Question

Two reasons for admission of a new partner

Answer 1

1) Increase the capital of the firm for the expansion plans of the business. 2) Include a capable and efficint employee like a manager into partnership so as to encourage him. 3) To take advantage of the experience, reputation and goodwill of the incoming partner etc

Calculation of New Profit Sharing Ratio.

Revaluation of Assets and Liabilities of the firm.

Treatment of Goodwill.

Adjustment of Accumulated. Reserves and Profits /Losses.

Adjustment of Capital (if agreed).

A business firm seeks new partners with business expansion being one of the driving motives. As per the Partnership Act, 1932, a new partner can be admitted into the firm with the consent of all the existing partners, unless otherwise agreed upon.

With the admission of a new partner, there is a reconstitution of the partnership firm and all the partners get into a new agreement for carrying out the business of the firm.

The following conditions led to the addition of a new partner:

When the firm is in an expansion mode and requires fresh capital.

When the new partners possesses expertise which can be beneficial for the business expansion of the firm.

When the partner in question is a person of reputation and adds goodwill to the firm.

Also Read: Basic Concepts of Accounting for Partnership

The following adjustments need to be made at the time of admission of a new partner

Calculating the new profit sharing ratio along with the sacrificing ratio.

Accounting for goodwill.

Revaluation of assets and liabilities.

Adjustment of capital as per new profit sharing ratio.

With the admission of a new associate, the partnership enterprise is restructured and a new agreement is entered into; to carry on the trading concern of the enterprise. A newly added partner obtains 2 primary rights in the enterprise :

Right to share the assets of the partnership firm

Right to share the profits of the partnership firm

Adjustment of Capital and Change in Profit Sharing Ratio Among Existing Partners

Few significant points which require observation during the admission of a new partner are mentioned below :

Sacrificing ratio

New profit sharing ratio

Revaluation of assets and Reassessment of liabilities

Valuation and adjustment of goodwill

Adjustment of partners’ capitals

Distribution of accumulated profits (reserves)