ADMISSION OF A PARTNER: Kapil and Krish are running a partnership firm dealing in

toys. They are one of the most successful businessmen in the locality. They now decide to start
manufacturing toys that are electronically operated to diversify their business. For this they need
more capital and also technical expertise.
Mohit their friend is an electronic engineer and has capital also. They have persuaded him to join
their firm. In case, he joins the partnership firm, this will be a case of admission of a partner. As a
result, he may need to bring in capital and share of goodwill. In this lesson, you will learn about
goodwill and other adjustments at the time of admission of a partner. Mohit will bring in capital
and share of goodwill. Some changes in the value of some assets and liabilities of the existing
firm are need to bring them at their realistic value, on his admission. There may be other issues
involving finance on his admission. All this need accounting treatment. In this lesson you will
learn accounting treatment and adjustments to be made on the admission of a partner.
ADMISSION OF A PARTNER: Meaning, New Profit Sharing Ratio and Sacrificing Ratio Meaning
An existing partnership firm may take up expansion/diversification of the business. In that case it
may need managerial help or additional capital. An option before the partnership firm is to admit
partner/partners, when a partner is admitted to the existing partnership firm. it is called
admission of a partner.
According to the Partnership Act 1932, a person can be admitted into partnership only with the
consent of all the existing partners unless otherwise agreed upon.
On admission of a new partner, the partnership firm is reconstituted with a new agreement. For
example, Rekha and Nitesh are partners sharing profit in the ratio of 5:3. On April 1, 2006 they
admitted Nitu as a new partner with 1/4th share in the profit of the firm. In this case, with the
admission of Nitu as partner, the firm stands reconstituted.
On the admission of a new partner, the following adjustments become necessary:
(i) Adjustment in profit sharing ratio;
(ii) Adjustment of Goodwill;
(iii) Adjustment for revaluation of assets and reassessment of liabilities;
(iv) Distribution of accumulated profits and reserves; and
(v) Adjustment of partners capitals.
Adjustment in Profit sharing Ratio: When a new partner is admitted he/she acquires his/her
share in profit from the existing partners. As a result, the profit sharing ratio in the new firm is
decided mutually between the existing partners and the new partner. The incoming partner
acquires his/her share of future profits either incoming from one or more existing partner. The
existing partners sacrifice a share of their profit in the favour of new partner, hence the
calculation of new profit sharing ratio becomes necessary.

Sacrificing Ratio: At the time of admission of a partner, existing partners have to surrender
some of their share in favour of the new partner. The ratio in which they agree to sacrifice their
share of profits in favour of incoming partner is called sacrificing ratio. Some amount is paid to
the existing partners for their sacrifice. The amount of compensation is paid by the new partner

to the existing partner for acquiring the share of profit which they have surrendered in the favour
of the new partner.
Sacrificing Ratio is calculated as follows:

Sacrificing Ratio = Existing Ratio New Ratio

Following cases may arise for the calculation of new profit sharing ratio and sacrificing ratio:
(i) Only the new partners share is given In this case, it is presumed that the existing partners
continue to share the remaining profit in the same ratio in which they were sharing before the
admission of the new partner. Then, existing partners new ratio is calculated by dividing
remaining share of the profit in their existing ratio. Sacrificing ratio is calculated by deducting
new ratio from the existing ratio.
Illustration 1 Deepak and Vivek are partners sharing profit in the ratio of 3 : 2. They admit Ashu
as a new partner for 1/5 share in profit. Calculate the new profit sharing ratio and sacrificing
ratio.
Solution: Calculation of new profit sharing ratio:
Let total Profit = 1, New partners share = 1/5, Remaining share = 1 1/5 = 4/5, Deepaks new
share = 3/5 of 4/5 i.e. 12/25
Admission of a Partner:
Viveks new share = 2/5 of 4/5 i.e. 8/25
Ashus Share = 1/5
The new profit sharing ratio of Deepak, Vivek and Ashu is : = 12/25 : 8/25 : 1/5 = 12 : 8 : 5/25 =
12 : 8 : 5
So Deepak Sacrificed = 3/5 12/25 = 15 12/25 = 3/25
Vivek Sacrificed = 2/5 8/25 = 10 8/25 = 2/25
Sacrificing Ratio = 3 : 2
Sacrificing ratio of the existing partners is same as their existing ratio.
(ii) The new partner purchases his/her share of the profit from the Existing partner in a particular
ratio.
In this case: the new profit sharing ratio of the existing partners is to be ascertained after
deducting the sacrifice agreed from his share. It means the incoming partner has purchased
some share of profit in a particular ratio from the existing partners.
Illustration 2 Neha and Parteek are partners, sharing profit in the ratio of 5 : 3. They admit
Nisha as a new partner for 1/6 share in profit. She acquires this share as 1/8 from Neha and 1/24
share from Parteek. Calculate the new profit sharing ratio and sacrificing ratio.
Solution: Nehas and Parteek existing ratio is 5 : 3, Nehas new share = 5/8-1/8 = 4/8 or 12/24
Parteeks new share = 3/8-1/24 = 8/24,

