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Admission of a Partner – Adjustments & Procedures

Introduction

Admission of a Partner is a mode of reconstitution of a partnership firm. A new partner is admitted for capital requirement or managerial skill. According to Section 31 of the Indian Partnership Act, 1932, a new partner can be admitted only with the consent of ALL existing partners.

1. Adjustments Required on Admission

When a new partner enters, the old agreement ends and a new one begins. The following accounting adjustments are mandatory:

  1. Calculation of New Profit Sharing Ratio (NPSR).
  2. Calculation of Sacrificing Ratio.
  3. Valuation and Adjustment of Goodwill.
  4. Revaluation of Assets and Liabilities.
  5. Distribution of Accumulated Profits/Reserves.
  6. Adjustment of Partners' Capital Accounts.

2. Calculation of Ratios

A. New Profit Sharing Ratio (NPSR)

The ratio in which all partners (Old + New) will share future profits.

  • Case I: When new partner's share is given, and nothing else is specified.
    • Example: A and B share in 3:2. C is admitted for 1/5th share.
    • Logic: Let Total Profit = 1. Remaining for A & B = 1 - 1/5 = 4/5. Apply old ratio to remaining share.

B. Sacrificing Ratio (SR)

The ratio in which Old Partners surrender a part of their share in favor of the New Partner. This is used to distribute Goodwill brought by the new partner.

Formula:

Sacrificing Ratio = Old Ratio - New Ratio

3. Illustration (Ratio Calculation)

Problem: A and B are partners sharing profits in the ratio of 3:2. They admit C for 1/4th share in profits. Calculate NPSR and Sacrificing Ratio.

Solution:

  1. Total Share = 1
  2. C's Share = 1/4
  3. Remaining Share = 1 - 1/4 = 3/4
  4. A's New Share = 3/5 of 3/4 = 9/20
  5. B's New Share = 2/5 of 3/4 = 6/20
  6. C's New Share = 1/4 (multiply by 5/5) = 5/20
  7. New Ratio (A:B:C) = 9:6:5

Sacrificing Ratio: Because the old partners sacrificed in their old ratio (as nothing else was mentioned), SR = 3:2.

Exam Notes: Writing the Answer

Question: "Why is calculating Sacrificing Ratio important?" (5 Marks)

Model Answer:

Importance: When a new partner is admitted, he acquires a share in future profits from the old partners. In return, he must compensate the sacrificing partners for this loss of share.

  • This compensation is paid in the form of Goodwill (Premium).
  • The Goodwill brought by the new partner is distributed among the old partners strictly in their Sacrificing Ratio, not in the Old Ratio.
  • Therefore, calculating SR is essential to pass the correct journal entry for Goodwill adjustment.

Summary

  • Section 31: Admission requires 100% consent.
  • Sacrifice: Old Partners lose share. New Partner gains share.
  • SR Formula: Old Ratio - New Ratio.
  • SR Usage: Only for distributing Goodwill.
  • NPSR: Used for distributing future profits.

Quiz Time! 🎯

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