5 15,600
47,500 47,500
To Freehold premises A/c 40,000 By Provision for Bad Debts A/c 500
To Furniture A/c 5,000 By Inventory A/c 3,000
To Office equipment A/c 2,500 By Plant A/c 5,000
Loss on Revaluation A/c
A’s Capital -12/25 18,720
B’s Capital-8/25 12,480
C’s Capital-5/25 7,800
47,500 47,500
Partners’ Capital Accounts
Particulars A B C Particulars A B C
` ` ` ` ` `
To A’s Capital A/c 6,000 By Balance b/d 2,00,000 1,00,000 -
To B’s Capital A/c 4,000
To Loss on revaluation By Bank A/c 60,000
A/c 18,720 12,480 7,800
To Balance c/d 2,10,680 1,07,120 42,200 By C’s Capital A/c 6,000 4,000 -
By Profit on
revaluation A/c 23,400 15,600 -
2,29,400 1,19,600 60,000 2,29,400 1,19,600 60,000

© The Institute of Chartered Accountants of India

8.56 PRINCIPLES AND PRACTICE OF ACCOUNTING

Balance Sheet as at 1.4.2016

Liabilities ` Assets `
Trade payables 50,000 Freehold premises 2,00,000
Plant 40,000
Capital A/c : Furniture 20,000
A 2,10,680 Office equipment 25,000
B 1,07,120 Inventories 30,000
C 42,200 Trade receivables 25,000
Bank 70,000
4,10,000 4,10,000

? ILLUSTRATION 3
A and B are partners in a firm, sharing profits and losses in the ratio of 3:2. The Balance Sheet of A and B as on
1.1.2016 was as follows:
Liabilities Amount Assets Amount
` ` ` `
Trade payables 17,000 Building 26,000
Furniture 5,800
Bank overdraft 9,000 Inventories 21,400
Capital accounts: Trade receivables 35,000
A 44,000 Less: Provision (200) 34,800
B 36,000 80,000 Investment 2,500
Cash 15,500
1,06,000 1,06,000
‘C’ was admitted to the firm on the above date on the following terms:
(i) C is admitted for 1/6 share in the future profits and to introduce a capital of `25,000.
(ii) The new profit sharing ratio of A, B and C will be 3:2:1 respectively.
(iii) ‘C’ is unable to bring in cash for his share of goodwill, they decide to calculate goodwill on the basis of C’s
share in the profits and the capital contribution made by him to the firm.
(iv) Furniture is to be written down by `870 and Inventory to be depreciated by 5%. A provision is required for
trade receivables @ 5% for bad debts. A provision would also be made for outstanding wages for `1,560. The
value of buildings having appreciated be brought upto`29,200. The value of investments is increased by
`450.
(v) It is found that the trade payables included a sum of `1,400, which is not to be paid off.
Prepare the following:
(i) Revaluation account.
(ii) Partners’ capital accounts.

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 PARTNERSHIP ACCOUNTS 8.57

 SOLUTION
Revaluation Account
` `
To Furniture 870 By Building 3,200
To Inventory 1,070 By Trade payables 1,400
To Provision for doubtful debts By Investment 450
(`1,750 - `200) 1,550
To Outstanding wages 1,560
5,050 5,050
Partners’ Capital Accounts
A B C A B C
` ` ` ` ` `
To A 4,500 By Balance b/d 44,000 36,000 –
To B 3,000 By Cash A/c – – 25,000
To Balance c/d 48,500 39,000 17,500 By C (working note 2) 4,500 3,000 –
48,500 39,000 25,000 48,500 39,000 25,000
Working Notes:
1. Calculation of goodwill:
C’s contribution of `25,000 consists of only 1/6th of capital.
Therefore, total capital of firm should be `25,000 x 6 = `1,50,000
But combined capital of A, B and C amounts `44,000 + 36,000 + 25,000 = `1,05,000
Thus, the hidden goodwill is `45,000 (`1,50,000- `1,05,000).
Goodwill will be shared by A & B in their sacrificing ratio.
2. Calculation of sacrificing ratio
Partners New share Old share Sacrifice Gain
A 3 3 3
–
6 5 30
B 2 2 2
–
6 5 30
C 1 1
6 6
3
Therefore, A will get = `45,000 × = `4,500;
30
2
B will get = `45,000 × = `3,000; and
30
1
C will be debited on account of goodwill = `45,000 × = `7,500
6

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8.58 PRINCIPLES AND PRACTICE OF ACCOUNTING

3.3 RESERVES IN THE BALANCE SHEET

Whenever a new partner is admitted, any reserve etc. lying in the Balance Sheet should be transferred to the
Capital Accounts of the old partners in the old profit sharing ratio.
The necessary journal entry would be:
Debit: Reserves or Profit and Loss Account
Credit: Old Partners’ Capital Accounts (In the old profit sharing ratio)