Nishas share = 1/8+1/24 =4/24

The new profit sharing ratio of Neha, Parteek and Nisha is 12/24 : 8/24 : 4/24 = 12 : 8 : 4 = 3 : 2 :
1
(ii) Sacrifice ratio = 1/8 : 1/24 or 3 : 1
(iii) Existing partners surrender a particular portion of their share in favor of a new partner.
In this case, sacrificed share of the each partner is to be ascertained. This ascertained by
multiplying the existing partner share in the ratio of their sacrifice. The share sacrificed by the
existing partners should be deducted from his existing share. Therefore, the new share of the
existing partners is determined. The share of the incoming partner is the sum of sacrifice by the
existing partners.
Illustration 3: Him and Raj shared profits in the ratio of 5:3. Jolly was admitted as a partner.
Him surrendered 1/5 of his share and Raj 1/3 of his share in favor of Jolly. Calculate the new profit
sharing ratio.
Solution:
Him surrenders 1/5 of his share, i.e., = 1/5 of 5/8 = 1/8
Raj surrenders 1/3 of his share, i.e., = 1/3 of 3/8 = 1/8
So, sacrificing ratio of Him and Raj is 1/8 : 1/8 or equal.
Hims new share = 5/8 1/8 = 4/8
and Rajs new share = 3/8 1/8 = 2/8
New profit sharing ratio of Hims, Rajs and Jollys is = 4/8 : 2/8 : 2/8 or 4 : 2 : 2 or 2 : 1 : 1.
19.2 GOODWILL : MEANING, FACTORS AFFECTING, GOODWILL AND VALUATION
Meaning of Goodwill: Over a period of time, a business firm develops a good name and
reputation among the customers. This help the business earn some extra profits as compared to
a newly set up business. In accounting capitalized value of this extra profit is known as goodwill.
For example, your firm earns say Rs 1200 and the normal profit was expected from your firm Rs
700. The rate of return is @ 10%. In this case goodwill is ascertained as under :
Step 1: Excess profit = Actual profit Desired normal profit
= 1200 700 = 500
Step 2 : Goodwill = 500100/10 = Rs 5000
In other words, goodwill is the value of the reputation of a firm in respect of the profit earned in
future over and above the normal profit. It may also be defined as the present value of the
capacity to earn future profits. This means that a firm can be said to have goodwill only if it has
capacity to earn profit in future. A firm earning only normal profits like similar firms cannot claim
to have any goodwill.
Factors affecting the Goodwill: The factors affecting goodwill are as follows:
1. Location: If the firm is located at a central place, resulting in good sale, the goodwill tends to
be high.

2. Nature of Business: A firm that produces high value products or having a stable demand is
able to earn more profits and therefore has more goodwill.
3. Efficient management: A well managed firm earns higher profit and so the value of goodwill
will also be high.
4. Quality: If a firm is known for the quality of its products the value of goodwill will be high.
5. Market Situation: The monopoly condition to earn high profits which leads to higher value of
goodwill.
6. Special Advantages: The firm has special advantages like importing licenses, long term
contracts for supply of material, patents, trademarks, etc. enjoy higher value of goodwill.
Methods of valuation of Goodwill: The methods of valuation of goodwill are generally
decided by the partners among themselves while preparing partnership deed. The following are
the important methods of valuing the goodwill of a firm:
(i) Average Profit Method
(ii) Super Profit Method
(iii) Capitalisation Method
Let us learn about these methods.
1. Simple Average Profit Method: Under this method, average of the profits of certain given years
is calculated. The value of the goodwill is calculated at an agreed number of years purchase of
the average profit.
Thus the goodwill is calculated as follows:
Value of goodwill = Average Profit Number of year of purchase
For example, the average profits of a firm of say 3 years and the goodwill is to be calculated at
2 years purchase of the average profits works out at Rs.25,000 and it is assumed that the same
profits will be the value of the goodwill will be Rs.50,000[Rs.25,000 2]. Thus the goodwill is
calculated as goodwill = average profits Number of years purchase.
Illustration: 4: The profit for the last five years of a firm were as follows Year 2001 Rs. 1,20,000:
Year 2002 Rs.1,50,000: Year 2003 Rs.1,70,000: Year 2004 Rs.1,90,000: Year 2005 Rs.2,00,000.
Calculate goodwill of the firm on the basis of 3 years purchases of 5 years average profits.
Solution:

