- Meaning: Reconstitution of partnership means a change in the existing partnership agreement, leading to a change in the relationship among partners and their profit-sharing ratio.
- Change in Profit-Sharing Ratio: If existing partners decide to change their profit-sharing ratio, the old agreement ends, and a new one begins.
- Admission of a Partner: A new partner brings capital and goodwill; the existing partners give up a part of their profit share, and the partnership is reconstituted.
- Retirement of a Partner: When a partner retires, they receive their share of profit, capital, and reserves; the remaining partners adjust their profit-sharing ratio.
- Death of a Partner: On a partner’s death, their legal heir gets their share; the old agreement ends, and a new agreement is formed among the continuing partners.
Formulae [12]
Case 3: Share from Old Partners in Particular Fractions of Their Shares
(i) New Partner's Share = Sum of Profit Shares Given by Old Partners
(ii) New Share of Old Partner = Old Share – Share Given to New Partner
Case 1: Share from Old Partners in Old Ratio
(i) Old Partners’ New Shares = Remaining Share × Old Ratio
(ii) Remaining Share = 1 – New Partner’s Share
Case 2: Share from Old Partners in a Particular Ratio
(i) Old Partner’s New Share = Old Share – Sacrificed Share
(ii) New Partner’s Share = Sum of Sacrificed Shares (as per agreed ratio)
Situation 3: When Sacrificed Share and Old Ratio Are Both Given
New Partner’s Share = Sum of Profit Share Sacrificed by Old Partners
New Share of Old Partner = Old Share − Sacrificed Share
Situation 2: When Both Old and New Profit-Sharing Ratios Are Given
Sacrificed Profit Share = Old Profit Share - New Profit Share
Sacrifice Ratio
Sacrifice Ratio = Old Ratio - New Ratio
Situation 1: When New Partner’s Share is Given but Sacrificing Ratio is Not
Sacrificing Ratio = Old Profit - Sharing Ratio
Give the formula for valuation of goodwill by the Capitalisation of Average Profit Method.
Goodwill = Capitalised Average Profit – Actual capital employed/net assets
Where Capitalized Average Profit = `"Average Profit" xx 100/"Normal Rate of Return"`
Actual capital employed = Assets (excluding purchased Goodwill and fictitious assets) – Outside liabilities
Average Profit Method
(i) Goodwill = Average Profits × No. of years purchased
(ii) \[\text{Average Profit}=\frac{\text{Total Profit}}{\text{No.of years}}\]
Super Profit Method
(i) Goodwill = Super Profit x No. of Years Purchased
(ii) Super Profit = Actual or Average Profit - Normal Profit
(iii) \[\text{Normal Profit}=\frac{\text{Capital Invested}\times\text{Normal Rate of Return}}{100}\]
Adjusting Old Partners' Capital Based on New Partner's Capital
\[\text{Total Capital of the New Firm}=\frac{\text{Capital of the New Partner}}{\text{Share of Profit of New Partner}}\]
Calculating New Partner's Capital from Old Partners' Capital
\[\text{Total Capital of the New Firm}=\frac{\text{Total adjusted Capital of Old Partners}}{\text{Total Profit Share of Old Partners}}\]
Key Points
Key Points: Reconstitution of Partnership
Key Points: Admission of Partner
- Need for Admission: A new partner may be admitted to bring additional capital, skilled management, improve goodwill, or reward a capable employee.
- Legal Requirement: As per Section 31(1) of the Indian Partnership Act, a new partner can be admitted only with the consent of all existing partners.
- New Partner's Rights: Share in profits, assets, and liable for future debts.
- Goodwill & Capital: A new partner brings capital and goodwill to gain a share in profits and assets; existing partners sacrifice a share of profits in return.
- Adjustments at Admission: New profit-sharing ratio, Valuation of goodwill, Revaluation of assets and liabilities, and Adjustment of reserves, profits, and capital.
Journal Entries: Valuation of Goodwill
A. Premium for Goodwill is paid privately:
No Entry is passed
B. Premium for Goodwill is brought in cash by the New Partner:
1. When the Premium for Goodwill brought in by the New Partner is Retained in the Business:
(i) Cash/Bank A/c ...Dr.
To Premium for Goodwill A/c
(Amount of goodwill/premium brought in cash by new partner)
(ii) Premium for Goodwill A/c ...Dr.
