Accounts

1. Dr. B. Raja
Assistant Professor of Commerce
Vivekananda College
Tiruvedakam west
Madurai – 625 234

2. According to Section 31(1) of the Indian Partnership Act
1932, A new partner can be admitted only with the consent of
existing partner.

3. Whenever a partner is admitted into the
partnership firm, he acquires two rights:
• The rights to a share in the asset at the
partnership.
• The rights to a share in the profit of the business.

4. When a new person is admitted as partner, one or more of the
following accounting adjustments become necessary.
• Adjustment in the profit-sharing ratio.
• Adjustment for revaluation of assets and liabilities.
• Adjustment of Reserve and other accumulated Profits
• Adjustment for Capital.
• Adjustment for Goodwill

5. 1. Adjustment in the profit-sharing ratio:
 New Profit Sharing Ratio
 Sacrificing ratio

6. Calculation of Profit Sharing Ratio
Case 1. When new share of the incoming partner is given without
mentioning the details of sacrifice made by the old partners.
Example: A and B are partners in a business sharing profits in
the ratio of 5:3. the decide to admit C into the firm giving him
1/6th share. Calculate the new profit sharing ratio and
sacrificing ratio of the partners.

7. Calculation of Profit Sharing Ratio
Case 2. When old ratio of the old partners and the sacrificing
ratio for old partners are given.
Example: A and B are partners sharing profits and losses in
the ratio of 5:3. they admit C as a partner. C acquires his
share 4/20 from A ; and 2/20 from B. Find out the new
profit sharing ratio and sacrificing ratio.

8. Adjustment for Revaluation of Assets and
Liabilities

9. Adjustment for Revaluation of Assets and
Liabilities

10. Example of Revaluation account
Liabilities Amount Assets Amount
Creditors 40,000 Stock 10,000
Salary outstanding 5,000 Prepaid insurance 1,000
Capital Debtors 7,500
A 30000 Cash 18,500
B 20,000 Machinery 22,000
Buildings 30,000
Furniture 6,000
95,000 95,000
C is admitted as a new partner introducing a capital of Rs.
20,000, for his ¼ th share in future profits. Following revaluations are
made: 1. Stock be depreciated by 5%; 2. furniture be depreciated by 10%;
3. Building be revalued at Rs. 45,000. 4. the provision for doubtful debts
500. prepare revaluation account.
A and B are partners sharing profits in the ratio of 3:1. Their
Balance sheet stood as under on 31.3.2018

11. Adjustment of Reserve and Accumulated Profit
and Losses

12. Adjustment of Reserve and Accumulated Profit
and Losses
The new partner gets no share of such reserves or Profits.
Particulates Debit Credit
General reserve a/c Xxx
Profit and Loss a/c Xxx
To Old partners Capital a/c Xxx
(accumulated profit)

13. Adjustment for Capital

14. Adjustment for Capital
1. When the capitals are to be adjusted on the basis of
new partner’s capital.
2. When the new partner is required to bring in the
amount of capital in proportion to his share in the firm.
Example: the combined capital of old partners (after
adjustments) is Rs. 75,000. the new partner’s share is ¼.

15. Adjustment for Goodwill
1. Average profit method
2. Super profit method
3. Capitalization method
Methods of valuation of goodwill

16. Average Profit Method
Calculate the amount of goodwill at three year’s purchase of
last five years average profit. The profit were: I year – 9600;
II year- 14,400; III year – 20,000; IV year – 6,000; V year –
10,000

17. Super profit method
A firm earned net profit during the last three years as follows: I
year Rs. 36,000; II year Rs. 40,000 and III year Rs. 44,000
the capital investment of the firm is Rs. 1,20,000. A fair
return of the capital having regard to the risk involved is 10%.
Calculate the value of goodwill on the basis of 3 years purchase
of super profits.
Average profit = 36,000+40,000+44,000/3 year = Rs. 40,000
Normal profit = capital employed * Normal rate of return.
= 1,20,000 * 10% = Rs. 12,000
Super profit = Average expected profit – Normal Profit
= 40,000 – 12,000 = Rs. 28,000
Goodwill = Super profit * No. of years of purchase
= Rs. 28,000 * 3
Goodwill = Rs. 84,000

18. Capitalization Method
A firm earn Rs. 1,20,000 as its annual profits, the rate of
normal profit being 10%. The assets of the firm amount to
Rs. 14,40,000 and liabilities to Rs. 4,80,000. Find out the
value of goodwill by Capitalization method.
Total capitalized value of the firm = Actual Profit / Normal rate of return
= 1,20,000 /10 *100 = Rs. 12,00,000
Net assets of the firm = Total Assets – Liabilities
= Rs. 14,40,000 – Rs. 4,80,000 = 9,60,000
Goodwill = total capitalized value – net assets
= Rs. 12,00,000 – Rs. 9,60,000 = Rs. 2,40,000

19. Application of Accounting Standard (AS) 10
1. Goodwill amount paid privately by new partner
to old partners.
2. Goodwill amount paid in cash fully by the new
partner.
3. Goodwill amount paid partly by the new
partner.

