Reconstitution of a Partnership Firm

What is the Reconstitution of a Partnership Firm?

Partnership is an agreement between two or more people for sharing the gains of a trade carried by all or any one of them who is acting for all. Any change in the current agreement is called as reconstitution of the partnership firm.

SACRIFICING RATIO

(A) MEANING

It is the ratio in which old partners surrender a part of their share in favour of the new partner.

(B) RELATED PERSONS

Sacrificing ratio is related to old partners

(C) FORMULA

Sacrificing ratio = Old Ratio – New Ratio

NEW PROFIT SHARING RATIO

(A) MEANING

It is the ratio in which all partners including new partner will share the future profits and losses.

(B) RELATED PERSONS

New Profit Sharing ratio is related to all partners including new partner

(C) FORMULA

New Profit Sharing ratio = Old Ratio – Sacrificing Ratio

What is Admission of a Partner?

When a current partnership company does well in the business and wants to expand, they require organisational assistance or additional capital. Therefore, they include new individual as their partner. This inclusion of new partners to the existence of a business is known as the admission of a partner.

Partnership is :

  • An agreement between 2 or more people (also known as partners) for sharing the gains of a trading concern borne by all or one of them acting for all. Any difference in the current agreement leads to reconstitution of the partnership firm leads to an end of the existing agreement.
  • The partners normally resort to reconstitution of the enterprise in diversified methods such as a change in profit sharing ratio, admission of a new partner, decease or insolvency of a partner, retirement of a partner

The above mentioned is the concept that is explained in detail about Reconstitution of a Partnership Firm – Admission of a Partner for the class 12 students. To know more, stay tuned to BYJU’S.

3-4 MARKS QUESTIONS

Q.1- WHAT IS REVALUATION ACCOUNT? WHY IS IT PREPARED AT THE TIME OF ADMISSION OF A NEW PARTNER?

ANSWER:

(A) MEANING & NATURE OF REVALUATION ACCOUNT

  • Revaluation A/c is prepared for revaluation of assets and reassessment of liabilities at the time of reconstitution of partnership. This account is also known as P&L Adjustment A/c.
  • It is a Nominal Account in nature.
  • There is profit in case of a credit balance and loss in case of a debit balance.

(B) REVALUATION ACCOUNT IS PREPARED FOR VARIOUS PURPOSES:

i) TO REVALUE THE ASSETS AND LIABILITIES OF THE FIRM

  • Revaluation account is prepared to record the change in the value of assets and liabilities of the firm at the time of admission of a partner.

ii) TO DISTRIBUTE PROFIT OR LOSS (IF ANY) AMONG THE OLD PARTNERS

  • The net effect of revaluation is either profit or loss.
  • Profit or Loss on revaluation is distributed among the old partners in their old profit sharing ratio.
  • A new partner is not entitled to get a share of revaluation profit as it is the outcome of investment, patience, and initiative of old partners.

1 MARK QUESTIONS

Q.1- WHAT IS MEANT BY RECONSTITUTION OF A PARTNERSHIP FIRM?

ANS: Reconstitution of partnership means a change in existing agreement i.e. Change in mutual terms and conditions among the partners.

Q.2- STATE ANY TWO OCCASIONS ON WHICH A FIRM CAN BE RECONSTITUTED?

ANS:(i) Change in profit sharing ratio among the existing partner;

(ii) Admission of a new partner.

Q.3- WHAT IS MEANT BY CHANGE IN PROFIT-SHARING RATIO?

ANS: Change in profit-sharing ratio means a change in the ratio in which existing partners will share profits and losses in the future.

MULTIPLE CHOICE QUESTIONS

Q.1-New profit sharing ratio is calculated ____________:

a. Old ratio-gaining ratio

b. Gaining ratio-old ratio

c. Old ratio-sacrificing ratio

d. Sacrificing ratio-old ratio

Q.2-New partner may acquire his share from old partners through any of the ways:

a. In old profit-sharing ratio

b. In a particular ratio

c. In a surrendered ratio

d. All of the above

Q.3- It is necessary to determine ______ during the Admission of a new partner.

a. Gaining ratio

b. Sacrificing ratio

c. New profit sharing ratio

d. Both (b) & (c)

ANSWER KEY

1-c, 2-d, 3-d.

The above mentioned is the concept that is explained in detail about the Reconstitution of a Partnership Firm – Admission of a Partner for the class 12 students. To know more, stay tuned to BYJU’S.

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