Adjustments on Admission of New Partner
When a new partner joins a partnership firm, he is said to be admitted into partnership.
He is required to bring the following:
1. Capital for his share in the firm.
2. Goodwill for his share in the future profits.
New partner will enjoy the following rights after his admission:
1. His share in the future profits of the firm.
2. His share in the assets of the firm.
3. All other rights as a partner like right to be consulted, right to participate in decision making etc.
Adjustments on Admission of the new partner from accounting point of view:
Calculation of new profit sharing ratio.
When a new partner is admitted, his ratio should be clear to all partners. The old partners are also affected by his admission, their New Shares should also be clear to all of them.
Accounting treatment of goodwill.
New partner will be entitled to profits in the firm after his joining wherever the efforts were made by the old partners. The position regarding Goodwill should also be handled well.
Revaluation of assets and liabilities.
The values of assets and/or liabilities of the firm would have changed till the date of admission. The Profit or Loss on revaluation of assets and liabilities should also be shared properly.
Treatment of reserves, accumulated profits/ losses.
There is possibility of undistributed profits and/or accumulated losses appearing in the Balance Sheet of partnership firm, on the date of admission of new partner. He was not there so; he has no claim or share in all these. Profit will not be shared by Old partners with him, and He would not like to share the Losses before his joining the firm.
Adjustment of partners' capitals.
All partners can decide on the new Capital of the firm or new capital share can be prescribed for new partner. Anyway, Capital Accounts of the partners need to be adjusted with settlement through payment or withdrawal of cash or through their current accounts.
Read all the concerned topics to understand these issues well.