Class Accountancy English

UNIT . Introduction . Adjustments required at the time of admission of a partner . Distribution of accumulated profits, reserves and losses .

Revaluation of assets and liabilities . New profit sharing ratio and Sacrificing ratio . Adjustment for goodwill . Adjustment of capital on the basis of new profit sharing ratio Contents The following points are to be recalled before learning admission of a partner:  Meaning and features of partnership firm  Partnership deed  Partners’ capital accounts  Valuation of goodwill Points to recall To enable the students to  Understand the accounting treatment at the time of admission of a partner  Prepare revaluation account, capital accounts and balance sheet of the firm after admission of a partner.

Learning objectives . Introduction Student activity . Assume you are a partner in a firm. You are going to admit a new partner into your firm.

Think of any five agreements that you may want to include in your partnership deed. A person may join as a new partner in an existing partnership firm. This is called admission of a partner. The purpose of admission of a new partner may be to raise additional capital for expansion of business or managerial skill of the new partner or both.

Generally, the new partner has to contribute capital to the firm and thereby he / she acquires the right to share the future profits and the assets of the firm. On admission of a new partner, the firm is reconstituted with a new agreement and the existing agreement comes to an end. According to Section ( ) of the Indian Partnership Act, , subject to contract between the partners no person shall be introduced as a partner into a firm without the consent of all the existing partners. .

Adjustments required at the time of admission of a partner On admission, the new partner may bring capital in cash or in kind or both. The following journal entry is passed to record the capital brought in. Journal entry Date L.F. Debit Credit Cash or Bank A/c Assets A/c To Partner’s capital A/c On the admission of a partner, generally there is a change in the mutual rights of the partners.

The new partner becomes liable for all the acts which are carried out by the firm from the date of his / her admission into the firm. Hence, the accumulated profits, losses and reserves before admission are to be distributed to the existing partners. Similarly, assets and liabilities are to be revalued and the profit or loss on revaluation is to be distributed to the existing partners. The following adjustments are necessary at the time of admission of a partner: .

Distribution of accumulated profits, reserves and losses . Revaluation of assets and liabilities . Determination of new profit-sharing ratio and sacrificing ratio . Adjustment for goodwill .

Adjustment of capital on the basis of new profit sharing ratio (if so agreed) . Distribution of accumulated profits, reserves and losses Profits and losses of previous years which are not distributed to the partners are called accumulated profits and losses. Any reserve and accumulated profits and losses belong to the old partners and hence these should be distributed to the old partners in the old profit sharing ratio. Reserves include general reserve, reserve fund, workmen compensation fund and investment fluctuation fund.

Incase of workmen compensation fund, the excess amount after providing for anticipated claim is the accumulated profit to be transferred. Following are the journal entries to be passed: (a) For transferring accumulated profit and reserves Journal entry Date L.F. Debit Credit Profit and loss appropriation A/c General reserve A/c Reserve fund A/c Workmen compensation fund A/c Investment fluctuation fund A/c To Old partners’ capital / current A/c (in the old ratio) (b) For transferring accumulated loss Journal entry Date L.F. Debit Credit Old partner’s capital / current A/c ToProfit and loss A/c (in old ratio) Investment fluctuation fund Investment fluctuation fund is created out of profit to adjust the reduction in the market value of the investments.

If the market value of the investments is greater than or equal to the book value, then, the entire investment fluctuation fund is transferred to the old partners’ capital account in old profit sharing ratio. If the market value of the investments is less than the book value, then the difference is to be subtracted from the investment fluctuation fund and the balance of investment fluctuation fund is to be transferred to the old partners’ capital account in old profit sharing ratio. Illustration Mala and Vimala were partners sharing profits and losses in the ratio of : . On .

. , Varshini was admitted as a partner. On the date of admission, the book of the firm showed a reserve fund of ` , . Pass the journal entry to distribute the reserve fund.

Journal entry Date L.F. Debit Credit Reserve fund A/c , March To Mala’s capital A/c ( , x / ) To Vimala’s capital A/c ( , x / ) (Reserve fund transferred to old partners’ capital account in the old profit sharing ratio) Illustration Kavitha and Radha are partners of a firm sharing profits and losses in the ratio of : . They admit Deepa on . .