? ILLUSTRATION 4
Dalal, Banerji and Mallick are partners in a firm sharing profits and losses in the ratio 2:2:1. Their Balance Sheet
as on 31st March, 2016 is as below:
Liabilities ` Assets `
Trade payables 12,850 Land and Buildings 25,000
Outstanding Liabilities 1,500 Furniture 6,500
General Reserve 6,500 Inventory of goods 11,750
Capital Account : Trade receivables 5,500
Mr. Dalal 12,000 Cash in hand 140
Mr. Banerji 12,000 Cash at Bank 960
Mr. Mallick 5,000 29,000
49,850 49,850
The partners have agreed to take Mr. Mistri as a partner with effect from 1st April, 2016 on the following terms :
(1) Mr. Mistri shall bring `5,000 towards his capital.
(2) The value of Inventory should be increased by `2,500 and Furniture should be depreciated by 10%.
(3) Reserve for bad and doubtful debts should be provided at 10% of the Trade receivables.
(4) The value of land and buildings should be enhanced by 20% and the value of the goodwill be fixed at `15,000.
(5) The value of the goodwill be fixed at `15,000.
(6) General Reserve will be transferred to the Partners’ Capital Accounts.
(7) The new profit sharing ratio shall be: Mr. Dalal 5/15, Mr. Banerji 5/15, Mr. Mallick 3/15 andMr. Mistri 2/15.
The outstanding liabilities include `1,000 due to Mr. Sen which has been paid by Mr. Dalal. Necessary entries were
not made in the books.
Prepare (i) Revaluation Account, (ii) The Capital Accounts of the partners, (iii) Balance Sheet of the firm after
admission of Mr. Mistri.

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 PARTNERSHIP ACCOUNTS 8.59

 SOLUTION
Revaluation Account
2016 ` 2016 `
April 1 To Provision for bad 550 April 1 By Inventory in trade 2,500
and doubtful debts
To Furniture and fittings 650 By Land and Building 5,000
To Capital A/cs:
(Profit on revaluation
transferred)
Dalal 2,520
Banerji 2,520
Mallick 1,260 6,300
7,500 7,500
Partners’ Capital Accounts
Particulars Dalal Banerji Mallick Mistri Particulars Dalal Benerji Mallick Mistri
` ` ` ` ` ` ` `
To Dalal 1,000 By Balance b/d 12,000 12,000 5,000 –
To Banerji 1,000 By General Reserve 2,600 2,600 1,300
To Balance c/d 19,120 18,120 7,560 3,000 By Cash – – – 5,000
By Mistri 1,000 1,000 – –
By Outstanding Liabilities 1,000 – –
By Revaluation A/c 2,520 2,520 1,260 –
19,120 18,120 7,560 5,000 19,120 18,120 7,560 5,000

Working Note:
Calculation of sacrificing ratio
Partners New share Old share Sacrifice Gain
Dalal 5 1
–
15 15
Banerji 5 1
–
15 15
Mallick 3 1 No gain No loss —
15 5
Mistri 2 2
15 15
1
Sacrifice by Mr. Dalal and Mr. Banerji= `15,000× = `1,000 each
15

© The Institute of Chartered Accountants of India

8.60 PRINCIPLES AND PRACTICE OF ACCOUNTING

Balance Sheet of M/s. Dalal, Banerji, Mallick and Mistri as on 1-4-2016

Liabilities ` ` Assets ` `
Trade payables 12,850 Land and Buildings 30,000
Outstanding Liabilities 500 Furniture 5,850
Capital Accounts of Partners : Inventory of goods 14,250
Mr. Dalal 19,120 Trade receivables 5,500
Mr. Banerji 18,120 Less : Provisions (550) 4,950
Mr. Mallick 7,560 Cash in hand 140
Mr. Mistri 3,000 47,800 Cash at Bank 5,960
61,150 61,150

3.4 COMPUTATION OF NEW PROFIT SHARING RATIO

When a new partner is admitted and there is no agreement to the contrary, it is supposed that old partners
will continue to have inter se at the old profit sharing ratio.
For example, A and B are in partnership sharing profits and losses at the ratio of 3:2. They admitted C as 1/5
partner. For computation of new profit sharing ratio.
(i) Firstly, deduct the share offered to new partner from 1.
1 – 1/5 = 4/5
(ii) Divide the balance of share between A and B in the ratio of 3:2.
A = 4/5 x 3/5 = 12/25
B = 4/5 × 2/5 = 8/25
(iii) New profit sharing ratio is
A : B : C
12/25 : 8/25 : 1/5
or 12/25 : 8/25 : 5/25
i.e. 12:8: 5
Computation of New profit sharing ratio- Cases
Case I: When new partner’s share is given but the question is silent about the sacrifice made by the old
partners: In this case it is assumed that the old partner will share the remaining share in their old profit
sharing ratio.
Example: A and B are partners sharing profits in the ratio 3:2. They admit C for 1/3 share in future profits.
Calculate the new ratio.
Solution:
Share in Firm = 1
C’s Share = 1/3
Remaining Profit = 1 - 1/3 = 2/3
This remaining share of 2/3 is divided between A and B in the ratio 3:2
So A’s share = 2/3 × 3/5 = 6/15

