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Reconstitution of a Partnership Firm – Admission of a Partner – Class 12 Accountancy notes, important questions and MCQs

NCERT Class 12 Accountancy, chapter 2. Notes, key terms, important questions with answers and MCQs.

Chapter overview

Any change in the relationship among partners reconstitutes the firm. When a new partner is admitted, he gets a share in future profits and usually brings capital and a premium for goodwill. The old partners sacrifice a part of their share, a new profit-sharing ratio and a sacrificing ratio are calculated, assets and liabilities are revalued, and accumulated profits and reserves are distributed among the old partners.

New ratio and sacrificing ratio

The new partner's share is taken from the old partners, in the old ratio or in an agreed ratio.
Sacrificing ratio = old share − new share, for each old partner.
Example: A and B share 3:2; C is admitted for 1/5 share taken in the old ratio. New ratio = A 12/25, B 8/25, C 5/25, and the sacrificing ratio is 3:2.

Goodwill on admission

As per AS 26, goodwill is recorded only when purchased; internally generated goodwill is not shown.
The premium for goodwill brought by the new partner is credited to the old partners in the sacrificing ratio.
If the new partner does not bring premium in cash, his current or capital account is debited for his share of goodwill and old partners are credited in the sacrificing ratio.
Any existing goodwill in the books is written off among the old partners in the old ratio.

Revaluation and adjustments

A revaluation account records changes in the values of assets and liabilities; its profit or loss is shared by the old partners in the old ratio.
Accumulated profits, reserves and losses appearing in the balance sheet are distributed among old partners in the old ratio.
Partners' capitals may be adjusted in proportion to the new ratio based on the new partner's capital.

Key terms

Admission of a partner: the entry of a new partner into an existing firm
Sacrificing ratio: the ratio in which old partners give up their share of profit in favour of a new partner
Premium for goodwill: the amount brought by a new partner as compensation for sharing the firm's goodwill
Revaluation account: an account recording the profit or loss on revaluing assets and liabilities
New profit-sharing ratio: the ratio in which all partners share profits after reconstitution

Important questions with answers

What is the sacrificing ratio?2 marks

The sacrificing ratio is the ratio in which the old partners give up their share of profit in favour of the new partner. It is calculated for each old partner as old share minus new share and is used to distribute the premium for goodwill brought by the new partner.

Why is a revaluation account prepared at the time of admission?3 marks

A revaluation account is prepared because the book values of assets and liabilities may differ from their current values. Any increase or decrease up to the date of admission belongs to the old partners, so the profit or loss on revaluation is shared by them in the old ratio, and the new partner neither gains nor loses from past changes in value.

Explain the accounting treatment of goodwill, revaluation and reserves on the admission of a new partner.5 marks

When a new partner is admitted, he acquires a share in the future profits of the firm, which partly results from the goodwill built by the old partners. As per AS 26, goodwill is recorded only when purchased, so the premium for goodwill brought by the new partner in cash is credited to the old partners' capital accounts in the sacrificing ratio. If the new partner cannot bring the premium in cash, his current or capital account is debited with his share of goodwill and the old partners are credited in the sacrificing ratio. Any goodwill already appearing in the books is written off among the old partners in the old ratio. Assets and liabilities are revalued through a revaluation account: increases in assets and decreases in liabilities are credited, decreases in assets and increases in liabilities are debited, and the resulting profit or loss is transferred to the old partners in the old ratio. Accumulated profits and reserves, such as general reserve and the credit balance of the profit and loss account, are distributed among the old partners in the old ratio, while accumulated losses are debited to them. Finally, the capitals of the partners may be adjusted in the new profit-sharing ratio, with surplus amounts withdrawn or deficiencies brought in.

Quick revision

Sacrificing ratio = old − new.
Premium for goodwill to old partners in sacrificing ratio (AS 26).
Revaluation account: old partners, old ratio.
Reserves and accumulated profits to old partners in old ratio.

Exam tips

Always calculate the new ratio and sacrificing ratio first before passing entries.
Remember: revaluation profit, reserves and old goodwill belong to old partners in the old ratio.

Practice MCQs

When a new partner joins, old partners give up a share of profit in the
1. sacrificing ratio
2. gaining ratio
3. capital ratio
4. equal ratio
Show answer
Answer: (a) sacrificing ratio. They sacrifice in favour of the new partner.
Profit on revaluation at the time of admission is shared by
1. all partners in the new ratio
2. old partners in the old ratio
3. the new partner only
4. nobody
Show answer
Answer: (b) old partners in the old ratio. It relates to the period before admission.
General reserve at the time of admission is credited to
1. the new partner
2. old partners in the old ratio
3. all partners equally
4. the bank
Show answer
Answer: (b) old partners in the old ratio. It was earned before admission.
Sacrificing ratio is calculated as
1. old share − new share
2. new share − old share
3. old share + new share
4. new share ÷ old share
Show answer
Answer: (a) old share − new share. For each old partner.
Premium for goodwill brought by a new partner is credited to old partners in the
1. old ratio
2. sacrificing ratio
3. new ratio
4. capital ratio
Show answer
Answer: (b) sacrificing ratio. They compensate for their sacrifice.
As per AS 26, goodwill can be recorded in the books only when it is
1. self-generated
2. purchased
3. estimated
4. agreed by partners
Show answer
Answer: (b) purchased. Internally generated goodwill is not recorded.
A and B share 3:2. C is admitted for 1/5 share taken in the old ratio. The new ratio is
1. 12:8:5
2. 3:2:1
3. 2:2:1
4. 6:4:5
Show answer
Answer: (a) 12:8:5. A = 3/5 × 4/5 = 12/25, B = 8/25, C = 5/25.
C brings ₹10,000 as his share of goodwill; A and B sacrifice in 3:2. A's account is credited with
1. ₹5,000
2. ₹4,000
3. ₹6,000
4. ₹10,000
Show answer
Answer: (c) ₹6,000. 10,000 × 3/5.

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Written by Kundali IQ from standard, well-established facts to help with revision. This is not an official NCERT publication; always read your textbook too.