. On that date, their balance sheet showed debit balance of profit and loss account being accumulated loss of ` , on the asset side of the balance sheet. Give the journal entry to transfer the accumulated loss on admission. Journal entry Date L.F.

Debit Credit Kavitha’s capital A/c , January Radha’s capital A/c To Profit and loss a/c , (Accumulated loss transferred to old partners’ capital account in the old profit sharing ratio) Illustration Rathna Kumar and Arockia Das are partners in a firm sharing profits and losses in the ratio of : . Their balance sheet as on 31st March, is as follows: Liabilities Assets Capital accounts: Buildings Rathna Kumar Plant , Arockia Das , , Furniture Profit and loss appropriation A/c Debtors , General reserve , Stock , Workmen compensation fund , Cash at bank , Sundry creditors , , , , David was admitted into the partnership on . . .

Pass journal entry to distribute the accumulated profits and reserve on admission. Journal entry Date L.F. Debit Credit Profit and loss appropriation A/c April General reserve A/c , Workmen compensation fund A/c , To Rathna Kumar’s capital A/c ( , x / ) , To Arockia Das’s capital A/c ( , x / ) , (Accumulated profit and reserve transferred to old partners’ capital account in the old profit sharing ratio) . Revaluation of assets and liabilities When a partner is admitted into the partnership, the assets and liabilities are revalued as the current value may differ from the book value.

Determination of current values of assets and liabilities is called revaluation of assets and liabilities. The reasons for revaluation of assets and liabilities are as follows: (i) To give a true and fair view of the state of affairs of the firm and (ii) To share the gain arising from the revaluation of assets and liabilities as it is due to the old partners. There are two ways in which the revaluation of assets and liabilities may be dealt with in the accounts. (a) Revised value of assets and liabilities are shown in the books (b) Revised value of assets and liabilities are not shown in the books .

. When revised value of assets and liabilities are shown in the books Under this method, the assets and liabilities are shown at their revised values in the books and in the balance sheet which is prepared immediately after the admission of a partner. A Revaluation account is opened to record the increase or decrease in assets and liabilities. Revaluation account is also called Profit and loss adjustment account.

It is a nominal account. Revaluation account is credited with increase in value of assets and decrease in the value of liabilities. It is debited with decrease in value of assets and increase in the value of liabilities. Unrecorded assets if any are credited and unrecorded liabilities if any are debited to the revaluation account.

The profit or loss arising therefrom is transferred to the capital accounts of the old partners in the old profit sharing ratio. If the total of the credit side of the revaluation account exceeds the total of the debit side, the difference is profit on revaluation. If the total of the debit side of the revaluation account exceeds the total of the credit side, the difference is loss on revaluation. Following are the journal entries to be passed to record the revaluation of assets and liabilities: Date L.F.

Debit Credit . For increase in the value of asset Concerned asset A/c To Revaluation A/c . For decrease in the value of asset Revaluation A/c To Concerned asset A/c . For increase in the amount of liabilities Revaluation A/c To Concerned liability A/c .

For decrease in the amount of liability Concerned liability A/c To Revaluation A/c . For recording an unrecorded asset Concerned asset A/c To Revaluation A/c . For recording an unrecorded liability Revaluation A/c To Concerned liability A/c . For transferring the balance in revaluation A/c (a) If there is profit on revaluation Revaluation A/c To Old partners’ capital A/c (individually in old ratio) (b) If there is loss on revaluation Old partners’ capital A/c (individually in old ratio) Dr.

To Revaluation A/c Format of Revaluation Account: Revaluation Account Cr. To Concerned asset A/c By Concerned asset A/c (net decrease) (net increase) To Concerned liability A/c By Concerned liability A/c (net increase) (net decrease) To Old partners’ capital A/c By Old partners’ capital A/c (profit on revaluation shared in old ratio)* (loss on revaluation shared in old ratio)* *There will be either profit or loss on revaluation. Illustration Rajesh and Ramesh are partners sharing profits in the ratio : . Raman is admitted as a new partner and the new profit sharing ratio is decided as : : .