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 PARTNERSHIP ACCOUNTS 8.61

     B’s share = 2/3 × 2/5 = 4/15

     C’s share = 1/3 × 5/5 = 5/15
New ratio = 6/15: 4/15: 5/15 = 6:4:5
Case II: When new partner purchases his share from old partner’s in a particular ratio: In this case the new
ratio of the old partners will be calculated by deducted the proportion given to the new partner from the
shares of old partner.
Example: A and B are partners sharing in the ratio 3:2. They admit C as a new partner for 1/3rd share in
future profits which he gets 1/9 from A and 2/9 from B. Calculate the new ratio.
Solution:
A’s old share = 3/5; A sacrifice in favour of C = 1/9
So A’s new share = 3/5 - 1/9 = 22/45
B’s old share = 2/5; B sacrifice in favour of C = 2/9
So B’s new share = 2/5 - 2/9 = 8/45
C’s new share = 1/9 x 5/5 = 5/45
New ratio = 22: 8: 5
Case III: When the old partners surrender a particular fraction of their share in favour of new partner: In this
case following steps are followed:
1. Determine the share surrendered by the old partners.
2. Find the new share of the old partners by deducting share surrendered from their old share.
3. Calculate share of the new partner by taking the sum of surrendered share of old partners.
4. Calculate the new ratio.
Example:
A and B are partners sharing in the ratio 3:2. They admit C as the new partner. A surrenders 1/3rd of his share
and B surrenders 2/3rd of his share in favour of C. calculate the new ratio.
Solution:
A’s old share = 3/5; A surrender in favour of C = 3/5 x 1/3 = 3/15
A’s new share = 3/5 - 3/15 = 6/15
B’s old share = 2/5; B surrender in favour of C = 2/5 x 2/3 = 4/15
B’s new share = 2/5 - 4/15 = 2/15
C’s share = 3/15 + 4/15 = 7/15
New ratio = 6:2:7
Case IV: When the new partner acquires his share entirely from the new partner: In this case the sacrificing
partner share is calculated by deducting his sacrifice from his old share.
Example: A and B are partners sharing in the ratio 3:2. They admit C for 1/5th share in profits which he
acquires entirely from A. Calculate the new ratio.
© The Institute of Chartered Accountants of India
8.62 PRINCIPLES AND PRACTICE OF ACCOUNTING

Solution:
A’s old share = 3/5; Sacrifice in favour of C = 1/5
A’s new share = 3/5 - 1/5 = 2/5
B’s share = 2/5
C’s share = 1/5
New ratio = 2:2:1
Case V: When the new partner acquires his share from the old partners in the certain ratio: In this the sacrifice
of each partner is deducted from their old shares.
Example: A and B are partners sharing profits in the ratio 3:2. C is admitted for 1/3rd share which he acquires
from A and B in the ratio of 2:1. Calculate the new ratio.
Solution:
A’s old share = 3/5, A’s sacrifice = 1/5 × 2/3 = 2/15
A’s new share = 3/5 - 2/15 = 7/15
B’s old share = 2/5, B’s sacrifice = 1/5 × 1/3 = 1/15
B’s new share = 2/5 - 1/15 = 5/15
C’s share = 1/3 × 5/5 = 5/15
New ratio = 7:5:5
Sacrificing Partner:
The partners whose shares have decreased as a result of change are known as sacrificing partners.
Sacrificing Ratio:
Ratio in which the old partners sacrifice their share in favour of new partner is called sacrificing ratio. This
ratio is calculated by taking out the difference between old profit shares and new profit shares
Sacrificing ratio = Old Profit sharing ratio - New Profit sharing ratio
Gaining Partners
The partners whose shares have increased as a result of change are known as gaining partners.
Gaining Ratio
The ratio in which the partners have agreed to gain their shares in profit from the other partner or partners,
is known as gaining ratio. This ratio is calculated by taking out the difference between new profit shares and
old profit shares
Example:  X and Y are partners in a firm sharing profits and losses in the ratio 5:3. They admit Z into
partnership. The new ratio 3:2:1. Calculate the Sacrificing Ratio.
Solution:
X’s sacrifice = X’s old share - X’s new ratio = 5/8 - 3/6 = 6/48
Y’s sacrifice = Y’s old share - Y’s new ratio = 3/8 - 2/6 = 2/48
Thus, sacrificing ratio = 6:2 or 3:1
© The Institute of Chartered Accountants of India
 PARTNERSHIP ACCOUNTS 8.63

Example A , B and C are sharing profits and losses in the ratio of 5:3:2. Calculate the new profit sharing ratio
and the sacrificing ratio in each of the following alternative cases:
Case (a) If C acquires 1/10th share from B
Case (b) If C acquired 1/10th share equally from A and B
Case (c) If C’s share is increased by 1/10th share by acquiring from A.
Case (d) If C’s share is increased to 3/10th by acquiring from B.
Case (e) if A, B and C decide to share future profits and losses in the ratio of 5:2:3.
Case (f ) if A, B and C decide to share future profits and losses in the ratio of 2:3:5.
Case (g) if A, B and C decide to share future profits and losses in the ratio of 2:1:2.
Case (h) if A, B and C decide to share future profits and losses equally.
Case(i) If A , B and C decide that the future profit sharing ratio between B and C shall be the same as existing
between A and B
Solution

Case (a) A B C
Their existing shares 5/10 3/10 2/10
Share acquired by C from B - -1/10 +1/10
Their new shares 5/10 2/10 3/10
New Profit sharing ratio of A, B and C = 5 : 2 : 3
Share sacrificed by B = 1/10

Case (b) A B C
Their existing shares 5/10 3/10 2/10
Share acquired by C from A and B -1/20 -1/20 +1/10
Their new shares 9/20 5/20 3/10
New Profit sharing ratio of A, B and C = 9 : 5 : 6
Sacrificing ratio of A and B = 1 : 1

