Reconstitution of a Partnership Firm - Admission of a Partner
Admission leads to reconstitution of firm as the existing agreement comes to an end and a new agreement comes into effect. A new partner may be admitted for increasing the capital, augmenting managerial skills, etc. Rights of new partner are right to share assets of the firm and to share future profits. On admission of a partner the adjustments are required for profit sharing ratio, goodwill, revaluation of assets and liabilities, reserves, accumulated profits/losses and capital. When a new partner is admitted into a partnership, he acquires his share of profit from the old partners which reduces their share of profits. Hence, it becomes necessary to calculate the new profit sharing ratio.
Sacrificing Ratio is the ratio in which the old partners sacrifice their share of profit in favour of the new partner. If new partner brings premium for goodwill, such premium should be distributed among the existing partners. If new partner is unable to bring premium for goodwill, his share of goodwill is adjusted through Partners’ Current Accounts or Capital Accounts. New partner does not suffer because of reduction in the value of assets, nor should he be benefitted by increase in the value of assets. Hence, profit or loss on revaluation is divided among the old partners in the old profit sharing ratio. Sometimes, it is desired by all the partners that revised values of assets and liabilities should not be shown in new Balance Sheet. So, Memorandum Revaluation account is prepared. Reserves and accumulated profits/losses should be transferred to the Old Partners Capital Accounts in their old ratio. There can be three types of situations that require the adjustment of capital. The capitals of old partners may be adjusted by taking new partner’s capital as base, the new partner may be required to contribute the proportionate capital considering old partners’ capitals as base or capital of the new firm is given in the question and capital of all the partners is to be according to profit sharing ratio.