The following revaluations are made. Pass journal entries and prepare revaluation account. (a) The value of building is increased by ` , . (b) The value of the machinery is decreased by ` , .

(c) Provision for doubtful debt is made for ` , . Journal entries Date L.F. Debit Credit Buildings A/c , To Revaluation A/c , (Appreciation in value of buildings recorded) Revaluation A/c , To Machinery A/c , To Provision for doubtful debts A/c , (Decrease in assets recorded and provision made) Revaluation A/c , To Rajesh’s capital A/c , To Ramesh’s capital A/c , (Profit on revaluation transferred) Revaluation Account Cr. To Machinery A/c , By Buildings A/c , To Provision for doubtful debts A/c , To Profit on revaluation transferred to Rajesh’s capital A/c ( / ) , Ramesh’s capital A/c ( / ) , , , , Illustration Sriram and Raj are partners sharing profits and losses in the ratio of : .

Nelson joins as a partner on 1st April . The following adjustments are to be made: (i) Increase the value of stock by ` , (ii) Bring into record investment of ` , which had not been recorded in the books of the firm. (iii) Reduce the value of office equipment by ` , (iv) A provision would also be made for outstanding wages for ` , . Give journal entries and prepare revaluation account.

Journal entries Date L.F. Debit Credit Stock A/c , April Investment A/c , To Revaluation A/c , (Increase in the value of stock and unrecorded investment accounted) ,, Revaluation A/c , To Office equipment A/c , To Outstanding wages A/c , (Reduction in the value of office equipment and provision of outstanding wages recorded) ,, Sriram’s capital A/c , Raj’s capital A/c , To Revaluation A/c , (Loss on revaluation transferred) Revaluation Account Cr. To Office equipment A/c , By Stock A/c , To Outstanding wages A/c , By Investment A/c , By Loss on revaluation transferred to Sriram’s capital A/c ( / ) , Raj’s capital A/c ( / ) , , , , Illustration Raghu and Sam are partners in a firm sharing profits and losses in the ratio of : . Their balance sheet as on 31st March, is as follows: Liabilities Assets Capital accounts: Machinery Raghu , Furniture , Sam , Stock , Sundry creditors Debtors , Less: Provision for doubtful debts , Bank , , , , Prakash is admitted on .

. subject to the following conditions: (a) He has to bring a capital of ` , (b) Machinery is valued at ` , (c) Furniture to be depreciated by ` , (d) Provision for doubtful debts should be increased to ` , (e) Unrecorded trade receivables of ` , would be brought into books now Pass necessary journal entries and prepare revaluation account and capital account of partners after admission. Journal entries Date L.F. Debit Credit Bank A/c , April To Prakash’s capital A.c , (Capital brought by Prakash) ,, Revaluation A/c , To Machinery A/c , To Furniture A/c , To Provision for doubtful debts A/c , (Depreciation on machinery and furniture and provision made for doubtful debts adjusted) ,, Trade receivables A/c , To Revaluation A/c , (Unrecorded trade receivables recorded) ,, Raghu’s capital A/c , Sam’s capital A/c , To Revaluation A/c , (Loss on revaluation transferred to capital accounts) Revaluation Account Cr.

To Machinery To Furniture To Provision for bad debts , , , By Trade receivables A/c By Loss on revaluation transferred to Raghu’s capital A/c ( / ) Sam’s capital A/c ( / ) , , , , , , Capital Account Cr. Date Ragu Sam Prakash Date Ragu Sam Prakash To Revaluation A/c , , - By Balance b/d , , - To Balance c/d , , , By Bank - - , , , , , , By Balance b/d , , , Illustration Anand and Balu are partners in a firm sharing profits and losses in the ratio of : . Their balance sheet as on 31st March, is as follows: Liabilities Assets Capital accounts: Land , Anand , Stock , Balu , Debtors Sundry creditors Cash in hand , Profit and loss A/c , , , , Chandru is admitted as a new partner on . .

by introducing a capital of ` , for / share in the future profit subject to the following adjustments: (a) Stock to be depreciated by ` , (b) Provision for doubtful debts to be created for ` , . (c) Land was to be appreciated by ` , Prepare revaluation account and capital account of partners after admission. Revaluation Account Cr. To Stock To Provision for doubtful debts To Profit on revaluation transferred to Anand’s capital A/c ( / ) Balu’s capital A/c ( / ) , , , , , By Land A/c , , , Capital Account Cr.