Case (c) A B C
Their existing shares 5/10 3/10 2/10
Share acquired by C from B -1/10 - +1/10
Their new shares 4/10 3/10 3/10
New Profit sharing ratio of A, B and C = 4 : 3 : 3
Share sacrificed by A = 1/10
Share acquired by C = New Share – Old share = 3/10 -2/10 = 1/10

© The Institute of Chartered Accountants of India

8.64 PRINCIPLES AND PRACTICE OF ACCOUNTING

Case (d) A B C
Their existing shares 5/10 3/10 2/10
Share acquired by C from B - -1/10 +1/10
Their new shares 5/10 2/10 3/10
New Profit sharing ratio of A, B and C = 5 : 2 : 3
Share sacrificed by B = 1/10

Case (e) A B C
Their existing shares 5/10 3/10 2/10
Their new shares 5/10 2/10 3/10
- 1/10 -1/10
C gains by 1/10th share &B sacrifice 1/10th Share

Case (f) A B C
Their existing shares 5/10 3/10 2/10
Their new shares 2/10 3/10 5/10
3/10 - -3/10
C gains by 3/10th share &A sacrifice 3/10th Share

Case (g) A B C
Their existing shares 5/10 3/10 2/10
Their new shares 2/5 1/5 2/5
1/10 1/10 -2/10
C gains by 2/10th share &A sacrifices 1/10th Share &B sacrifices 1/10th share.

Case (h) A B C
Their existing shares 5/10 3/10 2/10
Their new shares 1/3 1/3 1/3
5/30 -1/30 -4/30
B gains by 1/30th share, C gains by 4/30th share and A sacrifices by 5/30th Share
Case (i)
Ratio of A and B= 5 : 3
Ratio of B and C should be =5:3
Since B’s share in relation to A is 3/5 or 60% of A’s share, C’s share should also be 60% of B’s share
Thus C’s share = 60% of 3 = 1.8
New ratio of A, B and C = 5 : 3 : 1.8 or 25 : 15 : 9

© The Institute of Chartered Accountants of India

 PARTNERSHIP ACCOUNTS 8.65

A B C
Their existing shares 5/10 3/10 2/10
Their new share 25/49 15/49 9/49
-5/490 -3/490 8/490
C sacrifices by 8/490 and A gains by 5/490 and B gains by 3/490

? ILLUSTRATION 5
A and B are in partnership sharing profits and losses at the ratio 3:2. They take C as a new partner. Calculate the
new profit sharing ratio if -
(i) C purchases 1/10 share from A
(ii) A and B agree to sacrifice 1/10th share to C in the ratio of 2: 3
(iii) Simply gets 1/10th share of profit.

 SOLUTION
(i) New profit sharing ratio:
A = 3/5 – 1/10 = 5/10
B = 2/5 i.e. 4/10
C = 1/10
i.e. 5:4: 1
(ii) A’s sacrifice 1/10× 2/5 = 2/50
B’s sacrifice 1/10 × 3/5 = 3/50
New profit sharing ratio
A = 3/5 – 2/50 = 28/50
B = 2/5 – 3/50 = 17/50
C = 1/10 i.e. 5/50
i.e. 28:17: 5
(iii)
Let total share be 1
C’s share=1/10
Remaining share=1-1/10=9/10
Distribution:
A = 9/10 × 3/5 = 27/50
B = 9/10 × 2/5 = 18/50
C = 1/10. i.e. = 5/50
i.e. 27:18: 5

© The Institute of Chartered Accountants of India

8.66 PRINCIPLES AND PRACTICE OF ACCOUNTING

? ILLUSTRATION 6
A and B are in the partnership sharing profits and losses in the proportion of three-fourth and one-fourth
respectively. Their balance sheet as on 31st March, 2016 was as follows:
Cash `1,000; trade receivables `25,000; Inventory `22,000; plant and machinery `4,000; trade payables `12,000;
bank overdraft `15,000; A’s capital `15,000; B’s capital `10,000.
On 1st April, 2016, they admitted C into partnership on the following terms:
(i) C to purchase one–third of the goodwill for `2,000 and provide `10,000 as capital. Goodwill not to appear in
books.
(ii) Further profits and losses are to be shared by A, B and C equally.
(iii) Plant and machinery is to be reduced by 10% and `500 is to be provided for estimated bad debts. Inventory
is to be taken at a valuation of `24,940.
(iv) By bringing in or withdrawing cash and capitals of A and B are to be made proportionate to that of C on their
profit-sharing basis.
Set out entries to the above arrangement in the firm’s journal and give the partners’ capital accounts in tabular
form.

