What is the Admission of a Partner?
Admission of a new partner is the inclusion of a new partner as an associate or partner to an existing enterprise is known as an admission of a partner. For the right to share the profit of the partnership firm, the new partner is required to bring some amount which is known as a premium or his share of goodwill.
Also Read: Basic Concepts of Accounting for Partnership
When an enterprise requires additional capital or organisational assistance or both for the growth of its trading concern, a new partner may be admitted to extending its current resources. With accordance to the Partnership Act 1932, a new partner can be admitted into the enterprise only with the agreement of all the existing partners until and unless otherwise consented upon.
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
For the authority to obtain a share in the assets and profits of the partnership enterprise, the partner brings the consented amount of capital either in kind or in cash.
Moreover, in the case of an established enterprise which may be earning more gains than the normal rate of return on its capital the new partner is needed to fund some supplement amount which is called as goodwill or premium. This is done mainly to reimburse the current partners for loss of their share in the super-profits of the firm.
Must Read: What is Goodwill?
Treatment of Goodwill in the Admission of a Partner
New partner brings in some amount as his share of Goodwill or Premium to repay the existing partners for the loss of their share in the future profits of the enterprise. Therefore, at the time of admission of a partner, there are following two ways to treat goodwill. Namely,
- Premium Method
- Revaluation Method
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.