Admission of a partner

The essentials

A new partner can be admitted only with the consent of all existing partners. He acquires a right to a share in the firm's assets and future profits, and usually brings capital and a premium for goodwill. Before admission, the firm calculates the new profit-sharing ratio and the sacrificing ratio, revalues assets and liabilities, distributes reserves, and adjusts goodwill.

Key points

• If the new partner takes his share from old partners in their old ratio, sacrificing ratio = old ratio, and each old partner's new share = old share × (1 − new partner's share).
• Premium brought in cash: Cash/Bank A/c Dr; To Premium for Goodwill A/c; then Premium for Goodwill A/c Dr; To Old Partners' Capital A/cs (sacrificing ratio).
• Premium not brought in cash: New Partner's Capital (or Current) A/c Dr; To Sacrificing Partners' Capital A/cs.
• Existing goodwill in the books is written off among old partners in the old ratio.
• Hidden goodwill = (New partner's capital × reciprocal of his share) − (Total capital of all partners after adjustments, including new partner's capital).
• Capitals may be adjusted on the basis of the new partner's capital, with surplus withdrawn or deficit brought in.

Exam tips

Write every share with a common denominator. Credit goodwill premium to the partners who sacrifice, not to all old partners automatically in the old ratio.

Common mistakes

• Crediting goodwill premium to the new partner's capital.
• Forgetting to write off existing goodwill before recording the new partner's premium.