 SOLUTION
Journal Entries
as on 1st April, 2016
Dr. (`) Cr. (`)
Revaluation Account Dr. 900
To Plant and machinery Account 400
To Provision for bad debts Account 500
(Plant & machinery reduced by 10% and `500 provided for
bad debts)
Inventory Account Dr. 2,940
To Revaluation Account 2,940
(Value of inventory increased by `2,940)
Revaluation Account Dr. 2,040
To A’s capital Account 1,530
To B’s capital Account 510
(Profit on revaluation transferred)
Cash Account Dr. 12,000
To C’s capital Account 12,000
(Cash brought in by C as his capital)
C’s Capital Account Dr. 2,000
B’s capital Account Dr. 500
To A’s capital Account 2,500
(Entry for goodwill purchased by B and C)

© The Institute of Chartered Accountants of India

 PARTNERSHIP ACCOUNTS 8.67

A’s capital Account Dr. 9,030

B’s capital Account Dr. 10
To Cash Account 9,040
(Excess amount of capital withdrawn)

Partners’ Capital Accounts

A B C A B C
` ` ` ` ` `
To A’s capital A/c - 500 By Balance b/d 15,000 10,000 –
To Cash 9,030 10 By Revaluation A/c 1,530 510 –
To Balance c/d 10,000 10,000 10,000 By Cash 2,000 – 10,000
By B’s Capital A/c 500
19,030 10,510 10,000 19,030 10,510 10,000
Working Note:
Calculation of goodwill
C pays `2,000 on account of goodwill for 1/3rd share of profit/loss. Total goodwill is
`2,000 x 3 = `6,000.
Gaining ratio:

B: 1/3-1/4 = 1/12
C: 1/3
Goodwill to be paid to A:
By B ` 6,000 x 1/12 = ` 500
By C ` 6,000 x 1/3 = ` 2,000
Total ` 2,500

? ILLUSTRATION 7

A and B are partners of X & Co. sharing profits and losses in 3:2 ratio between themselves. On 31st March, 2016,
the balance sheet of the firm was as follows:
Balance Sheet of X & Co. as at 31.3.2016
Liabilities ` ` Assets `
Capital accounts: Plant and machinery 20,000
A 37,000 Furniture and fittings 5,000
B 28,000
65,000 Inventories 15,000
Trade payables 5,000 Trade receivables 20,000
Cash in hand 10,000
70,000 70,000
X agrees to join the business on the following conditions as and from 1.4.2016:
© The Institute of Chartered Accountants of India
8.68 PRINCIPLES AND PRACTICE OF ACCOUNTING

(a) He will introduce `25,000 as his capital and pay `15,000 to the partners as premium for goodwill for 1/3rd
share of the future profits of the firm.
(b) A revaluation of assets of the firm will be made by reducing the value of plant and machinery to `15,000,
Inventory by 10%, furniture and fitting by `1,000 and by making a provision of bad and doubtful debts at
`750 on trade receivables.
Prepare profit and loss adjustment account, capital accounts of partners including the incoming partner X
assuming that the relative ratios of the old partners will be in equal proportion after admission.

 SOLUTION
Profit and Loss Adjustment Account
2016 ` 2016 `
April 1 April 1
To Plant and machinery A/c 5,000 By Partners’ capital accounts
To Inventory A/c 1,500 - Loss on revaluation
To Furniture and fitting A/c 1,000 A (3/5) 4,950
To Provision for bad and doubtful debts 750 B (2/5) 3,300 8,250
8,250 8,250
Partners’ Capital Accounts
A B X A B X
` ` ` ` ` `
To Profit & loss 4,950 3,300 – By Balance b/d 37,000 28,000 –
adjustment A/c By Cash A/c – – 40,000
To A’s & B’s capital A/cs – – 15,000 By X’s capital A/c 12,000 3,000 –
To Balance c/d 44,050 27,700 25,000 [W. N. (ii)]
49,000 31,000 40,000 49,000 31,000 40,000
Working Notes:
(i) New profit sharing ratio:
On admission of X who will be entitled to 1/3rd share of the future profits of the firm. A and B would
share the remaining 2/3rd share in equal proportion i.e. 1:1.
A: 2/3 x 1/2 = 1/3
B: 2/3 x 1/2 = 1/3
X:1/3
A, B and X would share profits and losses in equal ratio.
(ii) Adjustment of goodwill:
X pays `15,000 as premium for goodwill for 1/3rd share of the future profits.
Thus, total value of goodwill is `15,000 x 3 i.e. `45,000
Sacrificing ratio:
A: 3/5 - 1/3 = 4/15
A: 2/5 - 1/3 = 1/15
Hence, sacrificing ratio is 4:1

© The Institute of Chartered Accountants of India

 PARTNERSHIP ACCOUNTS 8.69

Adjustment of X’s share of goodwill through existing partners’ capital accounts in the profit sacrificing
ratio:

`
A: 15,000 x 4/5 = 12,000
B: 15,000 x 1/5 = 3,000
15,000

3.5 HIDDEN GOODWILL

When the value of the goodwill of the firm is not specifically given, the value of goodwill has to be inferred
as follows:

Particulars `
Incoming partner’s capital x Reciprocal of share of incoming partner xxx
Less: Total capital after taking into consideration the capital brought in by xxx
incoming partner
Value of Goodwill xxx

? ILLUSTRATION 8
A and B are partners with capitals of `7,000 each. They admit C as a partner with 1/4th share in the profits of the
firm. C brings `8,000 as his share of capital. Give the necessary journal entry to record goodwill.