Year

Profit (Rs.)

2001 1,

20,000

2002 1,

50,000

2003 1,

70,000

2004 1,

90,000

2005

2,00,000

Total

8,30,000

Average Profit = Total Profit/No. of Years = Rs.8,30,000/5 = Rs.1,66,000

Goodwill = Average Profits No. of years purchased = Rs.1,66,000 3 = Rs.4,98,000
2. Super Profit Method: Super profits is the excess of actual profit over the normal profits. If a
new business earns certain percentage of the capital employed, it is called normal profit. The
value of the goodwill is calculated at an agreed number of years purchase is multiplied by the
Super profit. Normal profit is that profit which is, earned by other
business unit of the same business. Normal profit will be calculated as follows:
Normal profit = Capital employed normal rate of return/100
Actual Profit: These are the profit earned during the year or it is also taken as the average of
the last few years profit.
Super Profit = Actual Profit Normal Profit
For example, A firm earns profit of Rs.65,000 on a capital of Rs.4,80,000 and the normal rate of
return in similar business is 10%. Then the normal profit is Rs.48,000[10% of the Rs.4,80,000].
The actual profit is Rs.65,000. Thus,
Super profit = Actual profit Normal profit = Rs.65,000 Rs.48,000 = Rs.17,000
If value of Goodwill is calculated by 3 years purchase of super profit then goodwill is equal to
Rs.51,000 [ Rs.17,000 3].
(b) Weighted average method: This method is a modified version of average profit method. In
this method each year profit is assigned a weight i.e. 1, 2, 3, 4 etc. Thereafter each year profit is
multiplied by the weight and find product. The total of products is divided by the total of weight.
As a result we find the weighted average profit. After this the value of goodwill is calculated to
multiplied the weight average profit into the agreed number of years purchase. Thus the
goodwill is calculated as follows

Weighted average profit = Total product of profit/Total of

weights
Value of goodwill = Weighted average profit number of year of purchase
(Note: This method is used when we observe that there is a tendency to increase the
annual profits. Latest year profit is assigned the highest weight.
Illustration: 5
The profit of firm for past years were as follow :
Profit Rs.:

2002 80,000
2003 85,000
2004 90,000

2005 1,00,000
2006 1,10,000
The weight to be used are 1, 2, 3, 4, and 5 for the years from 2002- 2006.
Calculate the value of goodwill on the basis of two years purchase of weighted average
profit.
Solution: Year Profit Weight Products
2002

80,000

1 80,000

2003

85,000

2 170000

2004

90,000

3 270000

2005

1,00,000

2006

1,10,000

4 400000
5 550000

15 1470000
Weighted Average Profit = 14,70,000 /15 = Rs 98,000
Goodwill = Rs 98000 2 = Rs 1,96,000
Illustration: 6: A firm earned the following net profits during the last 4 years 2003
90,000
2004

1,20,000

2005

1,60,000

2006

1,80,000

Capital employed in the firm is Rs.10,00,000. The normal rate of profit is 10%. Calculate
the value of the goodwill on the basis of 4 year purchase.
Solution: Total profit of 4 years = Rs. 90,000 + Rs. 1,20,000 + Rs. 1,60,000 +
Rs.1,80,000 = Rs.5,50,000
Average annual profit = Rs.5,50,000/4 = Rs.1,37,500
Normal Profit = Rs.10% of Rs.10,00,000 = Rs.10,00,000 10/ 100 = Rs.1,00,000
Super profit = Rs. 1,37,500 Rs. 1,00,000 = Rs.37,500
Value of goodwill at = Rs. 37,500 4 = Rs. 1,50,000
4 years of purchase

