Lesson
Learn what happens when a new partner joins an existing partnership firm.
Understand new profit sharing ratio, sacrificing ratio, goodwill, revaluation, old reserves, and capital when a new partner enters the firm.
Concept explanation
Admission of a Partner means a new person joins an existing partnership firm as a partner.
When two or more partners are already running a business and another person joins them as a new partner, it is called admission of a partner.
Example: Riya and Amit are running a stationery shop. Later, Neha joins the firm and becomes a partner.
Simple line: Admission means a new partner enters the partnership firm.
A new partner may be admitted because the firm needs more capital.
The firm may need more skills or experience.
The old partners may want to expand the business.
The new partner may have good contacts.
The new partner may manage a new branch.
The old partners may want to share work and risk.
Example: Riya and Amit want to open another stationery shop near a college. They admit Neha because she brings money and knows the college market well.
Simple line: A new partner brings capital, skill, experience, or business support.
Riya and Amit run a stationery shop.
Their profit sharing ratio is 1:1.
The shop is doing well, but they want to open a second branch.
Neha wants to join the business.
Neha brings capital Rs.50,000, good business contacts, and experience in online sales.
Riya and Amit agree to admit Neha as a partner.
Now the firm must decide the new profit sharing ratio, Neha's capital, goodwill, revaluation, and treatment of old profits or losses.
This is why admission of a partner needs accounting.
Profit sharing ratio changes.
Old partners sacrifice some share of profit.
The new partner may bring capital.
The new partner may bring goodwill.
Assets and liabilities may be revalued.
Old accumulated profits or losses are adjusted.
Partner capital accounts may be adjusted.
Simple line: Admission changes ownership, profit sharing, and capital of the firm.
New Profit Sharing Ratio is the ratio in which all partners will share future profits after admission.
Before admission, Riya and Amit share profit equally. Old ratio = 1:1.
After Neha joins, Riya, Amit, and Neha agree to share profit in 2:2:1.
If future profit is Rs.50,000, total parts are 2 + 2 + 1 = 5.
Riya gets Rs.50,000 x 2/5 = Rs.20,000.
Amit gets Rs.50,000 x 2/5 = Rs.20,000.
Neha gets Rs.50,000 x 1/5 = Rs.10,000.
Simple line: New ratio decides future profit sharing.
Rule: Sacrifice = Old Share - New Share
When a new partner gets a share of profit, old partners give up some of their old profit share.
This given-up part is called sacrifice.
Riya and Amit earlier shared equally. Their old shares were 1/2 and 1/2.
After Neha joins, Riya = 2/5, Amit = 2/5, and Neha = 1/5.
Riya's sacrifice = 1/2 - 2/5 = 1/10.
Amit's sacrifice = 1/2 - 2/5 = 1/10.
Sacrificing ratio is Riya : Amit = 1:1.
Simple line: Sacrificing ratio shows how much old partners give up for the new partner.
Goodwill means the value of the firm's good name, reputation, loyal customers, and earning power.
Riya and Amit's shop is famous. Many students trust their shop, so it earns good profit.
When Neha joins, she gets the benefit of this already successful business.
So Neha may have to compensate old partners for goodwill.
Example: goodwill of firm is Rs.30,000 and Neha gets 1/5 share.
Neha's share of goodwill is Rs.30,000 x 1/5 = Rs.6,000.
If old partners sacrificed equally, Riya and Amit may get Rs.3,000 each.
Simple line: Goodwill is the value of a business's good reputation.
Before admitting a new partner, the firm may check whether assets and liabilities are shown at correct values.
Example: furniture is recorded at Rs.20,000, but actual value is Rs.25,000.
This increase should belong to old partners because it happened before Neha joined.
Another example: a liability recorded as Rs.10,000 is now expected to be Rs.12,000.
This loss also belongs to old partners.
Revaluation Account is used to record such increases and decreases.
Simple line: Revaluation means updating old asset and liability values before the new partner joins.
Sometimes the firm has old profits or losses not yet distributed.
Examples are General Reserve, Profit and Loss balance, Advertisement Suspense, and accumulated loss.
These belong to old partners because they were created before the new partner joined.
So they should be distributed among old partners in the old profit sharing ratio.
Simple line: Old profits and old losses belong to old partners.
The new partner usually brings capital into the firm.
Example: Neha brings capital Rs.50,000.
Journal entry idea: Cash/Bank A/c Dr. Rs.50,000, To Neha's Capital A/c Rs.50,000.
Cash or bank increases.
Neha's capital increases.
Simple line: New partner's capital increases firm's money and records the new partner's claim.
Sometimes partners agree that their capitals should be in the new profit sharing ratio.
Example: new ratio is 2:2:1 and total capital required is Rs.1,00,000.
Capital should be Riya Rs.40,000, Amit Rs.40,000, and Neha Rs.20,000.
If any partner's actual capital is more or less, adjustment may be made through cash or current account.
Simple line: Capital adjustment makes partners' capital match the agreed ratio.
Admission guide
| Item | Simple meaning | Who is affected |
|---|---|---|
| New Ratio | Future profit sharing ratio | All partners |
| Sacrificing Ratio | Old partners' given-up share | Old partners |
| Goodwill | Value of reputation | New partner compensates old partners |
| Revaluation | Update assets and liabilities | Old partners |
| Old Reserves | Past profits or losses | Old partners in old ratio |
| New Capital | Money brought by new partner | New partner's capital account |
Admission accounting tries to treat old partners and the new partner fairly.
Visual flow
New partner joins
Decide new profit sharing ratio
Calculate sacrificing ratio
Adjust goodwill
Revalue assets and liabilities
Distribute old profits or losses
New partner brings capital
Adjust capital if required
New partnership begins
Solved examples
Example 1
Total parts = 2 + 2 + 1 = 5 Riya = Rs.50,000 x 2/5 = Rs.20,000 Amit = Rs.50,000 x 2/5 = Rs.20,000 Neha = Rs.50,000 x 1/5 = Rs.10,000
The new ratio is used for future profits.
Neha receives one part out of five.
Example 2
Riya sacrifice = 1/2 - 2/5 = 1/10 Amit sacrifice = 1/2 - 2/5 = 1/10 Sacrificing Ratio = 1:1
Sacrifice means old share minus new share.
Both old partners sacrifice equally.
Example 3
Neha's share of goodwill = Rs.30,000 x 1/5 Neha's share of goodwill = Rs.6,000 Riya receives Rs.3,000 Amit receives Rs.3,000
New partner gets benefit of old reputation.
Old partners are compensated in sacrificing ratio.
Example 4
Bank A/c Dr. Rs.50,000 To Neha's Capital A/c Rs.50,000
Bank balance increases.
Neha's capital in the firm increases.
Example 5
Revaluation gain Rs.5,000 Riya's share Rs.2,500 Amit's share Rs.2,500
The gain happened before admission.
So it belongs to old partners in old ratio.
Example 6
General Reserve Rs.20,000 Riya's share Rs.10,000 Amit's share Rs.10,000
Old reserve belongs to old partners.
It is distributed in the old profit sharing ratio.
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After learning admission of a partner, learn what happens when a partner leaves the firm or passes away.
Continue to Retirement or Death of a Partner