2. Admission Of a Partner
INTRODUCTION
A new partner is admitted in a partnership firm due to
the following reasons:
1) Need for additional capital for the expansion of the
business as also the need for bringing fresh energy
into the business.
2) Sometimes when an old partner retires, then it
becomes necessary to admit a new partner in order to
help in the proper management of the firm.
3. Problems
The problem that will-arise on admission of a new
partner will be enumerated as follows:
1) New Ratio: The share of the new comer in
the future profits must also be determined,
as also the new ratio of the old partners.
2) Additional Capital: the new comer also
becomes a part-owner of the assets of the
firm, for which he is expected to-bring some
account towards his capital.
4. 3) Goodwill: The new partner will have to pay some
compensation to the existing partners for the share in
the future profits of the firm that he will receive from
them. The old partner will have to forego part their
share in favor of the new comer. Such payment is
known as Good will.
4) Reserves: Reserve Fund or any accumulated balance
of Profit and loss must be distributed among the old
partner s in their old profit sharing ratio before new
partners is admitted.
5. Revaluation
The true value of some of the assets may be more or less
than the book values on the date of admission. Similarly,
some of the liabilities, May not have been recorded in the
books, e.g. unpaid rent. In such circumstances, if the assets
and liabilities are not brought at their true values in the
books, either the new partner may suffer of the existing
partners may be put to loss. In order that neither party is
benefited or put to loss, it is usual to make necessary
changes in the values of the assets and liabilities before the
new partner is admitted. The changes are brought into the
books through an account called ‘Profit and Loss
adjustment Account’ or ‘Revaluation Account’. The Balance
of this account would show Profit or loss and it must be
transferred to the old partner’s capital accounts in their old
profit-sharing ratio.
6. Distribution Of Profits
When a new partner is admitted, there may be
accumulated profit in the firms. It may be in the name
of Reserve Fund or Profit and loss Account (Cr. Bal).
There may be Accumulated Losses also i.e. Profit and
loss Account (Dr. Bal) shown on the assets side of the
Balance sheet. This profit or loss belongs to the old
partners and must be distributed among the old
partners in the old profit sharing ratio before the new
partner is admitted.
7. Retirement Of a Partner
INTRODUCTION
When a partner retires due to illness old age of any other reason, the
partnership comes to an end. But the form may not be dissolved as the
other partner continues the business. In such a case, the partner ship is
reconstituted legally similarly, when one of the partners dies, the
partnership comes to an end. From the view point of accounts there is
hardly any difference between retirement and death of a partner.
In case of retirement, the partner decides to retire on some convenient
date, generally at the close of the financial year, whereas death occurs
on any date.
In case of the retirement, the total amount due to the retiring partner is
placed to the credit of his loan account, if it is not paid immediately.
And in the case of death, it is transferred to his Executor’s Account.
Generally, the retiring partner is paid his, dues in cash, if however,
accounts are not settled on the date of dissolution and the business is
continued, then the retiring partner has a right to get his proportionate
profit or he is entitled to get interest on these dues at 6% P.a.,
whichever is more beneficial to him.
8. Problems
The following points arise on retirement of a partner:
To revalue the assets and liabilities of the firm.
To distribute general reserve or profit and loss balance
among all partners.
To determine the new profit sharing ratio.
To fix up the value of goodwill of the firm.
To ascertain the profit or loss up to the date of
retirement
To determine the new capital of the firm and make
necessary adjustments
To make payment of the dues of retiring partner.
9. Amount’s Payable to retiring
Partner
The credit balance of his Capital Account. Also the
credit balance of his Current Account, if any
Interest on capital from the date of commencement of
accounting year till the date of his retirement.
Salary payable to the retiring partner, if any, for taking
active part in management of the business.
Partner’s loan, if any and interest on such loan.
10. Contd...
His drawings and interest on drawings, if chargeable.
If the assets and liabilities are to be revaluated at the
time of retirement, then share in any profit or loss
arising out of such revaluation.
His share in profit of the business of the firm till the
date of retirement.
His share in the firm’s goodwill.