3. Capitalization Method: In this method, goodwill is the amount of capital saved.

Normally businessmen invest capital to operate business activities, and earn profit with
the efficient utilization of capital. If the business earns more profit by investing lesser
amount of capital as compared to other business, who earned same amount of profit
with more amount of capital, the saved amount is assumed to be goodwill.
Under this method, the Goodwill is calculated in two ways:
1. Capitalization of Average profit
2. Capitalization of Super profit
1. Capitalization of Average profit: In this method, the value of goodwill is assumed to be
excess of the capital value of average profit over the actual capital employed. Following
formula is applied for Calculation of capital employed:
Capital
employed = Total assets outsider liabilities
Following formula is applied for calculation of capitalized value of profit:
Capitalized value of profit = Average Profit 100/ Normal rate of profit
Goodwill = Capitalized value of profits Capital employed
Illustration: 7: A firm earned average profit during the last few years is Rs.40,000 and
the normal rate of return in similar business is 10%. The total assets is Rs.3,60,000 and
outside liabilities is Rs.50,000. Calculate the value of goodwill with the help of
Capitalization of Average profit method.
Solution: Capital employed = Total assets - Outside liabilities = Rs.3,60,000 - Rs.50,000
= Rs.3,10,000
Capitalized value of average profit = Average Profit 100/ Normal rate of profit
= Rs. 40,000 100/10 = Rs. 4,00,000
Goodwill = Capitalized value Capital employed = Rs. 4,00,000 Rs. 3,10,000 = Rs.
90,000
Illustration: 8 The capital invested in a firm is Rs.4,60,000 and the rate of return in the
similar business is 12%. The firm earns the following profit in the last 4 years:
2003

Rs. 60,000, 2005

Rs. 90,000

Rs. 80,000, 2004

Rs. 70,000, 2006

Calculate the value of goodwill by Capitalization method.

Solution: Total Profit = Rs.60,000 + Rs.70,000 + Rs.80,000 + Rs.90,000/4
Average Profit = Rs.3,00,000/4 = Rs.75,000
Capitalized Value = Average profit 100/12 = Rs.75,000x100/12 = Rs.6,25,000

Goodwill = Capitalized value Capital employed = Rs.6,25,000 Rs.4,60,000 =

Rs.1,65,000
2. Capitalization of Super profit: In this method, the value of goodwill is calculated on
the basis of super profit method. Following formula is applied for Calculation of capital
employed:
Goodwill = Super profit 100/normal rate of profit
Illustration: 9 A firm earns a profit of Rs.26,000 and has invested capital amounting to
Rs.2,20,000. In the same business normal rate of earning profit is 10%.
Calculate the value of goodwill with the help of Capitalization of super profit method.
Solution: Actual profit = Rs. 26,000
Normal profit = Rs. 2,20,000 x 10/ 100 = Rs.22,000
Super Profit = Actual Profit Normal Profit = Rs. 26,000 Rs.22,000 = Rs. 4,000
Goodwill = Super profit 100/normal rate of profit
= Rs. 4,000 100/10 = Rs. 40,000
(a) From the following information, Calculate average profit : year

Year

Profit

2001

80,000

2002

90,000

2003

2004

1,10,000

(Rs) Loss (Rs)

30,000

Average Profit = Rs.

(b) Calculate value of goodwill at two years purchase of average profit, ascertained in
2(a) above.
TREATMENT OF GOODWILL
The new partner acquires his/her share profit from the existing partners. This will result
in the reduction of the share of existing partners. Therefore, he/she compensates the
existing partners for the sacrifices. He/she compensates them by making payment in
cash or in kind. The payment is equal to his/her share in the goodwill.
As per Accounting Standard 10(AS-10) that goodwill should be recorded in the books only
when some consideration in money has been paid for it. Thus, if a new partner does not

