class 12 accountancy admission of a partner notes

     Admission of a partner.... Short & Easy Notes for Board Exam

#1. why a new partner is admitted in the firm?
=> A new partner is admitted for the following reasons;

i. When more capital is needed for the business.
ii. When there is a need for experienced person of working of the firm.
iii. When the revaluation of the firm is to be enhance by admitting a reputed person in
     the firm.
iv. When more people are needed for the firm as an employee.

#2. Describe accounting treatment of goodwill as per Accounting Standard 26.

=> As per Accounting Standard 26, Goodwill can be recorded in the book of the firm only when some consideration in money has been paid for it. It means, only purchased Goodwill should be recognize.

(i) at the time of admission, retirement, death or in case of change in profit sharing ratio, Goodwill cannot be raised in the book of the firm.

(ii) If the Goodwill of the firm is evaluated and the new partner is unable to bring his share of goodwill in cash, it should be a adjusted through partner's capital account.

                 Gainer's capital account.....Dr

                               To sacrificer's capital A/c

#3. What do you mean by hidden goodwill?

=> Hidden Goodwill means excess of total capital as worked on the basis of new partner's capital and his share in profit over the adjusted capital of existing partners and capital of incoming partner.

Following steps should be taken to calculate the amount of hidden goodwill;

(i) find out the total capital of the firm on the basis of new partner's capital.

(ii) calculate total capital of the firm (combined adjusted capital of old partners + capital of New partner).

(iii) Goodwill = Total capital of the firm - combined capital of old and new partners.

#4. What are the causes of preparing revaluation account?

=> following are the causes of preparing revaluation account;

(i) At the time of admission of new partner, the current value of Assets and liabilities may be different from the book value of the firm.

(ii) There may be some unrecorded assets and liabilities of the firm.

(iii) The value of Assets and liabilities if increase or decrease, the incoming partner is not put to an advantage or disadvantage.

(iv) The old profit, reserve and losses is adjusted in old partners in their old profit sharing ratio.

#5. What do you mean by memorandum revaluation account?

=> sometimes all the partners may agree upon that if it's our abilities will continue to appear in the new balance sheet at their old value instead of revised value. In such a case, memorandum revaluation account is prepared.

Memorandum revaluation account is divided into two parts;

(i) the increase and decrease in the value of Assets and liabilities are recorded is similar to revaluation account. profit or loss shown by this part is transferred to old partners capital account in their old profit sharing ratio.

(ii) in this second part all entry made in the first part is reverse. The balance of second part is transferred to all partners including new partner in their new profit sharing ratio.

#6. Describe the treatment of Joint life policy,

(i) When premium of Joint life policy are treated as a revenue expenditure;

(a) Under this method premium paid is debited to profit and loss account, therefore the Joint  Life Policy will not appear in the assets side of the balance sheet.

(b) Every Joint Life Policy has a surrender value, so at the time of admission of a new partner, old partner will credited their capital in their old profit sharing ratio.

             Joint Life Policy A/c .....Dr

                          To old partners's capital A/c

(c) When new firm decide that Joint Life Policy should not appear in the Balance sheet.    

             All partner's capital A/c .......Dr

                          To Joint Life Policy A/c

            (being amount of JLP written off)

(ii) When premium paid on Joint life policy is treated as capital expenditure;

(a) Joint life policy has already been recorded on the assets side of the balance sheet, at the time of admission, not adjustment entries is required.

(b) However, if all the partner including new partner, not to show it in the balance sheet, it can be written off in the new ratio.

#7. Why should a new partner be called upon to pay for goodwill?

=> A new partner be called upon to pay for Goodwill because the new partner acquire the right to share the future profit of the firm. So must compensate the existing partners, who have sacrificed his share of profit in favour of the new partner by making payment in the form of Goodwill and Premium.

POINTS;

1. When the new partner doesn't bring his share of goodwill in cash, as per Accounting Standard 26 or new Indian Standard 38, Goodwill can be recorded in the book only when Goodwill brought in cash. It means, only purchased Goodwill can be recorded.

                                               If the Goodwill of the firm is evaluated and new partner is unable to bring his share of goodwill in cash, it should be adjusted through capital or current A/c. 

              New partner current A/c.....

                         To old partners capital A/c

  (Being adjustment made for Goodwill in sacrificing ratio)

2. When capital brought in form of Assets and liabilities;

             Assets A/c..... Dr 

             Property/stock A/c..... Dr 

                         To new partners capital A/c

      (Being assets brought by new partners as capital)

3. Revaluation account is also called profit and loss adjustment account.

4. Accumulated profit is also called undistributed profit.

5. Following ledger A/c are to be opened after maintaining journal entries;

    i. Revaluation A/c - To know revaluation profit or loss.

   ii. Capital A/c - To know the closing balance of partners.

   iii. Bank A/c - To know the closing balance of cash or bank.

After preparation of all the above, a new balance sheet are to be opened.

JOURNAL ENTRIES;

i. For cash brought by new partner for his share of capital;

Bank A/c..... Dr

      To new partners's capital A/c

(Being cash brought by the new partner for his share of capital)

ii. Cash brought for his share of goodwill by the new partner;

Bank A/c.....Dr 

       To premium for Goodwill A/c 

(being Goodwill brought by the new partner for his share of goodwill)

iii. Account of goodwill credited to old partner's capital in sacrificing ratio;

Premium for goodwill A/c.....Dr

       To old partner's capital A/c

(being amount of goodwill credited to old partner's capital account in their sacrificing ratio)

iv. When goodwill withdrawn by the old partners from the firm;

old partner's capital A/c.....Dr

       To bank A/c

(being amount of goodwill withdrawn)

v. When new partner is not able to bring his share of goodwill in cash;

New partner's current A/c.....Dr

       To old partner's capital A/c

(being adjustment made for goodwill)

vi. If goodwill already appear in the book of the firm. (for goodwill write-off;

Old partner's capital A/c......Dr

       To goodwill A/c

(being debit balance of goodwill written off in old profit sharing ratio)

vii. For distribution of reserve & profit;

reserve A/c...... Dr

profit & loss account.....Dr

          To old partners capital account 

(being profit &reserve transferred to capital account in their old ratio)

viii. For distribution of undistributed loss;

Old partners capital account......Dr 

            To profit & loss account

(being undistributed loss transferred to partners capital account in their old ratio)

ix. When account of profit & reserve are not to be closed;

Gainers capital account.....Dr 

            To sacrificers capital account

(Being adjust mint made for profit and reserve)

x. When account of loss are not to be closed;

Sacrifices capital account.....Dr 

            To Gainers capital account 

(being adjustment made for loss)

xi. For value of assets increase and burden of liabilities decrease;

Assets account......Dr

Liabilities account.......Dr 

             To revaluation account 

(being value of assets increase and burden of liabilities decrease)

xii. For value of assets decrease and burden of it is increase;

Revaluation account.....Dr

             To assets account 

             To liabilities account 

(being value of liabilities increase and value of assets decrease)

xiii. For distribution of revaluation profit;

Revaluation account.....Dr

             To old partners capital account

(being revaluation profit transfer to partners capital account in old ratio)

xiv. For distribution of revaluation loss;

Old partners capital account.....Dr

              To revaluation account

(being revaluation loss transferred to partners capital account in old ratio)

        THE END

PARTNERSHIP FIRM

GOODWILL