When a company lacks the capital to run its operational function, they seek for additional funds or managerial assistant or both for the development of its business. Therefore, a new partner may be admitted to enhancing its existing resources. This inclusion of new partners to the existence of a company is known as the Admission of a partner.
With the Admission of a new partner, a new agreement is registered, and the partnership firm is reconstituted. After the Admission, the newly admitted partner obtains two significant rights in the firm–
- Right to share the assets of the partnership firm
- Right to share the profits of the partnership firm
Adjustments in the Admission of a Partners
On the inclusion of a new partner, the following adjustments should be taken into consideration:
- Adjustment in profit sharing ratio – After the Admission, the new partner acquires a profit share from the existing partners. Therefore, the new profit ratio is decided jointly amongst the current and new partners.
- Adjustment in sacrificing ratio – Here the existing partners surrenders few of their share for the new partner. The sacrificed ratio of the profit share is known as sacrificing ratio.
- Adjustment of Goodwill – The new partner contributes some amount as his part of goodwill share to compensate for the loss suffered by the existing partners. If the partner does not pay for goodwill, then the equal amount will be deducted from the capital. The goodwill amount contributed by the new partner will be divided amongst the existing partners in their sacrificing ratio.
- Adjustment for revaluation of assets and reassessment of liabilities – On new partners admission, the reformed firm, reevaluates the assets and liabilities to determine the exact status of the firm. If the asset value is increased, the capital of the existing partners will be increased. Similarly, any decrease will decrease the current partners capital.
- Distribution of accumulated profits and reserves – At the time of Admission, the accumulated reserve or profit recorded in the balance sheet is credited, and in case of loss, it will be deducted in the capital account of the existing partners’ in a profit-sharing ratio.
- Adjustment of partners’ capitals – In this admission process, the partners’ accept to adjust their money in the profit-sharing ratio proportion. Therefore, the existing partners’ capital account is maintained with all the adjustments, general-reserve, goodwill account, reassessment of assets and liabilities.
The above-mentioned details are required to have a basic knowledge of Admission of Partners. For more information on accountancy class 12 stay tuned to BYJU’S.