Partnership and Admission of a Partner (ISC Class
12 Accountancy)
Definition & Concept: A partnership is “the relation between persons who have agreed to share the profits
of a business” 1 . In practice, a partnership involves two or more individuals carrying on a lawful business
with mutual agency. Partners combine resources and share assets, profits and losses. For example,
Investopedia notes that partners “agree to be personally responsible for unlimited liability” and to share
assets and profits 2 3 . Under Section 13(b) of the Indian Partnership Act (1932), if no agreement states
otherwise, partners share profits (and losses) equally 4 .
Essential Features: Key characteristics include: - Mutual Agency: Each partner acts as agent for the firm,
binding all partners.
- Unlimited Liability: Partners are jointly and severally liable for firm debts; personal assets may be used
3 .
- Profit/Loss Sharing: Profits (and losses) are shared as per the partnership deed or equally by default 4 .
- No Separate Legal Entity: The firm and partners are not separately taxed; profits pass through to
partners.
- Minimum/Maximum Partners: At least 2 persons (up to 20 in non-banking firms) 4 . (Maximum is
usually 20 by law.)
- Voluntary Agreement: Partnership arises from contract (not by status) 1 .
Key Legal Provisions (Partnership Act, 1932): Important sections relevant to partnership and admission
include:
- Section 4 (Definition): Defines partnership as above 1 .
- Section 13(b): Default rule for equal profit-sharing 4 .
- Section 30 (Minors): A minor can be admitted to the benefits of a partnership with all partners’ consent 5 .
The minor may share profits (as agreed) but is not personally liable for firm’s acts 6 .
- Section 31 (Introduction of a Partner): No person can be introduced as partner without the consent of
all existing partners 7 . (An admitted partner is not liable for firm acts prior to admission 8 .)
Thus, admission is a reconstitution of the firm. It requires unanimous consent 9 (Sec.31), and all existing
partners must agree on new terms.
Admission of a Partner: Steps and Concepts
When a new partner joins, several accounting adjustments are needed. An ISC text summarizes the key
aspects to handle upon admission:
1. Change in Profit-Sharing Ratio.
2. Accounting treatment of Goodwill.
3. Revaluation of Assets and Liabilities.
4. Adjustment of Reserves and Accumulated Profits/Losses.
5. Adjustment of Capital Accounts. 10 .
1
, Each step is crucial. Omitting any part can lead to errors (see Common Mistakes below). The final result is a
revised Balance Sheet (in horizontal format 11 ) reflecting the reconstituted firm.
1. New Profit-Sharing Ratio
This is the new ratio in which profits (and losses) will be shared among all partners (old and new). Typically:
- Case A: New Partner’s Share Given. If the new partner’s share (e.g. 1/5) is specified, subtract that from 1
and divide the remainder among old partners in their old ratio 12 . The old partners’ mutual ratio remains
the same within the “old portion.”
Example: A and B share profits 4:3. C is admitted for a 1/5 share. Then remaining profit = 1 – 1/5 = 4/5. A
and B divide 4/5 in 4:3 ratio:
- A’s new share = (4/5)×(4/7) = 16/35. B’s new share = (4/5)×(3/7) = 12/35. C’s share = 1/5 = 7/35. Thus new
ratio = 16:12:7 = 4:3:7 13 .
• Case B: New and Old Shares Given. If the new ratio (or both old and new) is directly provided, use
that. Otherwise use the method above.
• Check: The new ratio shares must sum to 1 (or 100%). Always show working (e.g. 16/35+12/35+7/35
= 35/35) and state the new ratio clearly.
2. Sacrificing Ratio
This is the loss of share of each old partner in favour of the newcomer. It equals “Old share – New share” for
each old partner 14 . The sacrificing ratio is used to distribute goodwill.
• Definition: The ratio in which old partners sacrifice profit share to the new partner 14 .
• Formula: Sacrifice = (Old profit share) – (New profit share) 14 .
Continuing the Example: Old shares: A=4/7, B=3/7. New shares: A=16/35, B=12/35 (from above). A’s
sacrifice = 4/7 – 16/35 = 2/7. B’s sacrifice = 3/7 – 12/35 = 3/14. Hence sacrificing ratio A:B = (2/7):(3/14) = 4:3
14 .
Always calculate sacrificing ratio explicitly. A common error is mixing up old vs. new ratio; clearly label “old
share” and “new share.”
3. Goodwill Treatment (Premium Methods and Hidden Goodwill)
The new partner often compensates old partners for the lost share of future profits via goodwill (also called
premium). ISC syllabus (and Accounting Standard 26) treats goodwill as an intangible asset.