20. Goodwill amount paid in cash fully by the new partner.
Particulars Debit Credit
Old partners’ capital a/c Xxx
To Goodwill a/c Xxx
(Goodwill given in B/S written off in old partner)
Cash a/c Xxx
To Goodwill a/c Xxx
(Amount brought in by new partner for goodwill)
Goodwill a/c Xxx
To Old partners’ capital a/c Xxx
(Goodwill shared in the sacrificing ratio)
Old partners’ capital a/c Xxx
To Cash a/c Xxx
(Goodwill amount withdrawn by old partners.)

21. Goodwill amount paid partly by the new partner
Particulars Debit Credit
Old partners’ capital a/c Xxx
To Goodwill a/c Xxx
(Goodwill given in B/S written off in old partner)
Cash a/c Xxx
To Goodwill a/c Xxx
(Part cash brought in by new partner for goodwill)
Goodwill a/c Xxx
New partners’ capital a/c Xxx
To Old partners’ capital a/c xxx
(Part cash brought in for goodwill, shared in
sacrificing ratio.)

22.  Problem No 1. X and Y are partners sharing the result of
the business in the ratio of 5:3. Z is admitted and asked to
bring Rs. 64,000 as goodwill and half of the combined
capitals of X and Y after making necessary adjustments:
Labilities ` Assets `
Creditors 8000 Cash 6000
Capital accounts Sundry assets 1,54,000
X 1,20,000 Profit loss 40,000
Y 40,000
Reserve fund 32,000
2,00,000 2,00,000
Revaluation account prepared on this date showed a loss of Rs. 11,200.
Calculate the amount of capital to be brought by Z

23. Solution:
Computation of the Capital Balance of X and Y
in the New Firm
Particulars X Y Particulars X Y
To P & L loss 25,000 15,000 By Balance b/d 1,20,000 40,000
To Revaluation 7,000 4,200 By Reserve Fund 20,000 12,000
To Balance c/d 1,48,000 56,800 By Z’s Capital 40,000 24,000
1,80,000 76,000 1,80,000 76,000
Total capital of X and Y in the new firm: 1,48,000 + 56,800
= 2,04,800
Z’s Capital is half of the combined capitals of X and Y =
2,04,800 x ½ = Rs. 1,02,400

24.  Problem No 2. X and Y were partners sharing profits in
the ratio of 5 : 4 respectively. On 1st April, 2012 they
admitted Z as a new partner; all the partners agreeing to
share future profits equally. On the date of admission of the
new partner, there was a goodwill account in the old firm’s
ledger showing a balance of Rs 18,000. The current value
of firm’s goodwill was placed at Rs 36,000. Z paid Rs
50,000 by way of his capital. He also paid an appropriate
amount for his share of goodwill. X and Y wrote off the
goodwill account before Z’s admission.

25. Pass the necessary journal entries:

27.  Problem No 3. The following was the Balance Sheet of A, B and C
sharing profits and losses in the proportion of 6, 5 and 3
respectively
They agreed to take D into partnership and give 1/8th share of profits on the following terms:
(1) That D brings in Rs 48,000 as his capital.
(2) That furniture be written down by Rs 2,760 and stock be depreciated by 10%.
(3) That provision of Rs 3,960 be made for outstanding repair bills.
(4) That the value of land and buildings be written up to Rs 1,95,300.
(5) That the value of goodwill be fixed at Rs 28,000 and an adjustment entry be passed for D’s share of goodwill.
(6) That the capitals of A,B and C be adjusted on the basis of D’s capital by opening current accounts.

28. Give the necessary journal entries, and the balance sheet of the
firm as newly constituted.

31.  Problem No 4. L and R are equal partners. Their Balance sheet on
31.12.2019 was as follows:
Liabilities ` Assets `
Creditors 20000 Cash at bank 10000
Capital Debtors 20000
L 50,000 Stock at cost 15,000
R 30000 Investment (cost
Rs. 15000)
12,000
Fixed assets 43,000
1,00,000 1,00,000
On the above date, N was admitted on the following conditions:
1. The new profit sharing will be 5:3:2
2. Create 10% provision for discount on creditors.
3. Write off `. 2,000 as bad debts and create 5% provision for doubtful doubtful
debts.
4. Value stock at its market value of `. 20,000
5. Depreciate fixed assets by 15%
6. Record investments at its cost
7. N to bring `. 20,000