CBSE Class 12 Accountancy: Admission of a Partner – Complete Notes, Examples & Important Adjustments
Admission of a Partner: CBSE Class 12 Accountancy Notes, Examples & Journal Entries
Chapter: Reconstitution of a Partnership Firm – Admission of a Partner
Class: CBSE Class 12 Accountancy
Admission of a partner is an important topic in CBSE Class 12 Accountancy. When a new partner joins an existing partnership firm, the profit-sharing arrangement changes. This change is known as reconstitution of partnership.
In this chapter, you will learn the new profit-sharing ratio, sacrificing ratio, goodwill treatment, revaluation of assets and liabilities, reserves, accumulated profits or losses, capital adjustment, journal entries, and Balance Sheet treatment.
📌 Quick Revision
- New Ratio: Ratio in which all partners share future profits and losses.
- Sacrificing Ratio: Old Share − New Share.
- Goodwill: New partner compensates sacrificing partners.
- Revaluation Profit/Loss: Transferred to old partners in the old ratio.
- Reserves and Past Profits/Losses: Belong to old partners.
1. Meaning of Admission of a Partner
Admission of a partner means bringing a new person into an existing partnership firm with the consent of all existing partners.
The incoming partner contributes capital and generally brings goodwill in return for the right to share future profits of the firm.
Why Does Admission Lead to Reconstitution?
A firm is reconstituted because the old agreement between the partners changes. Once a new partner enters, the existing profit-sharing ratio changes and a new partnership arrangement begins.
Example
A and B are partners sharing profits in the ratio of 3:2. They admit C as a new partner for a share in future profits. Since C becomes entitled to future profits, the existing partnership agreement changes.
2. Important Adjustments at Admission
At the time of admission of a new partner, the following adjustments are generally required:
- Calculation of new profit-sharing ratio
- Calculation of sacrificing ratio
- Goodwill adjustment
- Revaluation of assets and reassessment of liabilities
- Treatment of reserves and accumulated profits or losses
- Adjustment of partners’ capital accounts
- Preparation of the new Balance Sheet
Important Rule: Revaluation profit or loss, reserves, and accumulated profits or losses relating to the period before admission generally belong to the old partners. Therefore, these items are usually adjusted among old partners in their old profit-sharing ratio.
3. New Profit-Sharing Ratio
The new profit-sharing ratio is the ratio in which all partners, including the incoming partner, agree to share future profits and losses.
Case 1: New Partner Takes Share in the Old Ratio
A and B share profits in the ratio of 3:2. C is admitted for a 1/5 share. C takes this share from A and B in their old ratio.
Step 1: Calculate Remaining Share
Remaining share:
1 − 1/5 = 4/5
Step 2: Calculate New Shares
A’s new share:
4/5 × 3/5 = 12/25
B’s new share:
4/5 × 2/5 = 8/25
C’s share:
1/5 = 5/25
Therefore:
New Profit-Sharing Ratio = 12:8:5
Case 2: New Partner Takes Share in a Given Ratio
A and B share profits in the ratio of 3:2. C is admitted for a 1/5 share. C acquires 3/20 from A and 1/20 from B.
A’s new share:
3/5 − 3/20 = 12/20 − 3/20 = 9/20
B’s new share:
2/5 − 1/20 = 8/20 − 1/20 = 7/20
C’s share:
1/5 = 4/20
Therefore:
New Ratio = 9:7:4
Case 3: New Partner Takes Share from One Partner Only
A and B share profits equally. C is admitted for a 1/4 share, which is given entirely by A.
A’s new share:
1/2 − 1/4 = 1/4
B’s share remains:
1/2
C’s share:
1/4
Therefore:
New Ratio = 1:2:1
4. Sacrificing Ratio
When a new partner is admitted, the old partners give up a portion of their future profit share. The ratio in which they give up their share is called the sacrificing ratio.
Formula
Sacrificing Ratio = Old Share − New Share
Example
A and B share profits in the ratio of 3:2. C is admitted for a 1/5 share. C receives the share from A and B in their old ratio.
| Partner | Old Share | New Share | Sacrifice |
|---|---|---|---|
| A | 3/5 = 15/25 | 12/25 | 3/25 |
| B | 2/5 = 10/25 | 8/25 | 2/25 |
Therefore:
Sacrificing Ratio of A and B = 3:2
Exam Tip: Sacrificing ratio is calculated only for old partners. The new partner does not sacrifice; the new partner gains a right to future profits.
5. Treatment of Goodwill
Goodwill represents the value of the firm’s reputation, customer loyalty, location, business connections, and other advantages that help the firm earn higher profits.
When a new partner enters the firm, that partner receives a right to future profits. Therefore, the incoming partner generally compensates the sacrificing partners for the profit share they sacrifice.
