Reconstitution of a Partnership Firm – Admission of a Partner Class 12

Accountancy is one of the major parts of doing or handling a business. There are a lot of accounting principles and methods that one needs to be familiar with. Class 12th accountancy accurately sheds light on different aspects of accountancy. The 12th standard accountancy is divided into three different books: partnership, companies, and management accounting concepts.  The partnerships book carries the most weightage and teaches many important aspects of accounting principles in a partnership firm. Here in this blog, we have summarised the notes for the 3rd chapter, i.e. Reconstitution of a Partnership Firm – Admission of a Partner Class 12. 

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Reconstitution of Partnership Firm

Before moving forward with the admission of a partner class 12,we must know that during reconstitution of a partnership firm, it is important to understand what actually is reconstitution of a partnership firm. 

Partnership is defined as the agreement between two or more people sharing profits or losses in a business carried by all of them or anyone acting for all. Reconstitution of a partnership firm is defined as a change in the current partnership agreement. 

Reconstitution of a firm happens under the following circumstances-

• Admission of a partner
• Change in profit sharing ratio
• Retirement/Death of a partner

In this blog we will talk about admission of a partner

Admission of a New Partner

Moving forward with our notes on admission of a partner class 12, we look at what is the admission of a new partner. As per the companies act, 1932 a new partner can be permitted into an existing partnership if agreed by all the other existing partners. As the new partner enters the firm, the partnerships agreement needs to be revised which leads to the reconstitution of the partnership firm. 

Reasons for Admission of a New Partner

There is always a reason for the admission of a new partner. Some of the probable reasons are mentioned below. 

• The new partner has a specific skillset which is required by the firm.
• Firm requires fresh capital.
• The new partner is a person of reputation and will likely add to the goodwill of the firm.

Accounting Adjustments at the Time of Admission of a Partner

Certain accounting adjustments need to be made when there is an admission of a new partner in a firm. 

• Revaluation of assets and liabilities
• Calculation of new profit sharing ratio as well as the sacrificing ratio
• Adjustments of capital according to the new profit sharing ratio
• Accounting for goodwill

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Revaluation of Assets and Liabilities

Revaluation of assets and reassessment of liabilities is defined as the change in the value of assets or liabilities at the time of admission of a partner according to our notes on the chapter admission of a partner class 12. In order to find out the change in the value of assets and liabilities, a revaluation account is prepared. 

However, from an examination point of view, journal entries for revaluation of assets and liabilities are more important than revaluation accounts.

Journal entries for revaluation of assets and liabilities are as follows- 

• Increase in value of asset- 
  Asset A/C Dr, Revaluation A/C Cr

• Decrease in value of asset- 
  Revaluation A/C Dr, Asset A/C Cr

• Increase in amount of liabilities- 
  Revaluation A/C Dr, Liabilities A/C Cr

• Decrease in amount of liabilities- 
  Liabilities A/C Dr, Revaluation A/C Cr

• Profit on Revaluation 
  Revaluation A/C Dr, Old partners capital A/C Cr

• Loss on Revaluation-  
  Old partners capital A/C Dr, Revaluation A/C Cr

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New Profit Sharing Ratio

With the admission of a partner class 12, there is always a new profit sharing ratio. New profit sharing ratio is defined as the profit sharing ratio decided amongst all the partners after the admission of a new partner into the firm. 

New profit sharing ratio= Old ratio – Sacrificing ratio

In this formula the sacrificing ratio refers to the ratio in which the old partners have decided to sacrifice their profits in favour of the new partner entering the firm. 

Sacrificing Ratio= Old ratio – New Ratio

Adjustments of capital according to the new profit sharing ratio

During the admission of a new partner, the existing partners may decide their capitals to be adjusted as proportionate to their profit sharing ratio.

There are two ways for adjusting the capital of partners-

• Adjustment of old partners capital on the basis of incoming partner’s capital.

In order to adjust capital on the basis of incoming partner’s capital you need to calculate total capital of the firm on the basis of capital of new partner in the firm. After that you need to calculate the new capital of each partner and ascertain the present capital of partners. 

• Deciding the new capital of the partners on the basis of combined capital of old partners

For this method, you need to calculate adjusted capital of old partners and then calculate total capital of new firm and then calculate the total capital of new partners.

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Accounting for Goodwill

During the admission of a new partner, the profit sharing ratio of the new partner is equal to the sacrificing ratio of old partners. The amount that the new partner pays to old partners in order to compensate for this sacrifice is called as goodwill according to our notes on the chapter admission of a partner class 12.

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