Reconstitution of a Partnership Firm –
Admission of a Partner 2
LEARNING OBJECTIVES
After studying this chapter
P artnership is an agreement between two or more
persons (called partners) for sharing the profits
of a business carried on by all or any of them acting
you will be able to:
• Explain the concept of for all. Any change in the existing agreement
reconstitution of a partnership amounts to reconstitution of the partnership firm.
firm; This results in an end of the existing agreement and
• Identify the matters that need
adjustments in the books of
a new agreement comes into being with a changed
firm when a new partner is relationship among the members of the partnership
admitted; firm and/or their composition. However, the firm
• Determine the new profit continues. The partners often resort to reconstitution
sharing ratio and calculate
the sacrificing ratio; of the firm in various ways such as admission of a
• Define goodwill and new partner, change in profit sharing ratio,
enumerate the factors that retirement of a partner, death or insolvence of a
affect it; partner. In this chapter we shall have a brief idea
• Explain the methods of about all these and in detail about the accounting
valuation of goodwill;
implications of admission of a new partner or an on
• Describe how goodwill will
be treated under different change in the profit sharing ratio.
situations when a new
partner is admitted; 2.1 Modes of Reconstitution of a Partnership
• Make necessary adjustments Firm
for revaluation of assets and
reassessment of liabilities; Reconstitution of a partnership firm usually takes
• Make necessary adjustments place in any of the following ways:
for accumulated profits and
losses; Admission of a new partner: A new partner may be
• Determine the capital of each admitted when the firm needs additional capital or
partner, if required according
to the new profit sharing ratio managerial help. According to the provisions of
and make necessary Partnership Act 1932 unless it is otherwise provided
adjustments; in the partnership deed a new partner can be
• Make necessary adjustments admitted only when the existing partners
on change in the profit
sharing ratio among the unanimously agree for it. For example, Hari and
existing partners. Haqque are partners sharing profits in the ratio of
Rationalised 2023-24
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,Admission of a Partner 49
3:2. On April 1, 2017 they admitted John as a new partner with 1/6 share in
profits of the firm. With this change now there are three partners of the firm and
it stands reconstituted.
Change in the profit sharing ratio among the existing partners: Sometimes the
partners of a firm may decide to change their existing profit sharing ratio. This
may happen an account of a change in the existing partners’ role in the firm. For
example, Ram, Mohan and Sohan are partners in a firm sharing profits in the
ratio of 3:2:1. With effect from April 1,2017 they decided to share profits equally
as Sohan brings in additional capital. This results in a change in the existing
agreement leading to reconstitution of the firm.
Retirement of an existing partner: It means withdrawal by a partner from the
business of the firm which may be due to his bad health, old age or change in
business interests. In fact a partner can retire any time if the partnership is at
will. For example, Roy, Ravi and Rao are partners in the firm sharing profits in
the ratio of 2:2:1. On account of illness, Ravi retired from the firm on March 31,
2017. This results in reconstitution of the firm now having only two partners.
Death of a partner: Partnership may also stand reconstituted on death of a
partner, if the remaining partners decide to continue the business of the firm as
usual. For example, X,Y and Z are partners in a firm sharing profits in the ratio
3:2:1. X died on March 31, 2017. Y and Z decide to carry on the business sharing
future profits equally. The continuity of business by Y and Z sharing future
profits equally leads to reconstitution of the firm.
2.2 Admission of a New Partner
When firm requires additional capital or managerial help or both for the
expansion of its business a new partner may be admitted to supplement its
existing resources. According to the Partnership Act 1932, a new partner can
be admitted into the firm only with the consent of all the existing partners unless
otherwise agreed upon. With the admission of a new partner, the partnership
firm is reconstituted and a new agreement is entered into to carry on the business
of the firm.
A newly admitted partner acquires two main rights in the firm–
1. Right to share the assets of the partnership firm; and
2. Right to share the profits of the partnership firm.
For the right to acquire share in the assets and profits of the partnership
firm, the partner brings an agreed amount of capital either in cash or in kind.
Moreover, in the case of an established firm which may be earning more profits
than the normal rate of return on its capital the new partner is required to
contribute some additional amount known as premium or goodwill. This is done
Rationalised 2023-24
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,50 Accountancy – Not-for-Profit Organisation and Partnership Accounts
primarily to compensate the sacrificing partners for loss of their share in super
profits of the firm.
Following are the other important points which require attention at the time
of admission of a new partner:
1. New profit sharing ratio;
2. Sacrificing ratio;
3. Valuation and adjustment of goodwill;
4. Revaluation of assets and Reassessment of liabilities;
5. Distribution of accumulated profits (reserves); and
6. Adjustment of partners’ capitals.
2.3 New Profit Sharing Ratio
When new partner is admitted he acquires his share in profits from the old partners.