 SOLUTION:
Journal Entry

Particulars Dr. (`) Cr. (`)

C’s Capital A/c [`10,000 x 1/4] Dr. 2,500
To A’s Capital A/c 1,250
To B’s Capital A/c 1,250
(Being the share of C in the hidden goodwill adjusted through capital
accounts by crediting sacrificing partners in their sacrificing ratio)

 4
Note: Hidden Goodwill=  8,000 ×  –(` 7,000 + ` 7,000+8,000) = `10,000
 1

© The Institute of Chartered Accountants of India

8.70 PRINCIPLES AND PRACTICE OF ACCOUNTING

? ILLUSTRATION 9
A and B are in partnership sharing profits and losses equally. The Balance Sheet M/s. A and B as on 31.12.2016,
was as follows:

Liabilities ` Assets `
Capital A/cs Sundry Fixed Assets 60,000
A 45,000 Inventories 30,000
B 45,000 Bank 20,000
Trade payables 20,000
1,10,000 1,10,000
On 1.1.2017 they agreed to take C as 1/3rd partner to increase the capital base to `1,35,000.
C agrees to pay `60,000. Show the necessary journal entries and prepare partners’ capital accounts.

 SOLUTION
In the Books of M/s. A, B and C
Journal Entries
` `
Bank A/c Dr. 60,000
To C’s Capital A/c 60,000
(Cash brought in by C for 1/3rd share)
C’s Capital A/c Dr. 15,000
To A’s Capital A/c 7,500
To B’s Capital A/c 7,500
A’s Capital A/c Dr. 7,500
B’s Capital A/c Dr. 7,500
To Bank A/c 15,000
(Amount of goodwill due to A and B withdrawn)
Workings:
(1) Old Profit Sharing Ratio:1: 1
(2) New Profit Sharing Ratio: 1:1:1
(3) C’s share of capital `1,35,000 × 1/3 = `45,000
(4) Goodwill `60,000 – `45,000 = `15,000 for 1/3rd share.
Total Goodwill:`15,000 × 3 = `45,000
Partners’ Capital A/cs
Particulars A B C Particulars A B C
` ` ` ` ` `
To A 7,500 By Balance b/d 45,000 45,000 –
To B 7,500 By Bank – – 60,000
To Bank 7,500 7,500 – By C 7,500 7,500 –
To Balance c/d 45,000 45,000 45,000
52,500 52,500 60,000 52,500 52,500 60,000
© The Institute of Chartered Accountants of India
 PARTNERSHIP ACCOUNTS 8.71

SUMMARY
w New partners are admitted for the benefit of the partnership firm. New partner is admitted either for
increasing the partnership capital or for strengthening the management of the firm.
w When a new partner is admitted into the partnership, assets are revalued and liabilities are reassessed.
A Revaluation Account (or Profit and Loss Adjustment Account) is opened for the purpose. This account
is debited with all reduction in the value of assets and increase in liabilities and credited with increase
in the value of assets and decrease in the value of liabilities. The difference in two sides of the account
will show profit or loss. This is transferred to the Capital Accounts of old partners in the old profit sharing
ratio.
w Whenever a new partner is admitted, any reserve etc. lying in the Balance Sheet should be transferred
to the Capital Accounts of the old partners in the old profit sharing ratio.

TEST YOUR KNOWLEDGE

Multiple Choice Questions
1 A and B are partners sharing profits and losses in the ratio 5:3. They admitted C and agreed to give him
3/10th of the profit. What is the new ratio after C’s admission?
(a) 35:42:17. (b) 35:21:24. (c) 49:22:29.
2 A and B are partners sharing profits in the ratio 5:3, they admitted C giving him 3/10th share of profit. If
C acquires 1/5 from A and 1/10 from B, new profit sharing ratio will be:
(a) 5:6:3. (b) 2:4:6. (c) 17:11:12
3 C was admitted in a firm with 1/4th share of the profits of the firm. C contributes `15,000 as his capital, A
and B are other partners with the profit sharing ratio as 3:2. Find the required capital of A and B, if capital
should be in profit sharing ratio taking C’s as base capital:
(a) `27,000 and `16,000 for A and B respectively.
(b) `27,000 and `18,000 for A and B respectively.
(c) `32,000 and `21,000 for A and B respectively.
4 A, B and C are partners sharing profits and losses in the ratio 6:3:3, they agreed to take D into partnership
for 1/8th share of profits. Find the new profit sharing ratio.
(a) 12:27:36:42. (b) 14:7:7:4. (c) 1:2:3:4.
5 A and B are partners sharing profits and losses in the ratio of 3:2 (A’s Capital is `30,000 and B’s Capital is
`15,000). They admitted C and agreed to give 1/5th share of profits to him. How much C should bring in
towards his capital?
(a) `9,000. (b) `12,000. (c) `11,250.

© The Institute of Chartered Accountants of India

8.72 PRINCIPLES AND PRACTICE OF ACCOUNTING

6 A and B are partners sharing the profit in the ratio of 3:2. They take C as the new partner, who brings in
`25,000 against capital and `10,000 against goodwill. New profit sharing ratio is 1:1:1. In what ratio will
this amount will be shared among the old partners A & B.
(a) `8,000: `2,000. (b) `5,000: `5,000.
(c) Old partners will not get any share in the goodwill brought in by C.
7 A and B are partners sharing the profit in the ratio of 3:2. They take C as the new partner, who is
supposed to bring `25,000 against capital and `10,000 against goodwill. New profit sharing ratio is
1:1:1. C brought cash for his share of Capital and agreed to compensate to A and B outside the firm. How
this will be treated in the books of the firm.
(a) Cash brought in by C will only be credited to his capital account.
(b) Goodwill will be raised to full value in old ratio.
(c) Goodwill will be raised to full value in new ratio.
8 X and Y are partners sharing profits in the ratio of 3: 1. They admit Z as a partner who pays `4,000
as Goodwill the new profit sharing ratio being 2:1: 1 among X, Y and Z respectively. The amount of
goodwill will be credited to:
(a) X and Y as `3,000 and `1,000 respectively.
(b) X only (c) Y only.
Theory questions
Q1 Write short note on Revaluation account.
Q2. What is the difference between revaluation account and memorandum revaluation account?
Practical questions
1. The following was the balance sheet of A, B and C who were equal partners on January 1, 2017