To Old Partners' Capital A/cs
(Amount of goodwill/premium transferred to old partners' capital accounts in sacrificing ratio)
2. When Goodwill/Premium brought in by the New Partner is Withdrawn by the Old Partners:
Old Partner's Capital A/cs ...Dr.
To Cash/Bank A/c
(Amount of goodwill/premium withdrawn by the old partners)
C. Premium for Goodwill is brought in kind
1. For assets brought by the incoming partner:
Assets A/c ...Dr.
To Incoming Partner's capital A/c
To Premium for Goodwill A/c
2. For giving credit for goodwill to sacrificing partners in their sacrificing ratio:
Premium for Goodwill A/c ....Dr.
To Sacrificing Partners' Capital/Current A/c
D. Premium for Goodwill is brought by New Partner and is withdrawn by the Sacrificing Partners either fully or partly:
1. For premium for goodwill brought in cash by the new partner:
Cash/Bank A/c ...Dr.
To Premium for Goodwill A/c
2. For sharing of premium for goodwill:
Premium for Goodwill A/c ...Dr.
To Sacrificing Partners' Capital/Current A/c
3. For withdrawal of premium for goodwill amount fully/partly
Sacrificing Partners' Capital/Current A/cs ...Dr.
To Cash/Bank A/c
E. New Partner cannot bring his share of Premium for Goodwill; adjustment is made through the Current account of the New Partner:
New Partners' Current A/c ...Dr.
To Sacrificing Partners' Capital/Current A/cs
F. New Partner brings a part of Premium for Goodwill in cash or by Cheque or in Kind:
1.Cash/Bank/Assets A/c ...Dr.
To Premium for Goodwill A/c
2. New Partners' Current A/c ...Dr.
Premium for goodwill A/c ...Dr.
To Sacrificing Partners' Capital/Current A/cs
G. Goodwill appears (exists) in the Balance Sheet and Incoming Partner brings Premium for Goodwill in full or in part:
1. Write-off of Existing Goodwill
Old Partners' Capital/Current A/cs ...Dr.
To Goodwill A/c
2. Entry for Premium for Goodwill Brought by New Partner
Cash/Bank A/c ...Dr.
To Premium for Goodwill A/c
3. Distribution of Premium for Goodwill to Sacrificing Partners
Premium for Goodwill A/c ...Dr.
To Sacrificing Partners' Capital A/cs
4. Adjustment Entry for Premium Not Brought by New Partner
New Partner's Current A/c ...Dr.
To Sacrificing Partners' Capital/Current A/cs
H. Goodwill exists in the Balance Sheet and incoming partner is unable to bring his or her share of Premium for Goodwill in Cash or by Cheque:
1. Write-off of Existing Goodwill
Old Partners' Capital/Current A/cs ...Dr.
To Goodwill A/c
2. Adjustment for Incoming Partner’s Share of Goodwill Not Brought in Cash
Incoming Partner's Current A/c ...Dr.
To Sacrificing Partners' Capital/Current A/cs
Journal Entries: Reserves and Accumulated Profit/Loss
1. For distributing Reserves and Accumulated Profits :
General Reserve A/c ...Dr.
Reserve Fund A/c ...Dr.
Profit & Loss A/c (Credit balance) ...Dr.
To Old Partner's Capital A/cs or Current A/cs
2. For distributing accumulated losses among old partners in the old ratio :
Old Partner's Capital A/c or Current A/c ...Dr.
To Profit & Loss A/c (Debit balance)
To Advertisement Suspense A/c
To Deferred Revenue Expenditure A/c
3. For distributing surplus of specific reserves :
Workmen's Compensation Reserve A/c ...Dr.
Investment Fluctuation Reserve A/c ....Dr.
To Old Partner's Capital Ales or Current A/c
Format: Revaluation Account
Revaluation Account
Dr. Cr.
| Particulars | ₹ | Particulars | ₹ |
|---|---|---|---|
| To Assets A/c (Individually) —Decrease in value on revaluation |
... | By Assets A/c (Individually) —Increase in value on revaluation |
... |
| To Liabilities A/c (Individually) —Increase in amount on reassessment |
... | By Liabilities A/c (Individually) —Decrease in amount on reassessment |
... |
| To Unrecorded Liabilities A/c | ... | By Unrecorded Assets A/c | ... |
| To Partners' Capital A/c (Remuneration) | ... | By Partners' Capital (or Current) A/cs | ... |
| To Cash/Bank A/c (Expenses) | ... | ||
| To Partners' Capital (or Current) A/cs (Gain/Profit on Revaluation) |
... | ||
| ... | ... |
Journal Entries: Revaluation of Assets and Liabilities
1. For a decrease in the value of assets :
Revaluation A/c or Profit & Loss Adjustment A/c ...Dr.