bring necessary cash for goodwill, no goodwill account can be raised in the books.
He/she should pay for goodwill in addition to his/her contribution for capital. If, he/she
does not pay for goodwill, then amount equal to his/her share of
goodwill
will
be
deducted from the capital. The amount brought in by him/ her as goodwill or amount of
goodwill deducted from his/her capital and divided between the existing partners in their
sacrificing ratio. At the time of admission of a new partner any goodwill appearing in the
books, will be written off in existing ratio among the existing partners.
There are different situations relating to treatment of goodwill at the time of admission of
a new partner. These are discussed as under:
1. When the amount of goodwill is paid privately by the new partner.
2. When the new partner brings his/her share of goodwill in cash.
3. When the new partner does not bring his/her share of goodwill in cash.
1. The amount of goodwill is paid privately by the new partner If the amount of goodwill
is paid by the new partner to the existing partner privately, no journal entries are made
in the books of the firm.
2. The new partner brings his/her share of goodwill in cash and the amount of goodwill is
retained in the Business:
When, the new partner brings his/her share of goodwill in cash. The amount brought in
by the new partner is transferred to the existing partner in the sacrificing ratio. If there is
any goodwill account in the balance sheet of existing partner, it will be written off
immediately in existing ratio among the partners. The journal entries are as follows:
(i) The existing goodwill in the books of the firm will be written off in existing profit ratio
as;
Existing Partners Capital A/c Dr. [individually]
To Goodwill A/c
(Existing goodwill written off)
(ii) For bringing cash for Capital and goodwill
Cash/Bank A/c Dr.
To Goodwill A/c
To New partners Capital A/c
(Cash brought in for capital and goodwill)
(iii) For amount of goodwill transferred to existing partner capital account:
Goodwill A/c

Dr.

To Existing Partners Capital/current A/c [individually]

(The amount of goodwill credited to existing partners capitals in sacrificing ratio)
Illustration:10 Tanya and Sumit are partners in a firm sharing profit in the ratio 5 : 3.
They admitted Gauri as a new partner for 1/4th share in the profit. Gauri brings Rs.
30,000 for her share of goodwill and Rs.1,20,000 for capital. Make journal entries in the
books of the firm after the admission of Gauri.
The new profit sharing ratio will be 2 : 1 : 1.
Solution :
Date
1

Particular

L.F.

Amount
1,50,000

Bank
a/c
Dr.
To Goodwill
a/c
To Gauris Capital
a/c
(cash brought by Gauri for her share of
goodwill and capital )
Goodwill
30,000
a/c
Dr.
To Tanyas Capital
a/c
To Sumits capital
a/c
(goodwill transferred to existing
partners capital account in their profit
sharing ratio)
Working Note: Calculation of sacrificing ratio [existing ratio new ratio]
Partners
Tanaya
Sumit

Existing ratio
5/8
3/8

New ratio Sacrifice

2/4
1/4

5/8 2/4 = 1/8

Amount
30,000
1,20,000

15,000
15,000

Sacrificing ratio
Tanaya : Sumit

3/8 1/4 = 1/8

1:1

The amount of goodwill is withdrawn by the existing partners:

(iv)

Existing Partners Capital/current A/c Dr. [individually]

To Cash/Bank A/c

(The amount of goodwill withdrawn by the existing partners)

It is to be noted that sometimes partners withdraw only 50% or 25% amount of goodwill.
In such a case, entry will be made for the withdrawn amount only.
Illustration: 11 In previous illustration, it is assumed that the full amount of goodwill is
withdrawn by the Tanaya and Sumit . Make journal entry in the books of the firm.

Solution:

Books of Tanaya, Sumit and Gauri

Date

Particular
L.F.
Amount
Amount
Tanyas capital
15,000
a/c
Dr.
15,000
Sumits capital
30,000
a/c
Dr.
To Bank
a/c
(amount of goodwill is
withdrawn by them)
New partner does not bring his/her share of goodwill in cash: When the goodwill
of the firm is calculated and the new partner is not able to bring his/her share of goodwill
in cash, goodwill will be adjusted through new partners capital accounts. In this case
new partners capital account is debited for his/her share of goodwill and the existing
partners capital accounts are credited in their sacrificing ratio. The journal entry is as
under:
New Partners Capital

A/c

Dr.