Liabilities ` Assets `
Bills Payable 3,000 Cash 1,000
Creditors 6,000 Debtors 10,000
Capital Accounts : Stock 12,000
    A 20,000 Furniture 5,000
    B 15,000 Buildings 25,000
    C 10,000 Bills Receivable 1,000
54,000 54,000
They agree to take D into partnership and give him a 1/4 share in the profits on the following terms:
(1) that D should bring in ` 6,000 for goodwill and ` 10,000 as capital;
(2) that one-half of the goodwill shall be withdrawn by old partners;
(3) that stock and furniture be depreciated by 10%.
(4) that a liability of` 1,300 be created against bills discounted;
(5) that the building be valued at` 40,000;

© The Institute of Chartered Accountants of India

 PARTNERSHIP ACCOUNTS 8.73

(6) that the values of liabilities and assets other than cash are not to be altered.
Give the necessary entries to give effect to the above arrangement; prepare revaluation account and
opening balance sheet of the firm as newly constituted.
2. Gopal and Govind are partners sharing profits and losses in the ratio 60:40. The firms’ balance sheet as
on 31.03.2016 was as follows:

Liabilities ` Assets `
Capital accounts:
Gopal 1,20,000 Fixed assets 3,00,000
Govind 80,000 Investments 50,000
Long term loan 2,00,000 Current assets 2,00,000
Current liabilities 2,50,000 Loans and advances 1,00,000
6,50,000 6,50,000
Due to financial difficulties, they have decided to admit Guru as partner in the firm from 01.04.2016 on the
following terms:
Guru will be paid 40% of the profits.
Guru will bring in cash ` 1,00,000 as capital. It is agreed that goodwill of the firm will be valued at 2 years’
purchase of 3 years’ normal average profits of the firm and Guru will bring in cash his share of goodwill. It
was also decided that the partners will not withdraw their share of goodwill nor will the goodwill appear in
the books of account.
The profits of the previous three years were as follows:
For the year ended 31.3.2014: profit ` 20,000 (includes insurance claim received of ` 40,000).
For the year ended 31.3.2015: loss ` 80,000 (includes voluntary retirement compensation paid `1,10,000).
For the year ended 31.3.2016: profit of`1,05,000 (includes a profit of ` 25,000 on the sale of assets).
It was decided to revalue the assets on 31.03.2016 as follows:
`
Fixed assets (net) 4,00,000
Investments Nil
Current assets 1,80,000
Loans and advances 1,00,000
The new profit sharing ratio after the admission of Guru was 35:25:40.
Pass journal entries on admission, show goodwill calculation and prepare revaluation account, partners’
capital accounts and balance sheet as on 01.04.2016 after the admission of Guru.
ANSWERS/HINTS
MCQs

1 (b) 2 (c) 3 (b) 4 (b) 5 (c) 6 (a) 7 (a) 8 (b)

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8.74 PRINCIPLES AND PRACTICE OF ACCOUNTING

Theoretical Questions
1. When a new partner is admitted into the partnership, assets are revalued and liabilities are reassessed. A
Revaluation Account (or Profit and Loss Adjustment Account) is opened for the purpose. This account is
debited with all reduction in the value of assets and increase in liabilities and credited with increase in the
value of assets and decrease in the value of liabilities. The difference in two sides of the account will show
profit or loss. This is transferred to the Capital Accounts of old partners in the old profit sharing ratio.
2. Difference between revaluation account and memorandum revaluation account
(i) Revaluation account is prepared to find out the profit or loss on revaluation of assets and liabilities
which appear in the new balance sheet at the new or revalued figures. Memorandum revaluation
account is also prepared to record the effect of revaluation of assets and liabilities which of course
are recorded at their old figures in the new balance sheet.
(ii) Revaluation account is not divided into two parts. But the memorandum revaluation account has
two parts: first part for old partners and second part for all partners including the new partner.

Practical Problems
Answer 1

` `
Cash Account Dr. 16,000
  To D’s Capital Account 16,000
(Amount of goodwill and capital brought in by D)
D’s Capital Account Dr. 6,000
   To A’s Capital Account 2,000
   To B’s Capital Account 2,000
   To C’s Capital Account 2,000
(Goodwill brought in by D credited to old partners in sacrifice ratio)
A’s Capital Account Dr. 1,000
B’s Capital Account Dr. 1,000
C’s Capital Account Dr. 1,000
   To Cash Account 3,000
(Half the amount of goodwill withdrawn by existing partners)
Memorandum Revaluation Account Dr. 12,000
   To A’s Capital Account 4,000
   To B’s Capital Account 4,000
   To C’s Capital Account 4,000
(Profit on revaluation credited to old partners)
A’s Capital Account Dr. 3,000
B’s Capital Account Dr. 3,000
C’s Capital Account Dr. 3,000

