Ever wondered how a partnership reshuffles its books when a new buddy comes on board?
When someone becomes a partner, the firm’s accounts have to show the new capital, any goodwill that’s paid, and the updated profit‑sharing ratios. Think of it like adding a new player to a sports team – the scores and stats all need a quick update.
What actually changes when a partner is admitted?
Admission of a partner means a person who wasn’t part of the firm earlier is now allowed to share profits, losses and assets. The admission can be for cash, for taking over an existing share, or simply for goodwill (the reputation value of the business).
Goodwill is the extra value a business enjoys because of its name, customer loyalty, or location. It’s not a physical thing, but it can be paid for when a new partner joins.
Revaluation is the process of adjusting the book value of assets and liabilities to their current market values before the new partner comes in.
Capital account is a personal account of each partner that records how much they have invested, withdrawn or earned from the firm.
Step‑by‑step accounting treatment
- Identify the type of admission – cash, goodwill, or taking over an existing share.
- If goodwill is involved, decide whether it will be distributed among existing partners or kept as an asset.
- Revalue assets and liabilities if required. The surplus or deficit is shared according to the old profit‑sharing ratio.
- Adjust the existing partners’ capital accounts for goodwill or revaluation surplus/deficit.
- Record the new partner’s capital contribution (cash, assets, or share of goodwill).
- Update the profit‑loss sharing ratio in the partnership deed.
Worked example
Imagine A, B and C run a firm. Their old profit‑sharing ratio is 3:2:1. The capital balances are:
- A: Rs. 60,000
- B: Rs. 40,000
- C: Rs. 20,000
D wants to join for a cash contribution of Rs. 30,000. The partners also agree to record goodwill of Rs. 20,000, to be shared among A, B and C in the old ratio.
Steps:
- Goodwill is credited to a Goodwill Account (a temporary account) and then distributed:
- A gets 3/6 × 20,000 = Rs. 10,000
- B gets 2/6 × 20,000 = Rs. 6,667
- C gets 1/6 × 20,000 = Rs. 3,333
Journal entries:
| Sl. No. | Account | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|
| 1 | Goodwill | 20,000 | |
| To A’s Capital | 10,000 | ||
| To B’s Capital | 6,667 | ||
| To C’s Capital | 3,333 | ||
| 2 | Cash | 30,000 | |
| To D’s Capital | 30,000 |
Journal entries summary
| Scenario | Key journal entry |
|---|---|
| Cash admission only | Cash Dr. – New Partner’s Capital Cr. |
| Goodwill admitted and distributed | Goodwill Dr. – Existing Partners’ Capital Cr. (in old ratio) |
| Revaluation surplus | Revaluation Surplus Dr./Cr. – Existing Partners’ Capital Cr./Dr. (in old ratio) |
| Goodwill kept as an asset | Cash/Other Asset Dr. – Goodwill Cr. |
Key points to remember
- Always use the old profit‑sharing ratio for distributing goodwill or revaluation surplus.
- If goodwill is kept as an asset, it stays on the balance sheet and is amortised later.
- Revaluation surplus is transferred to capital accounts, not to a separate profit‑and‑loss account.
- After admission, update the partnership deed with the new ratio.
- Journal entries must balance – total debits = total credits.
📝 Likely Exam Questions
- Explain why goodwill is distributed among existing partners in their old profit‑sharing ratio.
- Journalize the admission of a partner who brings cash of Rs. 50,000 and goodwill of Rs. 15,000, assuming goodwill is shared among existing partners in the old ratio of 2:1.
- What is the effect of revaluation surplus on the capital accounts of existing partners?
- List the steps involved in the accounting treatment when a partner is admitted.
- Differentiate between goodwill kept as an asset and goodwill distributed among partners.
Model answers (brief)
- Goodwill reflects the reputation of the firm. Existing partners have built that reputation, so they deserve a share based on the old ratio.
- Goodwill Dr. 15,000; To A’s Capital 10,000; To B’s Capital 5,000. Cash Dr. 50,000; To New Partner’s Capital 50,000.
- Revaluation surplus increases each existing partner’s capital proportionally to the old profit‑sharing ratio.
- Identify type of admission, determine goodwill, adjust existing capital, record new partner’s capital, update profit‑sharing ratio.
- If kept as an asset, goodwill appears on the balance sheet and is amortised. If distributed, it is transferred to partners’ capital accounts immediately.