To Assets A/c
(Decrease in the value of assets)
2. For an increase in the value of assets :
Assets A/c ...Dr.
To Revaluation A/c or Profit & Loss Adjustment A/c
(Increase in the value of assets)
3. For an increase in the value of liabilities:
Revaluation A/c or Profit & Loss Adjustment A/c ...Dr.
To Liabilities A/c
(Increase in the value of liabilities)
4. For a decrease in the value of liabilities :
Liabilities A/c ...Dr.
To Revaluation A/c or Profit & Loss Adjustment A/c
(Decrease in the value of liabilities)
5. For accounting unrecorded assets
Unrecorded Assets A/c ...Dr.
To Revaluation A/c
(accounting of unrecorded assets)
6. For accounting unrecorded liabilities
Revaluation A/c ...Dr.
To Unrecorded Liabilities A/c
(Accounting of unrecorded liabilities)
7. For transferring Gain (Profit):
Revaluation A/c ...Dr.
To Old Partner's Capital A/cs
(Gain on revaluation credited to Old Partner's Capital A/cs)
8. For transferring loss:
Old Partner's Capital A/cs ...Dr.
To Revaluation A/c
(Loss on revaluation debited to Old Partner's Capital A/cs)
Journal Entries: Adjustment of Capital
A. Accounting Entry to Adjust Deficit Capital:
1. If amount is brought in cash or cheque:
Cash/Bank A/c ...Dr.
To Concerned Partner's Capital Account
2. If amount is transferred to Current Account of the partner:
Concerned Partner's Current A/c ...Dr.
To Concerned Partners Capital A/c
B. Accounting Entry to Adjust Surplus Capital:
1. If amount is paid:
Concerned Partner's Capital A/c ....Dr.
To Cash/Bank A/c
2. If amount is transferred to Current Account of the partner:
Concerned Partner's Capital A/c ...Dr.
To New Partner's Current A/c
C. When a new partner brings certain assets towards his capital:
Assets A/c ...Dr.
To New Partner's Capital A/c
Important Questions [12]
- Mrs Shehal and Mrs Meenal Are Equal Partners in a Business. Their Balance Sheet is as Follows. Prepare Profit and Loss Adjustment Account, Partner'S Capital Accounts and Balance Sheet of the New Firm.
- A Statement Similar to a Balance Sheet.
- Anil and Sunil Were Partners Sharing Profits and Losses in the Ratio of 2:1 Respectively. Their Balance Sheet Was as Follows: Prepare: (A) Profit and Loss Adjustment ) Balance Sheet of the New Firm.
- The Gradual and Permanent Decrease in the Value of Fixed Assets Due to Any Cause.
- What is revaluation account?
- Answer the Following Question in One Sentence. What Shows Credit Balance of Revaluation Account ?
- Shanti, Samadhan and Sangarsh Were Sharing Profits and Losses in the Ratio of 7: 5: 4. Their Balance Sheet as on 31st .03.2013 Was as Follows: Balance Sheet as on 31st March,2013.
- ______ is credited when an unrecorded asset is brought into the business.
- If the asset is taken over by the partner ______ account is debited.
- Ram and Shyam were in partnership sharing profits and Losses in the proportion of 3 : 1 respectively. Their Balance sheet as on 31st March, 2020 stood as follows:
- The following is the Balance sheet of partners Aditya and Chaitanya on 31st March, 2019 they share profits and losses in the ratio of 3 : 2: They admitted Sachin into partnership on 1st April, 2019
- Seeta and Geeta share profits and losses in the ratio of 3:2 in Partnership Firm. Their Balance Sheet as on 31st March, 2020 was as under: Balance Sheet as on 31st March, 2020
Concepts [11]
- Reconstitution of Partnership
- Admission of Partner
- New Profit Sharing Ratio
- Sacrificing Ratio
- Admission of Partner> Accounting Treatment of Goodwill
- Average Profit Method
- Super Profit Method
- Admission of Partner> Reserves and Accumulated Profit/Losses
- Admission of Partner> Revaluation of Assets and Liabilities
- Admission of Partner> Adjustment of Capital
- Examples on Admission of Partner
