12th Text Book Book Keeping & Accountancy

1. 1
Ajay J. Gursale M.Com.B.Ed.
Chapter : 3
ADMISSION OF PARTNER
INDEX
Sr.No. Content
1 Meaning
2 Need
3 Profit Sharing Ratio
4 Adjustment of capital
5 Sacrifice Ratio
6 Goodwill
7 Methods of valuation of goodwill
8 I. Average Profit Method
9 II. Super Profit Method
10 Journal Entries
a. Extra Premium Method (Goodwill brought in cash)
b.Valuation Method ( When goowill raised by firm.)
c. Adjustment of accumulated Profit & Loss/Reserves.
d. Revaluation of assets & liabilities.
ADMISSION OF PARTNER
Meaning :
The procedure of admitting a new partner into the
existing partnership firm as per the terms & conditions of
partnership deed is called as ‘admission of partner.’
Need :
1. To secure additional capital for expanding
business activities.
2. To secure additional managerial skill to develop
efficiency of the business.

2. 2
Ajay J. Gursale M.Com.B.Ed.
New Profit Sharing Ratio
New Profit Sharing Ratio is calculated as follows :
Assume the total profit of the firm Re.1/-
STEP 1
Find out balance of 1 .
Balance of 1 (Remaining Share) = 1 - Incoming Partner Share
STEP 2
Calculation of New Profit Sharing Ratio.
New Ratio = Old Ratio X Balance of 1.
FOR EXAMPLE :
Om & Jay are partner their profit sharing ratio is 1 : 1 (Equal).
They decided to admit Jagdish in the firm for 1/4 th share in the future
profits. Calculate New Profit Sharing Ratio of Om, Jay & Jagdish.
Solution :
1.Balance of 1 = 1 - Share of Jagdish (New Partner)
= 1 - 1/4
Balance of 1 = 3/4
2.New Ratio of all partners = Old Ratio x Balance of 1
Om’s New Raio = 1/2 x 3/4 = 3/8
Jay’s New Ratio = 1/2 x 3/4 = 3/8
Jagdish New Raio = 2/2 x 1/4 = 2/8
Hence New Profit Sharing Ratio of Om Jay Jagdish is 3 : 3 : 2.

3. 3
Ajay J. Gursale M.Com.B.Ed.
ADJUSTMENT OF CAPITAL
Adjustment of Capital as per new profit sharing ratio & his capital :
Formula :
1.Total Capital = Reciprocal of new Partner’s Share X New Partner’s Capital
of the Firm
2.Old Partner’s Capital = Total Capital X New Ratio of Partner
For Example :
Om & Jay are partner their profit sharing ratio is 1 : 1 (Equal).
They decided to admit Jagdish in the firm for 1/4 th share in the future profits.
IF JAGDISH brought CAPITAL = Rs.25000 /-
ANSWER :
New Profit Sharing Ratio As per Above calculation :
OM, JAY & JAGDISH 3 : 3 : 2 respectively.
Reciprocal of Jagdish’s Capital 1 = 4
4 1
1.Total Capital = Reciprocal of new Partner’s Share X New Partner’s Capital
of the Firm
= 4 X 25000
1
Total Capital = Rs.1,00,000/-
Of the firm
a) Om’s New Capital = Rs. 1,00,000 X 3
8
Om’s New Capital = Rs. 37,500 /-
b) Jay’s New Capital = Rs. 37,500 /-

4. 4
Ajay J. Gursale M.Com.B.Ed.
SACRIFICE RATIO.
Meaning :
The proportion in which old partners make a
sacrifice while admitting new partner in the firm is called
sacrifice ratio.
Formula : Sacrifice Ratio = Old Ratio - New Ratio
For example :
Sudhir & Budhir are partners sharing profit & losses in
the proportion 2/3 & 1/3 respectively. They decided to
admit Randhir in to partnership and agreed to share
future profit in the ratio of 3 : 1 : 1.
The Sacrifice Ratio of Sudhir & Budhir as under :
Sacrifice Ratio = Old Ratio - New Ratio
Sudhir’s Sacrifice Ratio = 2 - 3 10 - 9 = 1
3 5 15 15
Budhir’s Sacrifice Ratio = 1 - 1 5 - 3 = 2
3 5 15 15
Sacrifice Ratio of Sudhir & Budhir is 1 : 2

5. 5
Ajay J. Gursale M.Com.B.Ed.
GOODWILL
Meaning :
Goodwill is the reputation or good name of the
business expressed in terms of money.
Goodwill is the reputation of the business enterprise
which is acquired through successful operation of the
business and customer’s satisfaction.
Methods of valuation of Goodwill.
1. Average Profit Method. 2. Super Profit Method.
1.AVERAGE PROFIT METHOD :
Under this method goodwill is calculated on the basis of
number of years purchase of average profit of the firm.
For Example :
Year Profit
2001 Profit 1
2002 Profit 2
2003 Profit 3
2004 Profit 4
2005 Profit 5
Formula :
STEP 1 :
Average Profit = Profit 1 + Profit 2 + Profit 3 + Profit 4 + Profit 5
Total No. Of years
STEP 2 :
Goodwill = Average profit X No. Of years purchase

