Admission of a Partner, Reconstitution of a Partnership firm Accounts Chapter, 12th, Beautiful PPT for free

1. Prepared by :- Vishwakarma Sir
Admission of a
Partner
Reconstitution of a Partnership
firm
12th Commerce HSC

2. Profit Sharing Ratio
5:3
Existing Partner
of Firm
Rahul
Ami
t
Sures
h
1/4 share in
profits
New Partner
On the admission
of a new partner,
the firm stands
reconstituted
=
+

3. • Partnership is an agreement between two or more persons for sharing the
profits of a business carried on by all or any of them acting for all
• Any change in the existing agreement amounts to reconstitution of the
partnership firm
• This result in the end of the existing agreement and a new agreement comes
into being .
Meaning Of Reconstitution

4. Modes of Reconstitution of a
Partnership Firm
New Paer
Admission of a
new partner
Change in profit
sharing ratio
Retirement of an
existing partner
Death of a partner

5. • When a firm requires additional capital or managerial help, a new partner
may be admitted
• A new partner can be admitted into the firm only with the consent of all the
existing partners unless otherwise agreed upon
Admission Of A New Partner

6. • Right to share the assets of the partnership firm (brings capital)
• Right to share the profits of the partnership firm (brings premium or goodwill)
Two Rights Of Newly
Admitted Partner

7. • New profit sharing ratio
• Sacrificing ratio
• Valuation and adjustment of goodwill
• Revaluation of assets and reassessment of liabilities
• Distribution of accumulated profits (reserves)
• Adjustment of partner's capitals
Important Points At The Time Of
Admission Of A Partner

8. • Partnership is an agreement between two or more persons for sharing the
profits of a business carried on by all or any of them acting for all
• Any change in the existing agreement amounts to reconstitution of the
partnership firm
• This result in the end of the existing agreement and a new agreement comes
into being .
New Profit Sharing Ratio

9. • When a new partner is admitted, he acquires his share in profits from the
old partners.
• Steps for calculating new PSR :-
Balance of 1 = 1 – new partner’s share
New Ratio = balance of 1 x Old Ratio
New Profit Sharing Ratio

10. Deepak & Ramesh are partners sharing profits & losses in the ratio of 3 : 2. Mahesh is
admitted to the partnership for 1/5th share in the profits. Calculate the new profit sharing
ratio.
Problem
Solution :-
Balance of 1 = 1 – 1/5 = 4/5
New PSR = Balance of 1 x old Ratio
Deepak = 4/5 x 3/5 = 12/25
Ramesh = 4/5 x 2/5 = 8/25
Mahesh = 1/5 = 5/25
Deepak : Ramesh : Mahesh = 12 : 8 : 5
Meaning Of Reconstitution

11. Problem
Solution :-
Sacrifice Ratio = Old Ratio – New Ratio
In previous question the sacrifice ratio will be
Deepak = 3/5 – 12/25 = 15/25 – 12/25 = 3/25
Ramesh = 2/5 – 8/25 = 10/25 – 8/25 = 2/25
Deepak : Ramesh = 3:2
Sacrifice Ratio
The ratio in which the old partners sacrifices or surrender their share of profit in favour of incoming partner is called sacrificing ratio.

12. • Ajay and Vijay are equal partners. They decided to admit Kapil in the firm
for 1/4th share in future profits. Calculate the new profit sharing ratio of
Ajay, Vijay and Kapil.
• Rahul and Suresh are partners sharing profits and losses in the proportion
of 2/3 and 1/3. They decided to admit Sanjeev into partnership and agreed to
share future profit in the ratio of 3:1:1. Calculate the sacrifice ratio.
Practice question's

13. • Revalue Assets and prepare a table showing changes
• Add profit or loss from revaluation of assets to partners Capital Accounts
• Calculate existing partner’s share of Goodwill
• Prepare Capital accounts of all partners
• Write off Goodwill against all partners
• Calculate new profit sharing ratio
Steps in Admitting
New Partner

14. A revaluation account is a nominal account prepared to bring the asset and
liabilities of the firm to their true values and to find out the profit or loss
arising there from.
Revaluation Account

15. Proforma of Revaluation Account
Decrease in value of Assets
Increase in value of liabilities
Capital account
(Profit on
revaluation)
xxx
xxx
xxx
Increase in the value of assets
Decrease in value of liabilities
Capital accounts (Loss on
revaluation)
xxx
xxx
xxx
xxx
xxx
Particulars Particulars
AMT AMT