Anand Balu Chandru Anand Balu Chandru To Balance c/d , , By Balance b/d , - By Bank A/c - - By Revaluation A/c , , - By Profit and loss A/c , , - , , , , By Balance b/d , , Student activity . Whole class game: Change your position One student says a transaction. If that transaction has the effect of revaluation gain, other students should stand up and vice versa. Examples: When one student says depreciation of buildings, others should sit down.

When one student says furniture revaluation upwards, others should stand up. It can also be played in groups or pairs. . .

When revised values of assets and liabilities are not shown in the books Under this method, the assets and liabilities are shown at their original values and not at the revised values in the books and in the balance sheet which is prepared immediately after the admission of a partner. The net result of revaluation is adjusted through the capital accounts of the partners. A Memorandum revaluation account which is a temporary account is opened when the revised values are not to be shown in the books of accounts. .

New profit sharing ratio and sacrificing ratio . . New profit sharing ratio It is necessary to determine the new profit sharing ratio at the time of admission of a partner because the new partner is entitled to share the future profits of the firm. New profit sharing ratio is the agreed proportion in which future profit will be distributed to all the partners including the new partner.

If the new profit sharing ratio is not agreed, the partners will share the profits and losses equally. . . Sacrificing ratio The old partners may sacrifice a portion of the share of profit to the new partner.

The sacrifice may be made by all the partners or some of the partners. Sacrificing ratio is the proportion of the profit which is sacrificed or foregone by the old partners in favour of the new partner. The purpose of finding the sacrificing ratio is to share the goodwill brought in by the new partner. The share sacrificed is calculated by deducting the new share from the old share.

Share sacrificed = Old share - New share Sacrificing ratio = Ratio of share sacrificed by the old partners Share of the new partner is the sum of shares sacrificed by the old partners. Tutorial note: When the new profit sharing ratio is not given in the problem, it is to be calculated based on the information given in the problem. Calcualtion of new profit sharing ratio and sacrificing ratio New ratio given New ratio not given Share sacrificed given Proportion of share sacrificed given Proportion of share sacrificed not given One partner sacrifices More than one partner sacrifices Proportion on old partner’s share Proportion on new partner’s share Unequal Equal Unequal Equal Unequal Equal Sometimes an existing partner may also gain in share of profit on admission of a partner when the new share is greater than the old share. In this case, the gaining partner has to compensate the sacrificing partners to the extent of his share in the total goodwill of the firm.

Calculation of sacrificing ratio and new profit sharing ratio under different situations . When new profit sharing ratio is given When new profit sharing ratio is given, sacrificing ratio has to be calculated as follows: Sacrificing ratio = Ratio of share sacrificed by the old partners Share sacrificed = Old share - New share Illustration Anbu and Raju are partners, sharing profits in the ratio of : . Akshai is admitted as a partner. The new profit sharing ratio among Anbu, Raju and Akshai is : : .

Find out the sacrificing ratio. Old ratio of Anbu and Raju = : that is, : New ratio of Anbu, Raju and Akshai = : : that is, : : Share sacrificed = Old share - New share Anbu = − − Raju = − − Sacrificing ratio of Anbu and Raju is : that is : . When new profit sharing ratio is not given (a) When share sacrificed is given When new profit sharing ratio is not given, but the share sacrificed by the old partner(s) is given, new profit sharing ratio is calculated as follows: New share of old partner = Old share - Share sacrificed Share of new partner = Sum of shares sacrificed by old partners Illustration Hari and Saleem are partners sharing profits and losses in the ratio of : . They admit Joel for / share, which he acquires entirely from Hari.