Formula for New Partner’s Share of Goodwill
New Partner’s Share of Goodwill = Total Goodwill × New Partner’s Profit Share
Example
Goodwill of the firm is valued at ₹50,000. C is admitted for a 1/5 share.
C’s share of goodwill:
₹50,000 × 1/5 = ₹10,000
If A and B sacrifice in the ratio of 3:2:
A’s compensation = ₹10,000 × 3/5 = ₹6,000
B’s compensation = ₹10,000 × 2/5 = ₹4,000
5.1 When Goodwill Is Brought in Cash and Retained in Business
If the incoming partner brings goodwill in cash and the amount remains in the business, pass the following entries.
Bank A/c Dr. ₹10,000
To Premium for Goodwill A/c ₹10,000
(Being premium for goodwill brought in cash by the new partner)
Premium for Goodwill A/c Dr. ₹10,000
To A’s Capital A/c ₹6,000
To B’s Capital A/c ₹4,000
(Being premium for goodwill credited to sacrificing partners in their sacrificing ratio)
No further entry is needed if the goodwill amount remains in the business.
5.2 When Goodwill Is Withdrawn by Old Partners
If the old partners withdraw the goodwill amount from the business:
A’s Capital A/c Dr. ₹6,000
B’s Capital A/c Dr. ₹4,000
To Bank A/c ₹10,000
(Being goodwill amount withdrawn by old partners)
5.3 When Goodwill Is Paid Privately
Sometimes the incoming partner pays goodwill directly to the old partners from personal funds.
No journal entry is passed in the books of the firm.
For example, if C pays ₹10,000 directly to A and B in the sacrificing ratio of 3:2:
- A receives ₹6,000.
- B receives ₹4,000.
5.4 When Goodwill Is Not Brought in Cash
If the incoming partner does not bring the goodwill amount in cash, the adjustment may be made through the incoming partner’s Capital Account or Current Account, depending on the question.
C’s Capital/Current A/c Dr. ₹10,000
To A’s Capital/Current A/c ₹6,000
To B’s Capital/Current A/c ₹4,000
(Being C’s share of goodwill adjusted in favour of sacrificing partners)
5.5 When Existing Goodwill Appears in the Balance Sheet
If goodwill already appears in the Balance Sheet and the question requires it to be written off before admission, it is written off among old partners in their old profit-sharing ratio.
Suppose existing goodwill is ₹20,000 and A:B = 3:2.
A’s Capital A/c Dr. ₹12,000
B’s Capital A/c Dr. ₹8,000
To Goodwill A/c ₹20,000
(Being existing goodwill written off among old partners)
5.6 Hidden Goodwill
Sometimes total goodwill is not directly given. In such questions, goodwill may be calculated from the capital brought by the incoming partner.
Implied Total Capital = New Partner’s Capital × Reciprocal of New Partner’s Share
Hidden Goodwill = Implied Total Capital − Actual Total Capital
Example
C is admitted for a 1/4 share and brings ₹30,000 as capital.
Implied Total Capital:
₹30,000 × 4 = ₹1,20,000
If actual total capital after admission is ₹1,00,000:
Hidden Goodwill = ₹1,20,000 − ₹1,00,000 = ₹20,000
Exam Tip: Use hidden goodwill only when the question provides enough information to calculate implied total capital and actual total capital.
6. Revaluation of Assets and Liabilities
At the time of admission, the values of assets and liabilities may need to be changed. These adjustments are recorded through the Revaluation Account.
The purpose of revaluation is to ensure that gains or losses relating to the period before admission are adjusted among the old partners.
| Adjustment | Journal Entry | Effect on Revaluation Account |
|---|---|---|
| Increase in asset | Asset A/c Dr. To Revaluation A/c | Gain; credited to Revaluation A/c |
| Decrease in asset | Revaluation A/c Dr. To Asset A/c | Loss; debited to Revaluation A/c |
| Increase in liability | Revaluation A/c Dr. To Liability A/c | Loss; debited to Revaluation A/c |
| Decrease in liability | Liability A/c Dr. To Revaluation A/c | Gain; credited to Revaluation A/c |
| Unrecorded asset | Asset A/c Dr. To Revaluation A/c | Gain |
| Unrecorded liability | Revaluation A/c Dr. To Liability A/c | Loss |
Example of Revaluation
A and B are old partners. C is admitted. The following adjustments are made:
- Machinery increases by ₹10,000.
- Furniture decreases by ₹3,000.
- Creditors increase by ₹2,000.