6. 6
Ajay J. Gursale M.Com.B.Ed.
2.SUPER PROFIT METHOD :
Under this method goodwill is to be valued of certain
number of years purchase of super profit of the firm.
Super Profit is calculated as under –
Given : a. Profit of previous few years
b. Capital Employed by firm
c. Normal Rate of Return ( N.R.R.)
d. No. Of years purchase
Important Note :
If Average Profit is less than Normal Profit then
goowill is Zero(0).
STEP 1 :
Average Profit = Total Profits of given years - Loss (if Given)
Total No.Of years
STEP 2 :
Normal Profit = Capital Employed by firm X N.R.R.
100
STEP 3 :
Super Profit = Average Profit - Normal Profit
STEP 4 :
Goodwill = Super Profit X No. Of years purchase

7. 7
Ajay J. Gursale M.Com.B.Ed.
JOURNAL ENTRIES FOR ADMISSION OF NEW PARTNER
DATE PARTICULARS Dr. Cr.
A] Capital Brought by new partner
1 Cash A/c Dr. xxxx
To New Partner’s Capital A/c xxxx
(Being cash brought by incoming partner
towards his capital)
2 New Partner brings asset towards his capital
Asset A/c Dr. xxxx
To New Partner’s Capital A/c xxxx
(Being asset brought by new partner
Towards his capital)
B] Treatment of Goodwill
I Extra Premium Method
a. Goodwill bring in cash & retained in the business.
Cash A/c Dr. xxxx
To Goodwill A/c xxxx
(Being goodwill brought by new partner in cash.)
2 Goodwill A/c Dr. xxxx
To Old Partner’s Capital A/c(Sacrifice Ratio) xxxx
(Being goodwill retained in the business)
b. Goodwill brought by new partner & withdrawn
by old partners.
1 Goodwill bring in cash & retained in the business.
Cash A/c Dr. xxxx
To Goodwill A/c xxxx
(Being goodwill brought by new partner in cash.)
2 Goodwill A/c Dr. xxxx
To Old Partner’s Capital A/c(Sacrifice Ratio) xxxx
(Being goodwill retained in the business)
3 Old Partner’s Captital A/c Dr. xxxx
To Cash A/c xxxx
(Being goodwill withdrawn by partners)

8. 8
Ajay J. Gursale M.Com.B.Ed.
DATE PARTICULARS Dr. Cr.
c. When new partner brings goodwill in cash &
Paid to old partners privately.
NO ENTRY
II Valuation Method
a. When new partner does not bring goodwill in
Cash but it is raised in the books of firm.
1 Goodwill A/c Dr. xxxx
To Old Partner’s Capital A/c(Sacrifice Ratio) xxxx
(Being goodwill raised in the books of firm)
Note : Goodwill appears in the new balance sheet.
b. When goodwill raised & write off.
1 Goodwill A/c Dr. xxxx
To Old Partner’s Capital A/c(Sacrifice Ratio) xxxx
(Being goodwill raised in the books of firm)
2 All Partner’s Capital A/c Dr. xxxx
To Goodwill A/c xxxx
(Being goodwill written off.)
3 When goodwill already appears in the books of
Firm.
Entry passed for the difference amount in
Revaluation A/c & Capital A/c
c Profit & Loss transferred to Capital A/c
1. Profits & Reserves transferred to capital a/c
Reserve (P & L) A/c Dr. xxxx
To Old Partner’s Capital A/c xxxx
(Being profits & reserves trf. ) (Old Ratio)
2. Losses transferred to capital a/c
Old Partner’s Capital A/c Dr. xxxx
To P & L A/c xxxx
(Being losses trf. ) (Old Ratio)

9. 9
Ajay J. Gursale M.Com.B.Ed.
DATE PARTICULARS Dr. Cr.
d. Revaluation of assets & liabilities
1 Increase in the value of asset/ Purchase of asset
Asset A/c Dr. xxxx
To Revaluation A/c xxxx
(Being increase in the value of asset.)
2 Decrease in the value of liability/Paid off liability.
Liability A/c Dr. xxxx
To Revaluation A/c xxxx
(Being decrease in the value of liability)
3 Increase in the value of liability
Revaluation A/c Dr. xxxx
To Liability A/c xxxx
(Being increase in the value of liability)
4 Decrease in the value of asset.
Revaluation A/c Dr. xxxx
To Asset A/c xxxx
(Being decrease in the value of asset)
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