© The Institute of Chartered Accountants of India

 PARTNERSHIP ACCOUNTS 8.75

D’s Capital Account Dr. 3,000

   To Memorandum Revaluation Account 12,000
(The profit credited previously to old partners written off to all
partners including D in the new profit-sharing ratio)
Memorandum Revaluation Account
Stock 1,200 Buildings 15,000
Furniture 500    
Liability for bills discounted 1,300    
Profit transferred to capital accounts:      
    A 4,000    
    B 4,000    
    C 4,000    
  15,000   15,000
Buildings 15,000 Stock 1,200
    Furniture 500
    Liability for bills discounted 1,300
    Loss transferred to capital accounts:  
        A 3,000
        B 3,000
        C 3,000
        D 3,000
  15,000   15,000
Balance Sheet of M/s. A, B, C and D
As at 1st January, 2017
Liabilities ` Assets `
Bills Payable 3,000 Cash 14,000
Creditors 6,000 Debtors 10,000
Capital Accounts: Stock 12,000
    A 22,000 Furniture 5,000
    B 17,000 Buildings 25,000
    C 12,000 Bills Receivable 1,000
    D 7,000 58,000
67,000 67,000
Answer 2
(i) Calculation of Profit/ Loss for the year ended

31.3.2014 31.3.2015 31.3.2016

Profit/(loss) for the year 20,000 (80,000) 1,05,000
Add/(less): Abnormal items (40,000) 1,10,000 (25,000)
Net Profit/(loss) (20,000) 30,000 80,000
© The Institute of Chartered Accountants of India
8.76 PRINCIPLES AND PRACTICE OF ACCOUNTING

Average profit= = ` 30,000

Two years’ purchase of average profits= 30,000 x 2= ` 60,000
Goodwill to be brought in by Guru=` 60,000 x 40%=` 24,000
Goodwill brought in by Guru shared (at the profit sacrificing ratio) by:
`
Gopal (` 24,000 x 5/8) 15,000
Govind (` 24,000 x 3/8) 9,000
24,000
(ii) Journal Entries

Date Particulars Dr. Cr.

` `
1.4.2016 Bank A/c Dr. 1,24,000
To Guru’s capital A/c 1,24,000
(Amount of capital and goodwill brought in by Guru)
1.4.2016 Guru’s capital A/c Dr. 24,000
To Gopal’s capital A/c 15,000
To Govind’s capital A/c 9,000
(Amount of goodwill brought in by Guru credited
to capital accounts of the old partners in the profit
sacrificing ratio 5:3)
1.4.2016 Revaluation A/c Dr. 70,000
To Investment A/c 50,000
To Current assets A/c 20,000
(Writing down the value of investments to nil and
current assets from ` 2,00,000 to ` 1,80,000 on the
occasion of admission of Guru)
1.4.2016 Fixed assets A/c Dr. 1,00,000
To Revaluation A/c 1,00,000
(Writing up the value of fixed assets from ` 3,00,000 to
` 4,00,000 on the occasion of admission of Guru)
1.4.2016 Revaluation A/c Dr. 30,000
To Guru’s capital A/c 18,000
To Govind’s capital A/c 12,000
(Net revaluation profit credited to the capital accounts
of the old partner in the old profit sharing ratio of 60:40)

© The Institute of Chartered Accountants of India

 PARTNERSHIP ACCOUNTS 8.77

(iii) Revaluation Account

Particulars ` Particulars `
To Investments A/c 50,000 By Fixed assets A/c 1,00,000
To Current assets A/c 20,000
To Partner’s capital A/c:
(Profit on revaluation)
Gopal (60%) 18,000
Govind (40%) 12,000

1,00,000 1,00,000
(iv) Partner’s Capital Accounts:
Gopal’s Capital Account
Particulars ` Particulars `
To Balance c/d 1,53,000 By Balance b/d 1,20,000
By Bank A/c 15,000
By Revaluation A/c 18,000
1,53,000 1,53,000
Govind’s Capital Account
Particulars ` Particulars `
To Balance c/d 1,01,000 By Balance b/d 80,000
By Bank A/c 9,000
By Revaluation A/c 12,000
1,01,000 1,01,000
Guru’s Capital Account
Particulars ` Particulars `
To Balance c/d 1,00,000 By Bank b/d 1,00,000
1,00,000 1,00,000
Balance Sheet (after admission of Guru)
as on 1.4.2016
Liabilities ` Assets `
Capital accounts: Fixed assets 4,00,000
Gopal 1,53,000 Current assets 3,04,000
Govind 1,01,000 (including bank balance of
Guru 1,00,000 3,54,000 ` 1,24,000)
Long term loan 2,00,000 Loans & advances 1,00,000
Current liabilities 2,50,000
8,04,000 8,04,000

© The Institute of Chartered Accountants of India

8.78 PRINCIPLES AND PRACTICE OF ACCOUNTING

Working Notes:
1. Calculation of profit sacrificing ratio
Profit sacrificed by Gopal=60%-35%=25%
Profit sacrificed by Govind =40%-25%=15%
Sacrificing ratio =25%: 15% or 5:3
2. Bank balance after admission of Guru:
Bank Account
Particulars ` Particulars `
To Guru’s capital A/c 1,24,000 By Balance c/d 1,24,000
1,24,000 1,24,000

© The Institute of Chartered Accountants of India