Find out the new profit sharing ratio and sacrificing ratio. Computation of sacrificing ratio and new profit sharing ratio Share sacrificed by old partners Hari = Saleem = Sacrificing ratio = : Old ratio of Hari and Saleem is : that is : New share of old partner = Old share - Share sacrificed Hari = − − Saleem = Share of new partner Joel = New profit sharing ratio of Hari, Saleem and Joel is : : that is, : : Illustration Ravi and Kumar share profits and losses in the ratio of : . Christy is admitted as a new partner with / share which he acquires / from Ravi and / from Kumar. Calculate the new profit sharing ratio and sacrificing ratio.

Computation of sacrificing ratio and new profit sharing ratio Shares sacrificed = , Sacrificing ratio of Ravi and Kumar is : Old profit sharing ratio = : or : New share of old partners = Old share - Share sacrificed Ravi = − − Kumar = − − Share of new partner Christy = In order to equate the denominator of Christy’s share, multiply and divide by × New profit sharing ratio of Ravi, Kumar and Christy = : : = Illustration Hameed and Govind are partners sharing profits and losses in the ratio of : . They admit John as a partner. John acquires his share / from Hameed and / from Govind. Find out the new profit sharing ratio and sacrificing ratio.

Computation of sacrificing ratio and new profit sharing ratio Share sacrificed = , Sacrificing ratio of Hameed and Govind is : Old ratio is : that is : New share of old partner = Old share - Share sacrificed Hameed = − − Govind − − Share of new partner John = Sum of shares sacrificed by old partners = + In order to equalise the denominator of John’s share, multiply and divide by John’s share = × New profit sharing ratio of Hameed, Govind and John is : : or : (b) When proportion of share sacrificed is given (i) When share sacrificed is given as a proportion on old partners’ share When new profit sharing ratio is not given, but the share sacrificed is given as a proportion on old partners’ share, new profit sharing ratio is calculated as follows: Share sacrificed by old partner = Old share x Proportion of share sacrificed New share of old partner = Old share - Share sacrificed Share of new partner = Sum of shares sacrificed by old partners Illustration Suresh and Dinesh are partners sharing profits in the ratio of : . They admit Ramesh as a new partner. Suresh surrenders / of his share in favour of Ramesh. Dinesh surrenders / of his share in favour of Ramesh.

Calculate the new profit sharing ratio and sacrificing ratio. Computation of sacrificing ratio and new profit sharing ratio Old share = : that is, Suresh and Dinesh Share sacrificed = Old share x Proportion of share sacrificed Suresh = × Dinesh = × Sacrificing ratio of Suresh and Dinesh is and , that is, : New share = Old share - Share sacrificed Suresh = − − Dinesh = − − Share of new partner = Sum of shares sacrificed by Suresh and Dinesh Ramesh = + + New profit sharing ratio of Suresh, Dinesh and Ramesh = : : that is, : : Illustration Prasanth and Nisha are partners sharing profits and losses in the ratio of : . They admit Ramya as a new partner. Prasanth surrenders / of his share and Nisha surrenders / of her share in favour of Ramya.

Calculate the new profit sharing ratio and sacrificing ratio. Computation of sacrificing ratio and new profit sharing ratio Old share = : that is, Prasanth and Nisha Share sacrificed = Old share × Proportion of share sacrificed Prasanth = × Nisha = × Sacrificing ratio of Prasanth and Nisha is and , that is, : New share = Old share - Share sacrificed Prasanth = − − Nisha = − − Share of new partner = Sum of shares sacrificed by Prasanth and Nisha Ramya = + + New profit sharing ratio of Prasanth, Nisha and Ramya = : : that is, : (ii) When proportion of share sacrificed on new partner’s share is given When new profit sharing ratio is not given, but the proportion of share sacrificed on new partner’s share is given, new profit sharing ratio is calculated as follows: New share of old partner = Old share - Share sacrificed Share sacrificed = New partner’s share × Proportion of share sacrificed Illustration Ramesh and Raju are partners sharing profits in the ratio of : . They admit Ranjan into partnership with / share of profit. Ranjan acquired the share from old partners in the ratio of : .

