MEANING OF KEY TERMS USED IN THE CHAPTER

1. Admission of Partner or Partners

Admission of a Partner or partners means new partner or partners being admitted into partnership.

2. New Profit-sharing Ratio

New Profit-sharing Ratio is the ratio in which all the partners or partners including the new or incoming
partner or partners share future profits and losses of the firm.

3. Sacrificing Ratio
Sacrificing Ratio is the ratio in which the old or existing partners forego, i.e., sacrifice their share in favour
of the new partner or partners.

4. Goodwill
Goodwill is an intangible asset resulting from the efforts made in the past by the existing partners of the
firm which results in profits in the future years.

5. Revaluation of Assets
Revaluation of Assets means change in the value of assets, i.e., present value being different from the book
value of the assets.

6. Reassessment of Liabilities
Reassessment of Liabilities means reassessing the liabilities and determining the change, i.e., whether the
liability is more or less than that shown in the books of account.

7. Revaluation Account
It is a nominal account, prepared to ascertain gain (profit)/loss on account of revaluation of assets
and reassessment of liabilities. It is credited with the increase in value of assets and decrease in the
value of liabilities. It is debited with the increase the value of liabilities and decrease in the value
of assets. It is closed by transferring the gain (profit) or loss to the Capital Accounts or Current
Accounts of the old or existing partners in their old profit-sharing ratio.

8. Reserve
Reserve means accumulated or undistributed profits. It is created out of profits.
The reserve created is sometimes invested outside the business in instruments such as securities, which
then becomes a Reserve Fund.

9. Workmen Compensation Reserve

It is a reserve created out of profits for payment of compensation to workers.

10. Investments Fluctuation Reserve

It is a reserve created out of profits to meet the fall in the market value of investment.

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 SUMMARY OF THE CHAPTER
• When the existing partners of a firm allow a person to become a partner in the firm, it is called admission
of a partner.
• The matters that require adjustment at the time of admission of a new partner are:
(i ) Adjustment for change in Profit-Sharing Ratio. Calculation of New Profit-sharing Ratio and Sacrificing
Ratio.
(ii ) Adjustment for goodwill.
(iii ) Adjustment of Profit/Loss arising from the Revaluation of Assets and Reassessment of Liabilities.
(iv) Adjustment of Accumulated Profits, Reserves and Losses.
(v) Adjustment of Capital.
• Change in Profit-sharing Ratio takes place at the time of admission of a new partner in the firm.
• The ratio in which all partners including the incoming partner share the future profits and losses is known
as New Profit-Sharing Ratio.
Unless agreed otherwise, the New Profit-sharing Ratio of existing, i.e., old partners among them will be
same as their old profit-sharing ratio.
• The ratio in which the old (existing) partners have agreed to sacrifice their share in profit in favour of
an incoming partner is called Sacrificing Ratio.
Sacrificing Share = Old Profit Share – New Profit Share.
Unless agreed otherwise, Sacrificing Ratio of old partners will be the same as their old profit-sharing ratio.
• The partners whose share in profit increase due to change in profit-sharing ratio are called Gaining
Partners and the partners whose share in profit decrease are called Sacrificing Partners.
• Goodwill is the reputation of the organisation which attracts customers and increases the profit earning
capacity of the business.

ACCOUNTING TREATMENT OF GOODWILL ON ADMISSION OF A PARTNER

1. Goodwill (Premium) paid Privately No Entry

2. Goodwill brought in Cash Cash/Bank A/c ...Dr.

To Premium for Goodwill A/c
Distribution of Goodwill Premium for Goodwill A/c ...Dr.
To Sacrificing Partners’ Capital A/cs [In sacrificing ratio]
or
To Sacrificing Partners’ Current A/cs
(When capitals are fixed)

3. Goodwill withdrawn by Sacrificing (Old) Partners Sacrificing Partners’ Capital A/cs ...Dr.
To Cash/Bank A/c

4. Goodwill not brought in Cash New Partner’s Current A/c ...Dr.

To Sacrificing Partners’ Capital A/cs [In sacrificing ratio]

5. Goodwill brought in Kind Assets A/c ...Dr.

To Premium for Goodwill A/c

Note: Write off the goodwill appearing in the Old Balance Sheet by debiting the Old Partners’ Capital Accounts
(in case of fluctuating capitals) or Current Accounts (in case of fixed capitals) in their old profit-sharing
ratio and crediting the Goodwill Account.
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• Unless otherwise stated, the Partners’ Capitals should be assumed to be fluctuating. Current
Accounts are to be used in case of Fixed Capitals.
• When the incoming partner cannot bring premium for goodwill in cash, adjustments are to be done
through the Current Account of Incoming Partner.
• Revaluation Account or Profit and Loss Adjustment Account is prepared to revalue the assets and
reassess the liabilities of the firm at the time of reconstitution of the firm.
Dr. REVALUATION ACCOUNT Cr.
(i) Decrease in the value of assets. Increase in the value of assets.
(ii) Increase in amount of liabilities. Decrease in amount of liabilities.
(iii) Unrecorded liabilities. Unrecorded assets.
(iv) Gain (Profit)—difference. Loss—difference.

• Need to Revalue Assets and Reassess Liabilities: Assets are revalued and liabilities are reassessed at
the time of admission of a partner because new partner should neither benefit nor suffer because of
changes in the value of assets and liabilities as on the date of admission.
• Any Past Profits or General Reserve are also credited to Old Partners’ Capital Accounts in their profit-
sharing ratio. If there are any past losses, they will be debited to Old Partners’ Capital Accounts.
• Workmen Compensation Reserve is a reserve created out of profit to meet the workmen compensaton
claim, if any arise in future. Excess of Workmen Compensation Reserve over the Workmen Compensation
Claim should be credited to old partners’ Capital Accounts in their old ratio.
• Investments Fluctuation Reserve is created out of profit to guard against the fall in the price of the
investment. Excess of Investment Fluctuation Reserve over difference between book value and market value
should be credited to old partners in their old profit sharing ratio.
• Accounting Treatment of Accumulated Profits, Reserves and Losses through Single Journal Entry: The net
effect of accumulated profits, reserves and losses is adjusted through the following entry:
(i ) In Case of Net Profit: Gaining Partners’ Capital/Current A/cs ...Dr.
To Sacrificing Partners’ Capital/Current A/cs
(ii ) In Case of Net Loss: Sacrificing Partners’ Capital/Current A/cs ...Dr.
To Gaining Partners’ Capital/Current A/cs
• Employees’ Providend Fund is a statutory liability. Hence, is not distributed among the partners.
• Adjustment of Capital:
(i ) Adjustment of Old Partners’ Capitals on the basis of New Partner’s Capital:
Step 1: Calculate the total capital of the new firm.
Step 2: Determine the new capital of each partner.
Step 3: Ascertain the present capitals of old partners (Adjusted).
Step 4: Find out the surplus/deficit capitals by comparing Step 2 and Step 3.
(ii ) Calculation of the New Partner’s Capital on the basis of Old Partners’ Capitals:
Step 1: Determine the total adjusted capital of the old partners.
Step 2: Determine the total capital of the new firm.
Step 3: Determine the total capital of the incoming partner as follows:
Total capital of the new firm (Step 2) × Share of incoming partner.
In the absence of any contract, Shortage or Surplus of Capital should be adjusted in Cash and not
by transfer to Current Account.