The document discusses the reconstitution of a partnership firm through the admission of a new partner. Key points include: - A new partner can only be admitted with consent of existing partners, unless otherwise agreed. This reconstitutes the partnership with a new agreement. - The new partner acquires rights to share assets and profits. Other adjustments need to be made such as new profit sharing ratios, sacrificing ratios, goodwill valuation, revaluation of assets/liabilities, distribution of reserves, and adjustment of partner capitals. - Goodwill is the value of future excess profits, and is calculated using methods like average profits, super profits, or capitalization. It must be adjusted upon admission of a new partner.

1. RECONSTITUTION OF A
PARTNERSHIP FIRM
ADMISSION OF A PARTNER

2. Modes of Reconstitution of a
Partnership Firm
• Admission of a new partner
• Change in the profit sharing ratio among the
existing partners
• Retirement of an existing partner
• Death of a partner

3. ADMISSION OF A PARTNER
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

4. 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.

5. 1. SACRIFICING RATIO
The ratio in which the old partners agree to
sacrifice their share of profit in favour of the
incoming partner is called sacrificing ratio.
Share Sacrificed= Old share – New Share

6. 2. 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.
The new ratio in which all the partners (including the new partner
admitted) share the profits/losses of the firm is called NPSR.
• New Profit Sharing Ratio = Old Share-Sacrificed Share
OR
• New Profit Sharing Ratio = Old Ratio – Sacrifice Ratio

7. 3. GOODWILL
• Goodwill is the value of the reputation of a firm
in respect of the profits expected in future over
and above the normal profits.
• Goodwill can be defined as “the present value of
a firm’s anticipated excess earnings” or as “the
capitalised value attached to the differential
profit capacity of a business”.
• Any firm that earns normal profit or incurs a loss
has no goodwill.
• The capacity of a business to earn profits in
future is basically what is meant by the term
Goodwill

8. Factors Affecting the Value of
Goodwill
• Nature of business
• Location
• Efficiency of management
• Market situation
• Special advantages

9. Need For Valuation Of Goodwill
Need for valuation of goodwill arises at the time of
sale of a business. But, in the context of a partnership
firm it may also arise in the following circumstances:
1. Change in the profit sharing ratio amongst the
existing partners;
2. Admission of new partner;
3. Retirement of a partner;
4. Death of a partner; and
5. Dissolution of a firm involving sale of business as a
going concern.
6. Amalgamation of partnership firms.

10. Methods of Valuation Of Goodwill
The important methods of valuation of goodwill
are as follows:
1. Average Profits Method
2. Super Profits Method
3. Capitalisation Method

11. AVERAGE PROFITS METHOD
The goodwill is valued at agreed number of ‘years’
purchase of the average profits of the past few
years
1. Average Profits=
Total profits for the given years/ No. of years
2. Goodwill =
Average profits x no. of years of purchase

12. SUPER PROFITS METHOD
Under this method, goodwill is calculated by multiplying super
profits with the given number of years of purchase.
Super profit – The excess of actual earnings of the business over
the normal earnings.
CAPITALISATION METHOD
Under this method, average normal profit is Capitalised on the
basis of the normal rate of returns and from such Capitalised
value, the net asset (i.e. capital employed) is subtracted to
ascertain goodwill.

13. 4. REVALUATION OF ASSETS AND
LIABILITIES
It Is an account prepared to record the increase/decrease in the
value of Assets and Liabilities and to find out the profit or loss
on revaluation, which is transferred to the old partners’ capital
a/c in their old ratio.
• It is a nominal account.
• Increase in asset and decrease in liability is a profit- Credit
side of revaluation a/c
• Decrease in asset and increase in liability is a loss- Debit side
of revaluation a/c.

14. (i) For increase in the value of an asset
Asset A/c Dr.
To Revaluation A/c (Gain)
(ii) For reduction in the value of an asset
Revaluation A/c Dr.
To Asset A/c (Loss)
(iii) For appreciation in the amount of a liability
Revaluation A/c Dr.
To Liability A/c (Loss)
(iv) For reduction in the amount of a liability
Liability A/c Dr.
To Revaluation A/c (Gain)
The journal entries recorded for revaluation of assets and
reassessment of liabilities are as follows:

15. (v) For an unrecorded asset
Cash A/c Dr.
To Revaluation A/c (Gain)
(vi) For an unrecorded liability
Revaluation A/c Dr.
To Cash A/c (Loss)
(vii) For transfer of gain on Revaluation if credit balance
Revaluation A/c Dr.
To Old Partners Capital A/c (Old ratio)
(viii) For transferring loss on revaluation
Old partner’s Capital A/c Dr. (Individually) (Old ratio)
To Revaluation A/c

16. Format
Dr. Revaluation a/c Cr.
Particulars Amount
(Rs)
Particulars Amount
(Rs)
To decrease in Value of
Assets
XXX By Increase in value of
Assets
XXX
To increase in value of
liabilities
XXX By Decrease in value of
liabilities
XXX
To unrecorded liability
brought in a/c
XXX By unrecorded asset
brought in a/c
XXX
To profit on revaluation
transferred to partners’
capital a/c (O/R)
By loss on revaluation
transferred to partners’
capital a/c (O/R)
A’s Capital a/c XXX A’s Capital a/c XXX
B’s Capital a/c XXX B’s Capital a/c XXX
XXX XXX

17. 5. ADJUSTMENT FOR
ACCUMULATED PROFITS/LOSSES
• These are usually in the form of general reserve,
reserve fund and/or Profit and Loss Account
balance.
• The new partner is not entitled to have any
share in such accumulated profits.
• These are distributed among the old partners
only by transferring it to their capital accounts in
old profit sharing ratio.

18. JOURNAL ENTRIES:
• For distribution of reserves :
General reserve/reserve fund a/c Dr.
To old partners’ Capital a/c
• For distribution of accumulated profits
Profit/Loss a/c Dr.
To old partners’ capital a/c
• For Distribution of accumulated losses:
Old partners’ capital a/c Dr.
To profit/loss a/c

19. 6. ADJUSTMENT OF CAPITALS
At the time of admission, the partners agree that their
capitals should also be adjusted so as to be
proportionate to their profit sharing ratio. In such a
situation, if the capital of the new partner is given, the
same can be used as a base for calculating the new
capitals of the old partners.
The capitals ascertained should be compared with
their old capitals after all adjustments and then:
1. The partner whose capital falls short, will bring in
the necessary amount to cover the shortage and
2. The partner who has a surplus, will withdraw the
excess amount of capital.

20. ACCOUNTSTO BE PREPARED
1. REVALUATION A/C
2. PARTNERS’ CAPITAL A/C- This contains :
• Capital balance of old partners
• Profit/loss on revaluation
• Undistributed reserves and Profit/loss a/c appearing in the
balance sheet
• Capital brought in by new partner :
If capital brought in cash :
Cash/Bank a/c Dr.
To new partners’ capital a/c
If capital brought in the form of assets :
Concerned asset a/c Dr.
To new partners’ capital a/c

21. • Distribution of Goodwill (based on the cases)
• Balancing of Capital a/c
3. NEW BALANCE SHEET
This will contain all the assets and liabilities of the firm at their
revalued values. (old balance sheet values + adjustments)

22. HIDDEN GOODWILL
Sometimes the value of goodwill is not given at
the time of admission of a new partner. In such a
situation it has to be inferred from the
arrangement of the capital and profit sharing
ratio.