Calculate the new profit sharing ratio and sacrificing ratio. Computation of sacrificing ratio and new profit sharing ratio Ranjan’s share = Old ratio = : that is, : Proportion of share sacrificed = : that is, : Share sacrificed = New partner’s share × Proportion of share sacrificed Ramesh = × Raju = × Sacrificing ratio of Ramesh and Raju is and , that is, : New share of old partner = Old share - Share sacrificed Ramesh = − − Raju = − − Share of new partner Ranjan = In order to equate the denominator, multiply and divide Ranjan’s share by = × Thus, the new profit sharing ratio = : : = Illustration Mahesh and Dhanush are partners sharing profits and losses in the ratio of : . Arun is admitted for / share which he acquired equally from both Mahesh and Dhanush. Calculate the new profit sharing ratio and sacrificing ratio.

Computation of sacrificing ratio and new profit sharing ratio Arun’s share = Proportion of share sacrificed = : (equally) i.e. : Share sacrificed = New partner’s share × Proportion of share sacrificed Mahesh = × Dhanush = × Sacrificing ratio of Mahesh and Dhanush is : that is, : New share of old partner = Old share - Share sacrificed Mahesh = − − Dhanush = − − Share of new partner Arun = In order to equate, multiply and divide Arun’s share by = × New profit sharing ratio of = : : that is, : : . Mahesh, Dhanush and Arun (c) When share sacrificed and proportion of share sacrificed is not given When new profit sharing ratio, share sacrificed and the proportion of share sacrificed is not given, but only the share of new partner is given, new profit sharing ratio is calculated by assuming that the share sacrificed is the proportion of old share. New profit sharing ratio is calculated as follows: Share sacrificed = New partner’s share x Old share New share of old partner = Old share - Share sacrificed Illustration Vimal and Athi are partners sharing profits in the ratio of : .

Jeyam is admitted for / share in the profits. Calculate the new profit sharing ratio and sacrificing ratio. Computation of sacrificing ratio and new profit sharing ratio Since share sacrificed, proportion of share sacrificed and new profit sharing ratio are not given, it is assumed that the existing partners sacrifice in their old profit sharing ratio, that is, : . Sacrificing ratio of Vimal and Athi is : Let the total share be Jeyam’s share = Remaining share − − = New share of old partners = Remaining share × Old share Vimal = × Athi = × Share of new partner Jeyam = In order to equalise the denominator, multiply and divide by Jeyam’s share = × New profit sharing ratio of Vimal, Athi and Jeyam = : : that is, : : Illustration Anil, Sunil and Hari are partners in a firm sharing profits in the ratio of : : .

They admit Raja for % profit. Calculate the new profit sharing ratio and sacrificing ratio. Computation of sacrificing ratio and new profit sharing ratio Old ratio of Anil, Sunil and Hari = : : or : : Raja’s share of profit = % or / or / Let the total share be Remaining share − − = New share of old partners = Remaining share × Old share Anil = × Sunil = × Hari = × Share of new partner Raja = In order to equalise the denominator, multiply and divide Raja’s share by Raja’s share = × New profit sharing ratio of Anil, Sunil, Hari and Raja = : : : that is, : : : . Sacrificing ratio = : : .

Adjustment for goodwill Reputation built up by a firm has an impact on the present profit and future profit to be earned by the firm. At the time of admission of a partner, the existing partners sacrifice part of their share of profit in favour of the new partner. Hence, to compensate the sacrifice made by the existing partners, goodwill of the firm has to be valued and adjusted. In addition to capital, the new partner may contribute towards goodwill.

This goodwill is distributed in the sacrificing ratio to the old partners who sacrifice. . . Accounting treatment for goodwill Accounting treatment for goodwill on admission of a partner is disccussed below: .

When new partner brings cash towards goodwill . When the new partner does not bring goodwill in cash or in kind . When the new partner brings only a part of the goodwill in cash or in kind . Existing goodwill .