- An unrecorded asset worth ₹5,000 is discovered.
| Revaluation Account – Debit | Amount | Revaluation Account – Credit | Amount |
|---|---|---|---|
| Decrease in Furniture | ₹3,000 | Increase in Machinery | ₹10,000 |
| Increase in Creditors | ₹2,000 | Unrecorded Asset | ₹5,000 |
| Profit transferred to old partners | ₹10,000 | ||
| Total | ₹15,000 | Total | ₹15,000 |
Profit on Revaluation:
₹15,000 − ₹5,000 = ₹10,000
If A and B share profits in the old ratio of 3:2:
- A receives ₹6,000.
- B receives ₹4,000.
Revaluation A/c Dr. ₹10,000
To A’s Capital A/c ₹6,000
To B’s Capital A/c ₹4,000
(Being revaluation profit transferred to old partners in their old ratio)
Important: The incoming partner does not receive a share of revaluation profit or bear a share of revaluation loss relating to the period before admission.
7. Reserves and Accumulated Profits or Losses
Reserves and accumulated profits or losses that arose before admission belong to the old partners. They are generally transferred to old partners in their old profit-sharing ratio.
7.1 General Reserve
Suppose General Reserve is ₹25,000 and A:B = 3:2.
- A’s share = ₹15,000
- B’s share = ₹10,000
General Reserve A/c Dr. ₹25,000
To A’s Capital A/c ₹15,000
To B’s Capital A/c ₹10,000
(Being General Reserve transferred to old partners)
7.2 Accumulated Profit
If Profit and Loss Account has a credit balance of ₹20,000:
Profit and Loss A/c Dr. ₹20,000
To A’s Capital A/c ₹12,000
To B’s Capital A/c ₹8,000
(Being accumulated profit transferred to old partners)
7.3 Accumulated Loss
If Profit and Loss Account has a debit balance of ₹15,000:
A’s Capital A/c Dr. ₹9,000
B’s Capital A/c Dr. ₹6,000
To Profit and Loss A/c ₹15,000
(Being accumulated loss transferred to old partners)
7.4 Workmen Compensation Reserve
| Situation | Treatment |
|---|---|
| No claim exists | Transfer the full reserve to old partners in old ratio. |
| Claim equals reserve | Use reserve to settle the claim. |
| Claim is less than reserve | Use reserve for the claim and distribute remaining balance among old partners. |
| Claim exceeds reserve | Use reserve first and treat the excess liability according to the question. |
7.5 Investment Fluctuation Reserve
Investment Fluctuation Reserve is considered after comparing the book value and current value of investments.
- If investment value falls, use the reserve to cover the fall.
- If reserve exceeds the required adjustment, distribute the remaining balance among old partners.
- If no fall in value exists, the reserve may be transferred to old partners as instructed in the question.
8. Capital Adjustment
After admission, partners’ capitals may need to be adjusted according to the new profit-sharing ratio or according to the total capital of the reconstituted firm.
The question may require the incoming partner to bring capital, old partners to bring additional capital, old partners to withdraw excess capital, or all capitals to be adjusted in proportion to the new ratio.
Capital Brought by the Incoming Partner
If C brings ₹50,000 as capital:
Bank A/c Dr. ₹50,000
To C’s Capital A/c ₹50,000
(Being capital brought in cash by the incoming partner)
Important Point
If capitals of all partners are to be adjusted in their new profit-sharing ratio, first calculate the required total capital. Then calculate the capital required for each partner according to the new ratio.
- Partners with less capital bring cash into the business.
- Partners with excess capital may withdraw the excess amount.
- Follow the exact instruction given in the question.
9. Complete Solved Illustration
A and B are partners sharing profits in the ratio of 3:2. They admit C for a 1/5 share in future profits.
Additional Information:
- C brings ₹20,000 as capital.
- Goodwill of the firm is valued at ₹50,000.
- C brings goodwill in cash.
- Machinery is appreciated by ₹10,000.
- Furniture is reduced by ₹4,000.
- Creditors are increased by ₹2,000.
- General Reserve is ₹15,000.
Step 1: New Profit-Sharing Ratio
C’s share = 1/5
Remaining share = 1 − 1/5 = 4/5
A’s new share = 4/5 × 3/5 = 12/25
B’s new share = 4/5 × 2/5 = 8/25
C’s share = 1/5 = 5/25
New Ratio = 12:8:5
Step 2: Sacrificing Ratio
A’s sacrifice = 3/5 − 12/25 = 15/25 − 12/25 = 3/25
B’s sacrifice = 2/5 − 8/25 = 10/25 − 8/25 = 2/25
Sacrificing Ratio = 3:2
Step 3: Goodwill Adjustment
C’s share of goodwill:
₹50,000 × 1/5 = ₹10,000
- A receives ₹6,000.
- B receives ₹4,000.