To Existing Partners Capital A/c [individually in sacrificing ratio]

(New partners share in goodwill credited to existing partners in sacrificing ratio)
Goodwill appears in the books of the firm and new partner does not bring his/her share of
goodwill in cash:
If the goodwill account appears in the books of the firm, and the new partner is not able
to bring goodwill in cash. In this case, the amount of goodwill existing in the books is
written off by debiting the capital account of existing partners in their existing profit
sharing ratio.
Illustration 12 Ashmita and Sahil are partners sharing profit in the ratio of 3 : 2. They
agree to admit Charu for 1/5 share in future profit. Charu brings Rs. 2,50,000 as capital
and enable to bring her share of goodwill in cash, the goodwill of the firm to be valued at
Rs. 1,80,000. At the time of admission goodwill existed in the books of the firm at
Rs.80,000. Make necessary journal entries in the books of the firm.
Solution:
In Books of Ashmita, Sahil and Charu
Date

Particular
Bank
a/c
Dr.
To Charus capital
a/c
(cash brought by Charu for her
capital)

L.F.

Amount
2,50,000

Amount
2,50,000

Ashmitas capital
a/c
48,000
Dr.
32,000
Sahils capital
a/c
Dr.
To Goodwill
a/c
(goodwill written off before charus
admission)
Charus capital
a/c
36,000
Dr.
To Asmitas capital
a/c
To Sahils capital
a/c
(existing partners capital a/c
credited for goodwill on Charu,s
admission in sacrificing ratio)
Working Note: Ashmita and Sahil sacrifice their profit in favour of Charu in
existing profit sharing ratio i.e. 3 : 2. Therefore, the sacrificing ratio is 3 : 2.
Value of Goodwill = Rs.1,80,000

80,000

21,600
14,400

their

Charus share in Profit = 1/5

Charus share of Goodwill = Rs. 1,80,000 1/5 = Rs. 36,000

New partner brings in only a part of his share of goodwill: When new partner is not able
to bring the full amount of his/her share of goodwill in cash and brings only a part of
cash. In this case, the amount of goodwill brought by him is credited to goodwill account.
At the time of goodwill transferred to capital account of existing partners, new partners
capital account is debited with his unpaid share of goodwill besides debiting goodwill
account with the amount of goodwill is paid by him. The journal entries is as
Bank
To Goodwill

A/c

Dr.

A/c

[Part Amount of goodwill brought by new partnerI

Goodwill

A/c

New Partners Capital A/c

Dr.
Dr.

To Existing Partners Capital A/c [individually in sacrificing ratio]

[Credit given to sacrificing partner by new partners in full share of goodwill]
Illustration: 13 Tanu and Puneet are partners sharing profit in the ratio of 5 : 3. They
admit Tarun into the firm for 1/6 share in profit which he takes 1/ 18 from Tanu and 2/ 18
from Puneet. Traun brings Rs.9,000 as goodwill out of his share of Rs. 12,000. No
goodwill account appears in the books of the firm. Make necessary journal entries in the
books of the firm.

Solution:
Date

JOURNAL
Particular

L
F

Amount

Amount

Bank
9000
a/c
Dr.
9000
To Goodwill
a/c
(a part of his share of goodwil brought
in by Tarun )
Goodwill
a/c
9000
Dr.
3000
Tarun Capital
a/c
4000
Dr.
8000
To Tanus capital
a/c
To Puneets Capital
a/c
(goodwill credit to Tanu and Puneet in
their sacrificing ratio in 1:2)
REVALUATION OF ASSETS AND LIABILITIES: On admission of a new partner, the firm
stands reconstituted and consequently the assets are revalued and liabilities are
reassessed. It is necessary to show the true position of the firm at the time of admission
of a new partner. If the values of the assets are raised, gain will increase the capital of
the existing partners. Similarly, any decrease in the value of assets, i.e. loss will
decrease the capital of the existing partners. For this purpose a Revaluation Account is
prepared. This account is credited with all increases in the value of assets and decrease
in the value of liabilities. It is debited with decrease on account of value of assets and
increase in the value of liabilities. The balance of this account shows a gain or loss on
revaluation which is transferred to the existing partners capital account in existing profit
sharing ratio The following journal entries made for this purpose are:
(i) For increase in the value of assets:
Asset

(ii) For decrease in the value of

Asset A/c Dr. (individually)

Revaluation A/c Dr. (individually)

To Revaluation A/c

To Asset A/c

(iii) For increase in the value of Liabilities:

[Decrease in the value of assets]

Revaluation A/c Dr. (individually)

Liabilities:

(iv) For decrease in the value of

To Liabilities A/c

Liabilities A/c Dr.

[Increase in the value of Liabilities]

To Revaluation A/c

(v) For unrecorded Assets

Liabilities]

[Decrease in the value of

Asset A/c [unrecorded] Dr.