16. Under this method, the total capital of the firm is calculated on the basis of the share of
new partner and the amount of capital brought by him. Capital required for each partner is
ascertained on the basis of the total capital of the firm and new profit sharing ratio. The
required amount of capital will now be compared with actual amount of capital of each partner
after all adjustment are made. If the balance is more than the required amount, the excess will be
withdrawn by partner from the firm or will transferred to their current account.
Similarly if the balance is less than the required amount of capital, the deficiency will brought by the
partners in cash or will be transferred to their current account.
Adjustment of capital on the basis of
New Partners Capital

17. • For increase in the value of assets
⚬ Asset A/c Dr
￭ To Revaluation A/c
• For decrease in the value of assets
⚬ Revaluation A/c Dr
￭ To Asset A/c
• For increase in the value of liability
⚬ Revaluation A/c Dr
￭ To Liability A/c
• For decrease in the value of liability
⚬ LiabilityA/c Dr
￭ To Revaluation a/c
Journal Entries

18. • For recording unrecorded assets
⚬ Asset A/c Dr
￭ To Revaluation a/c
• For recording unrecorded liability
⚬ Revaluation A/c Dr
￭ To Liability A/c
• For transferring profit on revaluation
⚬ Revaluation A/c Dr
￭ To Old partners capital A/c
• For transferring loss on revaluation
⚬ Old partners capital A/c Dr
￭ To Revaluation A/c

19. The incoming partner is not entitled to any share in the accumulated profit or loss
of the business appearing in the balance sheet as on the date of admission.
The balance appearing in the form of reserves or profit or loss account balance
should be transferred to the capital account of old partners in their old profit sharing
ratio.
Adjustment for reserves and other
Accumulated profits or losses

20. • For undistributed / Accumulated profits/ Reserves
⚬ Accumulated profits/Reserves A/c Dr
￭ To Old Partners Capital A/c
• For undistributed losses
⚬ Old Partners’ Capital A/c Dr
￭ To Accumulated Losses A/c

21. • Goodwill is the name, fame, reputation & image of the business which
helps the business to earn more profits.
• Valuation of Goodwill
• Average Profit Method
• Super Profit Method
Meaning of Goodwill

22. Goodwill = Average Profit x Number of years of Purchase
* Average Profit = Total Profit
Number of years
e.g:- Calculate goodwill which is valued at 2 years purchase of Average profits for the last 5
years.
The profits & Losses are as under:
Year Profit/Loss
2010 Rs. 50,000
2011 Rs. 80,000
2012 Rs. 30,000 (Loss)
2013 Rs. 40,000
2014 Rs. 60,000
Average Profit Method

23. * Average Profit = Total Profit / Number of years
= 50,000 + 80,000 – 30,000 + 40,000 +60,000
5
Average Profit = Rs. 40,000
Goodwill = Average Profit x No. of years of purchase
= 40,000 x 2
Goodwill = Rs. 80,000
Average Profit Method

24. Goodwill = Super Profit x Number of years of Purchase
Super Profit = Average Profit – Normal Profit
Average Profit = Total Profit / No of years
Normal Profit = Capital employed x NRR / 100
Super Profit Method

25. e.g Calculate goodwill which is valued at 3 years purchase of Super profits for the
last 5 years.
The profits & Losses are as under:
Year Profit/Loss
⚬ 2010 Rs 60,000
⚬ 2011 Rs 1,00,000
⚬ 2012 Rs 20,000 (Loss)
⚬ 2013 Rs 60,000
⚬ 2014 Rs 80,000
Capital employed = Rs 3,00,000
Normal Rate of Return = 12%
Super Profit Method

26. Problem
Solution :-
* Average Profit = Total Profit / Number of years
= 60,000 + 1,00,000 – 20,000 + 60,000 +80,000 / 5
Average Profit = Rs. 56,000
Normal Profit = 3,00,000 x 12/100 = 36,000
Super Profit = 56,000 – 36,000 = 20,000
Goodwill = 20,000 x 3 years = Rs 60,000
Super Profit Method

27. 1. Calculate goodwill which is valued at 3 years purchase of Average profits
for the last 5 years.
The profits & Losses are as under:
year Profit/Loss Year Profit/Loss
2012 Rs 1,00,000 2015 Rs 50,000
2013 Rs 1,20,000 2016 Rs 80,000
2014 Rs 20,000 (Loss)
2. Calculate goodwill which is valued at 2 years purchase of Super Profits.
The profits/Losses are as unders:
Year Profit/Loss Year Profit / loss
2015 Rs 60,000 2018 Rs 70,000
2016 Rs 1,00,000 2019 Rs 1,00,000
2017 Rs 30,000(L)
Practice questions

28. • Premium method
• Revaluation method
• Memorandum Revaluation Method
Methods of treatment of Goodwill