Study Notes: Admission of a Partner
(Class 12 ICSE Accounts)
Prepared by - kushal agarwal ; Email -
1. Introduction to Admission of a Partner
The admission of a new partner is a fundamental form of partnership reconstitution, a critical
event that alters the existing partnership agreement and the mutual rights and liabilities of the
partners. This process is governed by the Indian Partnership Act, 1932, and requires a series of
carefully executed accounting adjustments. The primary objective of these adjustments is to
ensure fairness to all parties—the existing (or 'old') partners and the incoming (or 'new')
partner—by accurately reflecting the firm's financial position and the respective contributions
and sacrifices made.
Upon the admission of a new partner, the following key accounting treatments are typically
required:
1. Calculation of New Profit-Sharing and Sacrificing Ratios: Determining the new terms
for sharing future profits and quantifying the sacrifice made by old partners.
2. Accounting Treatment of Goodwill: Valuing and adjusting the firm's intangible asset of
goodwill to compensate the sacrificing partners.
3. Revaluation of Assets and Reassessment of Liabilities: Adjusting the book values of
assets and liabilities to their current market values to reflect the true state of the
business.
4. Adjustment for Accumulated Profits, Reserves, and Losses: Distributing past
undistributed profits, reserves, and losses among the old partners, as these belong to
them.
5. Adjustment of Partners' Capitals: Aligning the capital contributions of all partners
according to the new profit-sharing arrangement, if agreed upon.
This document will systematically explore each of these adjustments, beginning with the
foundational calculation of profit-sharing ratios.
2. Calculating New Profit-Sharing and Sacrificing Ratios
Calculating the new profit-sharing and sacrificing ratios is the first and most crucial step in the
admission process. These ratios form the bedrock for all subsequent adjustments, particularly
the distribution of goodwill. They define the new financial relationship between the partners and
, ensure that the compensation paid by the new partner is allocated equitably to the old partners
who have surrendered a portion of their future profits.
2.1. Sacrificing Ratio
The sacrificing ratio represents the proportion in which the old partners agree to surrender or
"sacrifice" their share of profits in favor of the new partner. This ratio is essential for correctly
distributing the premium for goodwill brought in by the incoming partner.
The formula to calculate this ratio is:
Sacrificing Ratio = Old Ratio – New Ratio
--------------------------------------------------------------------------------
Worked Example: Calculating the Sacrificing Ratio
Let's consider partners X and Y who share profits in the ratio of 3:2. A new partner, Z, is
admitted, and the new profit-sharing ratio among X, Y, and Z is 4:3:2.
Step 1: Calculate the sacrifice made by each old partner.
● Sacrifice made by X: Old Share - New Share = 3/5 - 4/9 = (27 - 20) /
45 = 7/45
● Sacrifice made by Y: Old Share - New Share = 2/5 - 3/9 = (18 - 15) /
45 = 3/45
Step 2: Determine the Sacrificing Ratio.
The sacrificing ratio is the ratio of the shares sacrificed by X and Y.
● Sacrificing Ratio = 7/45 : 3/45 = 7:3
This means X and Y have sacrificed their profit shares in the ratio of 7:3 to accommodate Z.
--------------------------------------------------------------------------------
2.2. New Profit-Sharing Ratio (NPSR)
The New Profit-Sharing Ratio (NPSR) is the ratio in which all partners, including the newly
admitted one, will share future profits and losses. A common scenario is when the new partner's
share is specified, and the old partners continue to share the remaining profits in their original
ratio.
--------------------------------------------------------------------------------
(Class 12 ICSE Accounts)
Prepared by - kushal agarwal ; Email -
1. Introduction to Admission of a Partner
The admission of a new partner is a fundamental form of partnership reconstitution, a critical
event that alters the existing partnership agreement and the mutual rights and liabilities of the
partners. This process is governed by the Indian Partnership Act, 1932, and requires a series of
carefully executed accounting adjustments. The primary objective of these adjustments is to
ensure fairness to all parties—the existing (or 'old') partners and the incoming (or 'new')
partner—by accurately reflecting the firm's financial position and the respective contributions
and sacrifices made.
Upon the admission of a new partner, the following key accounting treatments are typically
required:
1. Calculation of New Profit-Sharing and Sacrificing Ratios: Determining the new terms
for sharing future profits and quantifying the sacrifice made by old partners.
2. Accounting Treatment of Goodwill: Valuing and adjusting the firm's intangible asset of
goodwill to compensate the sacrificing partners.
3. Revaluation of Assets and Reassessment of Liabilities: Adjusting the book values of
assets and liabilities to their current market values to reflect the true state of the
business.
4. Adjustment for Accumulated Profits, Reserves, and Losses: Distributing past
undistributed profits, reserves, and losses among the old partners, as these belong to
them.
5. Adjustment of Partners' Capitals: Aligning the capital contributions of all partners
according to the new profit-sharing arrangement, if agreed upon.
This document will systematically explore each of these adjustments, beginning with the
foundational calculation of profit-sharing ratios.
2. Calculating New Profit-Sharing and Sacrificing Ratios
Calculating the new profit-sharing and sacrificing ratios is the first and most crucial step in the
admission process. These ratios form the bedrock for all subsequent adjustments, particularly
the distribution of goodwill. They define the new financial relationship between the partners and
, ensure that the compensation paid by the new partner is allocated equitably to the old partners
who have surrendered a portion of their future profits.
2.1. Sacrificing Ratio
The sacrificing ratio represents the proportion in which the old partners agree to surrender or
"sacrifice" their share of profits in favor of the new partner. This ratio is essential for correctly
distributing the premium for goodwill brought in by the incoming partner.
The formula to calculate this ratio is:
Sacrificing Ratio = Old Ratio – New Ratio
--------------------------------------------------------------------------------
Worked Example: Calculating the Sacrificing Ratio
Let's consider partners X and Y who share profits in the ratio of 3:2. A new partner, Z, is
admitted, and the new profit-sharing ratio among X, Y, and Z is 4:3:2.
Step 1: Calculate the sacrifice made by each old partner.
● Sacrifice made by X: Old Share - New Share = 3/5 - 4/9 = (27 - 20) /
45 = 7/45
● Sacrifice made by Y: Old Share - New Share = 2/5 - 3/9 = (18 - 15) /
45 = 3/45
Step 2: Determine the Sacrificing Ratio.
The sacrificing ratio is the ratio of the shares sacrificed by X and Y.
● Sacrificing Ratio = 7/45 : 3/45 = 7:3
This means X and Y have sacrificed their profit shares in the ratio of 7:3 to accommodate Z.
--------------------------------------------------------------------------------
2.2. New Profit-Sharing Ratio (NPSR)
The New Profit-Sharing Ratio (NPSR) is the ratio in which all partners, including the newly
admitted one, will share future profits and losses. A common scenario is when the new partner's
share is specified, and the old partners continue to share the remaining profits in their original
ratio.
--------------------------------------------------------------------------------