When new partner brings cash towards goodwill When the new partner brings cash towards goodwill in addition to the amount of capital, it is distributed to the existing partners in the sacrificing ratio. The following journal entries are to be made: (i) For the goodwill brought in cash credited to old partners’ capital account Date L.F. Debit Credit Cash / Bank A/c To Old partners’ capital / current A/c (in sacrificing ratio) (ii) For the goodwill brought in kind (in the form of assets) credited to old partners’ capital account Date L.F. Debit Credit Respective Asset A/c To Old partners’ capital / current A/c (in sacrificing ratio) (iii) For withdrawal of cash received for goodwill by the old partners Date L.F.

Debit Credit Old partners’ capital / current A/c To Cash / Bank A/c Illustration Amudha and Bhuvana are partners who share profits and losses in the ratio of : . Chithra joins the firm on 1st January, for / share of profits and brings in cash for her share of goodwill of ` , . Pass necessary journal entry for adjusting goodwill on the assumption that the fluctuating capital method is followed and the partners withdraw the entire amount of their share of goodwill. As the sacrifice made by the existing partners is not mentioned, it is assumed that they sacrifice in their old profit sharing ratio : .

Therefore, sacrificing ratio is : . Journal Entry Date L.F. Debit Credit Bank A/c , January To Amudha’s capital A/c ( / ) , To Bhuvana’s capital A/c ( / ) , (Cash brought for goodwill credited to Amudha and Bhuvana in sacrificing ratio) ,, Amudha’s capital A/c , Bhuvana’s capital A/c , To Bank A/c , (Amount withdrawn by the partners) Illustration Arun, Babu and Charles are partners sharing profits and losses equally. They admit Durai into partnership for / share in future profits.

The goodwill of the firm is valued at ` , and Durai brought cash for his share of goodwill. The existing partners withdraw half of the amount of their share of goodwill. Pass necessary journal entries on the assumption that the fluctuating capital method is followed. Durai’s share of goodwill = , × / = ` , As the sacrifice made by the existing partners is not mentioned, it is assumed that they sacrifice in their old profit sharing ratio : : .

Therefore, sacrificing ratio is : : . Journal Entries Date L.F. Debit Credit Bank A/c , To Arun’s capital A/c , To Babu’s capital A/c , To Charles’s capital A/c , (Cash brought for goodwill credited to old partners’ capital account in sacrificing ratio) Arun’s capital A/c , Babu’s capital A/c , Charles’s capital A/c , To Bank A/c , (Cash withdrawn by the partners) Illustration Vasu and Devi are partners sharing profits and losses in the ratio of : . They admit Nila into partnership for / share of profit.

Nila pays cash ` , towards her share of goodwill. The new ratio is : : . Pass necessary journal entry on the assumption that the fixed capital system is followed. Calculation of sacrificing ratio Sacrificing ratio = Old share – New share Vasu = − − Devi = − − Therefore, sacrificing ratio is : Journal entry Date L.F.

Debit Credit Bank A/c , To Vasu’s current A/c ( / ) , To Devi’s current A/c ( / ) (Cash brought for goodwill credited to old partners’ capital account in sacrificing ratio) . When the new partner does not bring goodwill in cash or in kind If the new partner does not bring goodwill in cash or in kind, his share of goodwill must be adjusted through the capital accounts of the partners. The following journal entry is passed. Date L.F.

Debit Credit New partners’ capital A/c To Old partners’ capital / current A/c (in sacrificing ratio) Illustration Ashok and Mumtaj were partners in a firm sharing profits and losses in the ratio of : . They have decided to admit Tharun into the firm for / share of profits. The goodwill of the firm on the date of admission was valued at ` , . Tharun is not able to bring in cash for his share of goodwill.

Pass necessary journal entries for goodwill on the assumption that the fluctuating capital system is followed. As the sacrifice made by the existing partners is not mentioned, it is assumed that they sacrifice in their old profit sharing ratio of : . Therefore, sacrificing ratio is : . Tharun’s share of goodwill = , × = ` , Journal entry Date L.F.