(vi) For unrecorded Liability :

To Revaluation A/c

Revaluation A/c Dr.

[Unrecorded asset recorded at actual value]

To Liability A/c [unrecorded]

(vii) For transfer of gain on revaluation:

recorded at actual value]

[Unrecorded Liability

Revaluation A/c Dr.

To Existing Partners Capital/Current A/c
[Profit on revaluation transferred to capital account in existing ratio]
(viii) For transfer of loss on revaluation:
Existing Partners Capital/Current A/c Dr.
To Revaluation A/c
[Loss on revaluation transferred to capital account in existing ratio]
Performa of Revaluation account is given as under:
Revaluation account
Particular
Amount
Particular
Amount
Assets [decrease in value]
Assets [Increase in value]
Liabilities [increase in value]
Liabilities [Decrease in value]
Liabilities [unrecorded]
Assets [unrecorded]
Profit transferred to Capital
Loss transferred to Capital A/c
A/c
[Individually in existing ratio]
[Individually in existing ratio]
Illustration 14: Karan and Tarun are partners sharing profit and losses in the ratio of 2 :
1. Their Balance Sheet was as follows:
Balance Sheet of Karan and Tarun as on December 31,2006
Liabilities
Creditors
Bills payable
Capitals:
Karan
Tarun

Amount
10,000
7,000
40,000
30,000

Assets
Cash in hand
Debtors
Building
Investment
Machinery
Stock

Amount
7,000
26,000
20,000
15,000
13,000
6,000
87000
87000
Nikhil is admitted as a partner and assets are revalued and liabilities reassessed as
follows:
(i) Create a Provision for doubtful debt on debtors at Rs.800.

(ii) Building and investment are appreciated by 10%.

(iii) Machinery is deprecated at 5%
(iv) Creditors were overestimated by Rs.500.
Make journal entries and Prepare revaluation account before the admission of Nikhil.
Date

Particular

L
F

Revaluation
a/c
Dr.
To Provision for doubtful debts
a/c
(provision made for doubtful debts)
Building
a/c
Dr.
Investment
a/c
Dr.
To Revaluation
a/c
(increase in the value of building &
investment)
Revaluation
a/c
Dr.
To machinery
a/c
(decrease in the value of machinery)
Creditors
a/c
Dr.
To Revaluation
a/c
(value of creditors reduced)
Revaluation a/c
Particular
Provision for Doubtful Debts
Machinery
Profit transferred to
Karans Capital 1,700
Taruns Capital 850

Amount
800
650

Amount

Amount

800
800

2000
1500
3500

650
650

500
500

Particular
Building
Investment
Creditors

Amount
2,000
1,500
500

2,550
4000
4000
ADJUSTMENTS OF RESERVES AND ACCUMULATED PROFIT OR LOSSES: Any
accumulated profit or reserve appearing in the balance sheet at the time of admission of
a new partner is credited in the existing partners capital account in existing profit
sharing ratio. If there is any loss, the same will be debited to the existing partner in the
existing ratio. For this purpose the following journal entries are made as:
(i) For distribution of undistributed profit and reserve.

Reserves

A/c

Profit & Loss A/c(Profit)

Dr

Dr.

To Partners Capital A/c

[individually]

[Reserves and Profit & Loss (Profit) transferred to all partners capitals A/c in existing
profit sharing ratio]
(ii) For distribution of loss
Partners Capital

A/c

Dr. [individually]

To Profit and Loss

A/c [Loss]

[Profit & Loss (loss) transferred to all partners capitals A/c in existing profit sharing ratio]
Illustration 15: Rohit and Soniya are partners sharing profit in the ratio of 4:3. On lst
April 2006 they admit Meena as as new partner for 1/4 shares in profits. On that date the
balance sheet of the firm shows a balance of Rs.70,000 in general reserve and debit
balance of Profit and Loss A/c of Rs.21,000. make the necessary journal entries.
Solution
Dat
e

Journal

Particular

L
F

Amount

Amount

General Reserve
70,000
Dr
40,000
To Rohits Capital A/c
30,000
To Soniyas Capital A/c
[Transfer of general reserve to the existing
partners capital accounts]
Rohits Capital
A/c
12,000
Dr.
9,000
Soniyas Capital
A/c
21000
Dr.
To Profit & Loss A/c
[transfer of accumulated Loss to existing
partners capital A/c]
Illustration: l6 Bhanu and Etika are partners sharing profit and losses in the ratio of 3:2
respectively. Their Balance Sheet as on March 31, 2006 was as under: Balance Sheet of
Bhanu and Etika as on December 31, 2006
Particular
Creditors
Capitals:

Amount
28,000
Bhanu 70,000
Etika 70,000

1,40,000

Particular
Cash in hand
Cash at Bank
Debtors
Buildings
Stock

Amount
3,000
23,000
19,000
65,000
30,000

Furniture
Machinery

15,000
13,000

168000
168000
On that date, they admit Deepak into partnership for 1/3 share in future profit on the
following terms:
(i) Furniture and stock are to be depreciated by 10%.
(ii) Building is appreciated by Rs.20,000.
(iii) 5% provision is to be created on Debtors for doubtful debts.
(iv) Deepak is to bring in Rs.50,000 as his capital and Rs.30,000 as goodwill.
Make necessary ledger account and balance sheet of the new firm.
Revaluation account
Particular
Provision for Doubtful Debts

Amount
950

Furniture
Stock
Profit transferred to
Bhanus Capital A/c
8,730
Etikas Capital A/c
5,820

1,500
3,000

Particular
Building

Amount
20,000

14,550

20000
Capital account
Particular

Bhanu Etika

Balance c/d
96,730
(closing) (closing)

96,73
0

87,820

87,82
0

Deep
ak
50,00
0

Balance b/d
Revaluation (Profit)
Bank A/c
Goodwill A/c

50,00
0

20000
Bhan
u
70,00
0
8,730

18,00
0
96,73
0

Etika

Deep
ak

50,00
0

70,00
0
5,820

12,00
0
87,82 50,00
0
0

Balance Sheet of Bhanu, Etika and Deepak as on

December 31, 2006
Particular
Creditors

Amount
28,000

Particular
Cash at Bank

Amount
1,03,000

Capitals:

Cash in hand
Debtors
Less: Provision
Stock
Furniture
Machinery
Building

Bhanu
96,730

3,000
19,000
950

18050
Etika
2,34,550
27,000
87,820
13,500
Deepak
13,000
50,000
85,000
262550
262550
Illustration: 17 Ashu and Pankaj are partners sharing profit in the ratio of 3 : 2, their
Balance sheet on March 31, 2007 was as follows:
Balance Sheet of Ashu and Pankaj as on March 31,2007
Liabilities
Creditors
Bills Payable
Salaries outstanding
Profit & Loss
Capitals:
Ashu 1,50,000
Pankaj 1,30,000

Amount
38,000
40,000
5,000
40,000

Assets
Cash in hand
Cash at Bank
Debtors
Stock
Machinery
Goodwill

Amount
15,000
62,000
58,000
85,000
1,45,000
2,80,000
38,000
403000
403000
They admitted Gurdeep into partnership on the following terms on March 31, 2007.
(a) New profit sharing ratio is agreed as 3: 2: l.
(b) He will bring in Rs. 1,00,000 as his shared capital and Rs.30,000 as his share of
goodwill.
(c) Machinery is appreciated by 10%
(d) Stock is valued at Rs. 87,000.
(e) Creditors are unrecorded to the extent of Rs.6,000.
(f) A provision for doubtful debts is to be created by 4% on debtors.
Prepare Revaluation account, Capital Accounts, Bank account and Balance Sheet of the
new firm after admission of Gurdeep.

Revaluation account
Particular
Provision for Doubtful
Debts
Creditors
Profit transferred to
Ashus Capital A/c
4,908

Amount
2,320
6,000

8,180

particular
Machinery
Stock

Amount
14,500
2,000

Pankajs Capital A/c

3,272
16500

16500
Capital account

Particular
Goodwill A/c
Balance c/d

Ashu

Panka
j
22,800 15,200
1,74,1 1,46,0
08
72

Gurde
ep

1,00,0
00

19690 16127 50000

8
2

Particular
Balance b/d
Profit & Loss
A/c
Revaluation
A/c (Profit)
Bank A/c
Goodwill A/c

Ashu

Panka
j
1,50,0 1,30,0
00
00
24,000 16,000
4,908
3,272

Gurde
ep

1,00,0

00
18,000 12,000
19690 16127 50000
8
2