What is the Admission of a Partner?
A business firm seeks new partners with business expansion being one of the driving motives. As per the Partnership Act, 1932, a new partner can be admitted into the firm with the consent of all the existing partners, unless otherwise agreed upon.
With the admission of a new partner, there is a reconstitution of the partnership firm and all the partners get into a new agreement for carrying out the business of the firm.
The following conditions led to the addition of a new partner:
- When the firm is in an expansion mode and requires fresh capital.
- When the new partners possesses expertise which can be beneficial for the business expansion of the firm.
- When the partner in question is a person of reputation and adds goodwill to the firm.
Also Read: Basic Concepts of Accounting for Partnership
The following adjustments need to be made at the time of admission of a new partner
- Calculating the new profit sharing ratio along with the sacrificing ratio.
- Accounting for goodwill.
- Revaluation of assets and liabilities.
- Adjustment of capital as per new profit sharing ratio.
With the admission of a new associate, the partnership enterprise is restructured and a new agreement is entered into; to carry on the trading concern of the enterprise. A newly added partner obtains 2 primary rights in the enterprise :
- Right to share the assets of the partnership firm
- Right to share the profits of the partnership firm
Must Read: What is Goodwill?
Treatment of Goodwill in the Admission of a Partner
A new partner is entitled to be a part of the future profits of the firm upon being added to the firm. The act of admitting new partner also leads to the reduction in the future profit sharing ratio of the existing partners. For this reason a new partner has to bring extra value apart from capital, this is known as Premium for Goodwill.
Treatment of goodwill on admission of a new partner will be based on the following conditions:
- When the amount for goodwill is paid privately
- When the amount necessary for paying the share of goodwill is brought as cash.
- When share of goodwill is not brought as cash.
Few significant points which require observation during the admission of a new partner are mentioned below :
- Sacrificing ratio
- New profit sharing ratio
- Revaluation of assets and Reassessment of liabilities
- Valuation and adjustment of goodwill
- Adjustment of partners’ capitals
- Distribution of accumulated profits (reserves)
The above mentioned is the concept that is explained in detail about the Admission of a New Partner for the Class 12 students. To know more, stay tuned to BYJU’S.