Cases:
- Premium in Cash (brought into firm): The new partner brings cash for goodwill. Journal entries vary by
approach:
- Under the premium method, record:
2
12 Accountancy)
Definition & Concept: A partnership is “the relation between persons who have agreed to share the profits
of a business” 1 . In practice, a partnership involves two or more individuals carrying on a lawful business
with mutual agency. Partners combine resources and share assets, profits and losses. For example,
Investopedia notes that partners “agree to be personally responsible for unlimited liability” and to share
assets and profits 2 3 . Under Section 13(b) of the Indian Partnership Act (1932), if no agreement states
otherwise, partners share profits (and losses) equally 4 .
Essential Features: Key characteristics include: - Mutual Agency: Each partner acts as agent for the firm,
binding all partners.
- Unlimited Liability: Partners are jointly and severally liable for firm debts; personal assets may be used
3 .
- Profit/Loss Sharing: Profits (and losses) are shared as per the partnership deed or equally by default 4 .
- No Separate Legal Entity: The firm and partners are not separately taxed; profits pass through to
partners.
- Minimum/Maximum Partners: At least 2 persons (up to 20 in non-banking firms) 4 . (Maximum is
usually 20 by law.)
- Voluntary Agreement: Partnership arises from contract (not by status) 1 .
Key Legal Provisions (Partnership Act, 1932): Important sections relevant to partnership and admission
include:
- Section 4 (Definition): Defines partnership as above 1 .
- Section 13(b): Default rule for equal profit-sharing 4 .
- Section 30 (Minors): A minor can be admitted to the benefits of a partnership with all partners’ consent 5 .
The minor may share profits (as agreed) but is not personally liable for firm’s acts 6 .
- Section 31 (Introduction of a Partner): No person can be introduced as partner without the consent of
all existing partners 7 . (An admitted partner is not liable for firm acts prior to admission 8 .)
Thus, admission is a reconstitution of the firm. It requires unanimous consent 9 (Sec.31), and all existing
partners must agree on new terms.
Admission of a Partner: Steps and Concepts
When a new partner joins, several accounting adjustments are needed. An ISC text summarizes the key
aspects to handle upon admission:
1. Change in Profit-Sharing Ratio.
2. Accounting treatment of Goodwill.
3. Revaluation of Assets and Liabilities.
4. Adjustment of Reserves and Accumulated Profits/Losses.
5. Adjustment of Capital Accounts. 10 .
1
, Each step is crucial. Omitting any part can lead to errors (see Common Mistakes below). The final result is a
revised Balance Sheet (in horizontal format 11 ) reflecting the reconstituted firm.
1. New Profit-Sharing Ratio
This is the new ratio in which profits (and losses) will be shared among all partners (old and new). Typically:
- Case A: New Partner’s Share Given. If the new partner’s share (e.g. 1/5) is specified, subtract that from 1
and divide the remainder among old partners in their old ratio 12 . The old partners’ mutual ratio remains
the same within the “old portion.”
Example: A and B share profits 4:3. C is admitted for a 1/5 share. Then remaining profit = 1 – 1/5 = 4/5. A
and B divide 4/5 in 4:3 ratio:
- A’s new share = (4/5)×(4/7) = 16/35. B’s new share = (4/5)×(3/7) = 12/35. C’s share = 1/5 = 7/35. Thus new
ratio = 16:12:7 = 4:3:7 13 .
• Case B: New and Old Shares Given. If the new ratio (or both old and new) is directly provided, use
that. Otherwise use the method above.
• Check: The new ratio shares must sum to 1 (or 100%). Always show working (e.g. 16/35+12/35+7/35
= 35/35) and state the new ratio clearly.
2. Sacrificing Ratio
This is the loss of share of each old partner in favour of the newcomer. It equals “Old share – New share” for
each old partner 14 . The sacrificing ratio is used to distribute goodwill.
• Definition: The ratio in which old partners sacrifice profit share to the new partner 14 .
• Formula: Sacrifice = (Old profit share) – (New profit share) 14 .
Continuing the Example: Old shares: A=4/7, B=3/7. New shares: A=16/35, B=12/35 (from above). A’s
sacrifice = 4/7 – 16/35 = 2/7. B’s sacrifice = 3/7 – 12/35 = 3/14. Hence sacrificing ratio A:B = (2/7):(3/14) = 4:3
14 .
Always calculate sacrificing ratio explicitly. A common error is mixing up old vs. new ratio; clearly label “old
share” and “new share.”
3. Goodwill Treatment (Premium Methods and Hidden Goodwill)
The new partner often compensates old partners for the lost share of future profits via goodwill (also called
premium). ISC syllabus (and Accounting Standard 26) treats goodwill as an intangible asset.
Cases:
- Premium in Cash (brought into firm): The new partner brings cash for goodwill. Journal entries vary by
approach:
- Under the premium method, record:
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