In other words, on the admission of a new partner, the old partners sacrifice a
share of their profit in favour of the new partner. But, what will be the share of
new partner and how he will acquire it from the existing partners is decided
mutually among the old partners and the new partner. However, if nothing is
specified as to how does the new partner acquire his share from the old partners;
it may be assumed that he gets it from them in their profit sharing ratio. In any
case, on admission of a new partner, the profit sharing ratio among the old
partners will change keeping in view their respective contribution to the profit
sharing ratio of the incoming partner. Hence, there is a need to ascertain the new
profit sharing ratio among all the partners. This depends upon how does the
new partner acquires his share from the old partners for which there are many
possibilities. Let us understand it with the help of the following illustrations.
Illustration 1
Anil and Vishal are partners sharing profits in the ratio of 3:2. They admitted
Sumit as a new partner for 1/5 share in the future profits of the firm. Calculate
new profit sharing ratio of Anil, Vishal and Sumit.
Solution
1
Sumit’s share =
5
1 4
Remaining share = 1 =
5 5
3 4 12
Anil’s new share = of =
5 5 25
2 4 8
Vishal’s new share = of =
5 5 25
New profit sharing ratio of Anil, Vishal and Sumit will be 12:8:5.
Note: It has been assumed that the new partner acquired his share from old partners in
old ratio.
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, Admission of a Partner 51
Illustration 2
Akshay and Bharati are partners sharing profits in the ratio of 3:2. They admit
Dinesh as a new partner for 1/5th share in the future profits of the firm which
he gets equally from Akshay and Bharati. Calculate new profit sharing ratio of
Akshay, Bharati and Dinesh.
Solution
1 2
Dinesh’s share = or
5 10
3 1 5
Akshay’s share =
5 10 10
2 1 3
Bharati’s share =
5 10 10
New profit sharing ratio between Akshay, Bharati and Dinesh will be 5:3:2.
Illustration 3
Anshu and Nitu are partners sharing profits in the ratio of 3:2. They admitted
Jyoti as a new partner for 3/10 share which she acquired 2/10 from Anshu and
1/10 from Nitu. Calculate the new profit sharing ratio of Anshu, Nitu and Jyoti.
Solution
3
Jyoti’s share =
10
3 2 4
Anshu’s new share =
5 10 10
Nitu’s new share = Old share – Share Surrendered
2 1 3
=
5 10 10
The new profit sharing ratio between
Anshu, Nitu and Jyoti will be 4 : 3 : 3.
Illustration 4
Ram and Shyam are partners in a firm sharing profits in the ratio of 3:2. They
admit Ghanshyam as a new partner. Ram sacrificed 1/4 of his share and Shyam
1/3 of his share in favour of Ghanshyam. Calculate new profit sharing ratio of
Ram, Shyam and Ghanshyam.
Rationalised 2023-24
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Admission of a Partner 2
LEARNING OBJECTIVES
After studying this chapter
P artnership is an agreement between two or more
persons (called partners) for sharing the profits
of a business carried on by all or any of them acting
you will be able to:
• Explain the concept of for all. Any change in the existing agreement
reconstitution of a partnership amounts to reconstitution of the partnership firm.
firm; This results in an end of the existing agreement and
• Identify the matters that need
adjustments in the books of
a new agreement comes into being with a changed
firm when a new partner is relationship among the members of the partnership
admitted; firm and/or their composition. However, the firm
• Determine the new profit continues. The partners often resort to reconstitution
sharing ratio and calculate
the sacrificing ratio; of the firm in various ways such as admission of a
• Define goodwill and new partner, change in profit sharing ratio,
enumerate the factors that retirement of a partner, death or insolvence of a
affect it; partner. In this chapter we shall have a brief idea
• Explain the methods of about all these and in detail about the accounting
valuation of goodwill;
implications of admission of a new partner or an on
• Describe how goodwill will
be treated under different change in the profit sharing ratio.
situations when a new
partner is admitted; 2.1 Modes of Reconstitution of a Partnership
• Make necessary adjustments Firm
for revaluation of assets and
reassessment of liabilities; Reconstitution of a partnership firm usually takes
• Make necessary adjustments place in any of the following ways:
for accumulated profits and
losses; Admission of a new partner: A new partner may be
• Determine the capital of each admitted when the firm needs additional capital or
partner, if required according
to the new profit sharing ratio managerial help. According to the provisions of
and make necessary Partnership Act 1932 unless it is otherwise provided
adjustments; in the partnership deed a new partner can be
• Make necessary adjustments admitted only when the existing partners
on change in the profit
sharing ratio among the unanimously agree for it. For example, Hari and
existing partners. Haqque are partners sharing profits in the ratio of
Rationalised 2023-24
Buy latest Educart Books on Amazon - https://amzn.to/3OwEosm
,Admission of a Partner 49
3:2. On April 1, 2017 they admitted John as a new partner with 1/6 share in
profits of the firm. With this change now there are three partners of the firm and
it stands reconstituted.
Change in the profit sharing ratio among the existing partners: Sometimes the
partners of a firm may decide to change their existing profit sharing ratio. This
may happen an account of a change in the existing partners’ role in the firm. For
example, Ram, Mohan and Sohan are partners in a firm sharing profits in the
ratio of 3:2:1. With effect from April 1,2017 they decided to share profits equally
as Sohan brings in additional capital. This results in a change in the existing
agreement leading to reconstitution of the firm.