Step 4: Revaluation Profit
| Particulars | Amount |
|---|---|
| Increase in Machinery | ₹10,000 |
| Less: Decrease in Furniture | ₹4,000 |
| Less: Increase in Creditors | ₹2,000 |
| Profit on Revaluation | ₹4,000 |
- A’s share of revaluation profit = ₹2,400.
- B’s share of revaluation profit = ₹1,600.
Step 5: General Reserve
General Reserve = ₹15,000
- A’s share = ₹9,000.
- B’s share = ₹6,000.
Important: C receives no share of the old General Reserve because it was created before C became a partner.
10. Important Journal Entries at Admission
| Adjustment | Journal Entry |
|---|---|
| Capital brought in cash | Bank A/c Dr. To New Partner’s Capital A/c |
| Goodwill brought in cash | Bank A/c Dr. To Premium for Goodwill A/c |
| Distribution of goodwill | Premium for Goodwill A/c Dr. To Sacrificing Partners’ Capital/Current A/cs |
| Goodwill not brought in cash | Incoming Partner’s Capital/Current A/c Dr. To Sacrificing Partners’ Capital/Current A/cs |
| Revaluation profit | Revaluation A/c Dr. To Old Partners’ Capital A/cs |
| Revaluation loss | Old Partners’ Capital A/cs Dr. To Revaluation A/c |
| General Reserve | General Reserve A/c Dr. To Old Partners’ Capital A/cs |
| Accumulated profit | Profit and Loss A/c Dr. To Old Partners’ Capital A/cs |
| Accumulated loss | Old Partners’ Capital A/cs Dr. To Profit and Loss A/c |
11. Common Mistakes Students Should Avoid
Mistake 1: Using the New Ratio for Revaluation Profit
Revaluation profit or loss relating to the period before admission is generally transferred to old partners in their old ratio.
Mistake 2: Giving Old Reserves to the New Partner
General Reserve, accumulated profits, and other old reserves normally belong to the old partners.
Mistake 3: Confusing Sacrifice and Gain
Remember:
Sacrifice = Old Share − New Share
Mistake 4: Giving Goodwill to All Partners
Goodwill brought by the incoming partner is credited to the sacrificing partners in their sacrificing ratio.
Mistake 5: Ignoring Instructions in the Question
Always check whether the question asks for:
- Revaluation Account
- Memorandum Revaluation Account
- Capital Account or Current Account treatment
- Goodwill brought in cash or adjusted through accounts
- Capital adjustment
- Preparation of the new Balance Sheet
12. Admission of a Partner: Quick Revision Chart
↓
CALCULATE NEW RATIO
↓
CALCULATE SACRIFICING RATIO
↓
MAKE GOODWILL ADJUSTMENT
↓
REVALUE ASSETS AND LIABILITIES
↓
TRANSFER REVALUATION PROFIT/LOSS TO OLD PARTNERS
↓
DISTRIBUTE RESERVES AND ACCUMULATED PROFITS/LOSSES
↓
ADJUST PARTNERS’ CAPITALS
↓
PREPARE NEW BALANCE SHEET
Frequently Asked Questions
What is admission of a partner?
Admission of a partner means bringing a new person into an existing partnership firm with the consent of all existing partners.
What is the sacrificing ratio?
Sacrificing ratio is the ratio in which old partners give up a portion of their future profit share in favour of the incoming partner.
Who receives goodwill on admission?
The sacrificing partners receive the incoming partner’s goodwill contribution in their sacrificing ratio.
Who gets revaluation profit?
Revaluation profit is transferred to old partners in their old profit-sharing ratio because it relates to the period before admission.
Does the incoming partner receive General Reserve?
Generally, no. General Reserve belongs to the old partners because it was created before the incoming partner joined the firm.
Why is a Revaluation Account prepared?
A Revaluation Account is prepared to record changes in the values of assets and liabilities and determine the resulting profit or loss at the time of admission.
What is hidden goodwill?
Hidden goodwill is goodwill calculated indirectly from the capital brought by the incoming partner and the implied total capital of the firm.
Conclusion
Admission of a partner is an important part of the Reconstitution of Partnership Firm chapter in CBSE Class 12 Accountancy. The chapter becomes much easier when students understand the purpose behind every adjustment.
Remember this sequence:
New Ratio → Sacrificing Ratio → Goodwill → Revaluation → Reserves → Capital Adjustment → Balance Sheet
For exam preparation, practise numerical questions involving new ratio, sacrificing ratio, goodwill, revaluation, reserves, capital adjustment, and the new Balance Sheet.
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Disclaimer: These notes are prepared for educational purposes with reference to the CBSE Accountancy syllabus and standard school-level accounting concepts. Students should verify the latest official CBSE syllabus and examination instructions before final preparation.
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