Two cases for the adjustment of capitals

1. When the new partner’s capital is not given (he has to bring in the proportionate capital/according to his share of profit).

2. When new partner’s capital is given (the capitals of old partners are adjusted on the basis of new partner’s capital).

1. When the new partner’s capital is not given (he has to bring in the proportionate capital/according to his share of profit).

Following steps are taken:

1.    Calculate the capitals of old partners after making all the adjustments.

2.    Calculate the total capital of the new firm as follows:

Total capital = Combined capitals of old partners after making all the adjustments x Reciprocal of combined share of old partners in the new firm.

3. Calculate the Capital of new partner as follows:

New Partner’s Capital = Total capital (as per step 2 above) – combined capitals of old partners after making all the adjustments (as per step 1 above).

2. When new partner’s capital is given (the capitals of old partners are adjusted on the basis of new partner’s capital).

Following steps are taken:

1. Calculate Total Capital of the New Firm:

Total capital of the new firm = New Partner’s capital × reciprocal of new partner’s share

2. Calculate the new capitals of old partners by dividing the total capital of the new firm in the new profit sharing ratio.

3. Show these capitals as closing capitals in the capital accounts and calculate the surplus or deficiency, as the case may be. (As given in the question.)

In case of the absence of any specific instruction the deficiency /surplus is adjusted by bringing in or withdrawing cash and not through current account.

Balance Sheet after Admission of new partner

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