Retirement of an existing partner: It means withdrawal by a partner from the
business of the firm which may be due to his bad health, old age or change in
business interests. In fact a partner can retire any time if the partnership is at
will. For example, Roy, Ravi and Rao are partners in the firm sharing profits in
the ratio of 2:2:1. On account of illness, Ravi retired from the firm on March 31,
2017. This results in reconstitution of the firm now having only two partners.
Death of a partner: Partnership may also stand reconstituted on death of a
partner, if the remaining partners decide to continue the business of the firm as
usual. For example, X,Y and Z are partners in a firm sharing profits in the ratio
3:2:1. X died on March 31, 2017. Y and Z decide to carry on the business sharing
future profits equally. The continuity of business by Y and Z sharing future
profits equally leads to reconstitution of the firm.
2.2 Admission of a New Partner
When firm requires additional capital or managerial help or both for the
expansion of its business a new partner may be admitted to supplement its
existing resources. According to the Partnership Act 1932, a new partner can
be admitted into the firm only with the consent of all the existing partners unless
otherwise agreed upon. With the admission of a new partner, the partnership
firm is reconstituted and a new agreement is entered into to carry on the business
of the firm.
A newly admitted partner acquires two main rights in the firm–
1. Right to share the assets of the partnership firm; and
2. Right to share the profits of the partnership firm.
For the right to acquire share in the assets and profits of the partnership
firm, the partner brings an agreed amount of capital either in cash or in kind.
Moreover, in the case of an established firm which may be earning more profits
than the normal rate of return on its capital the new partner is required to
contribute some additional amount known as premium or goodwill. This is done
Rationalised 2023-24
Buy latest Educart Books on Amazon - https://amzn.to/3OwEosm
,50 Accountancy – Not-for-Profit Organisation and Partnership Accounts
primarily to compensate the sacrificing partners for loss of their share in super
profits of the firm.
Following are the other important points which require attention at the time
of admission of a new partner:
1. New profit sharing ratio;
2. Sacrificing ratio;
3. Valuation and adjustment of goodwill;
4. Revaluation of assets and Reassessment of liabilities;
5. Distribution of accumulated profits (reserves); and
6. Adjustment of partners’ capitals.
2.3 New Profit Sharing Ratio
When new partner is admitted he acquires his share in profits from the old partners.
In other words, on the admission of a new partner, the old partners sacrifice a
share of their profit in favour of the new partner. But, what will be the share of
new partner and how he will acquire it from the existing partners is decided
mutually among the old partners and the new partner. However, if nothing is
specified as to how does the new partner acquire his share from the old partners;
it may be assumed that he gets it from them in their profit sharing ratio. In any
case, on admission of a new partner, the profit sharing ratio among the old
partners will change keeping in view their respective contribution to the profit
sharing ratio of the incoming partner. Hence, there is a need to ascertain the new
profit sharing ratio among all the partners. This depends upon how does the
new partner acquires his share from the old partners for which there are many
possibilities. Let us understand it with the help of the following illustrations.
Illustration 1
Anil and Vishal are partners sharing profits in the ratio of 3:2. They admitted
Sumit as a new partner for 1/5 share in the future profits of the firm. Calculate
new profit sharing ratio of Anil, Vishal and Sumit.
Solution
1
Sumit’s share =
5
1 4
Remaining share = 1 =
5 5
3 4 12
Anil’s new share = of =
5 5 25
2 4 8
Vishal’s new share = of =
5 5 25
New profit sharing ratio of Anil, Vishal and Sumit will be 12:8:5.
Note: It has been assumed that the new partner acquired his share from old partners in
old ratio.
Rationalised 2023-24
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, Admission of a Partner 51
Illustration 2
Akshay and Bharati are partners sharing profits in the ratio of 3:2. They admit
Dinesh as a new partner for 1/5th share in the future profits of the firm which
he gets equally from Akshay and Bharati. Calculate new profit sharing ratio of
Akshay, Bharati and Dinesh.
Solution
1 2
Dinesh’s share = or
5 10
3 1 5
Akshay’s share =
5 10 10
2 1 3
Bharati’s share =
5 10 10
New profit sharing ratio between Akshay, Bharati and Dinesh will be 5:3:2.
Illustration 3
Anshu and Nitu are partners sharing profits in the ratio of 3:2. They admitted
Jyoti as a new partner for 3/10 share which she acquired 2/10 from Anshu and
1/10 from Nitu. Calculate the new profit sharing ratio of Anshu, Nitu and Jyoti.
Solution
3
Jyoti’s share =
10
3 2 4
Anshu’s new share =
5 10 10
Nitu’s new share = Old share – Share Surrendered
2 1 3
=
5 10 10
The new profit sharing ratio between
Anshu, Nitu and Jyoti will be 4 : 3 : 3.
Illustration 4
Ram and Shyam are partners in a firm sharing profits in the ratio of 3:2. They
admit Ghanshyam as a new partner. Ram sacrificed 1/4 of his share and Shyam
1/3 of his share in favour of Ghanshyam. Calculate new profit sharing ratio of
Ram, Shyam and Ghanshyam.
Rationalised 2023-24
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