What happens when a new partner admitted in a company?

BusinessHow To Admit a partner into a firmHow To Admit a partner into a firmWriterSeptember 7, 2021The partnership is yet another important aspect when it comes to accounting. Its

What happens when a new partner admitted in a company?


How To Admit a partner into a firm

How To Admit a partner into a firm

WriterSeptember 7, 2021

The partnership is yet another important aspect when it comes to accounting. Its complexity forces one to go toPartnership Acthelp since certain concepts need a better understanding.

In order to understand the partnership act, it becomes very necessary to understand the concept of industrial laws, which is the basis for all the transactions as well as the decisions of a company. Determination of such behaviors and the theories behind them is a tough task, hence people generally need help for the same.

The admission of a new partner in the firm can only be done if all the existing partners have given consent unless otherwise agreed upon. At the time of admitting a new partner, to carry on the business, a new agreement is entered into, and the partnership firm is redesigned. This is an important point which business partners must keep in mind.

The old partnership deed comes to an end when admitting a new partner, so the new partnership deed is prepared.

The new partner brings his share of goodwill and capital at the time of his admission. The new partner gets a share in the future profits of the firm since the old partners sacrifice a share of their profits in his favor. At times, the following reasons can be held responsible for the admission of a new partner into the business:

  • When more capital is needed for the business to expand.
  • A capable employee is admitted into the partnership to motivate him.
  • When a competent and experienced person is needed for the business to run efficiently.
  • The renowned and reputed person is taken into the partnership when the goodwill and the reputation of the business are to be increased.

There are some famous case studies &research paperswhich allow us to further our general knowledge regarding this act. Now let us focus on the following adjustments that are needed to admit a partner and essential to mention when going for accounting assistance:

  • The new profit-sharing ratio is being calculated.
  • The Capitals are adjusted based on the new profit-sharing ratio.
  • The accounting treatment is done for the revaluation of assets and liabilities.
  • The accounting treatment of goodwill is completed.
  • The accounting treatment of the Joint Life Policy is completed.
  • The accounting treatment is being done for reserves and accumulated profits.

Treatment of Goodwill

As per Accounting Standard (AS) 26 (that is, intangible asset), only when some consideration in money or moneys worth has been paid for the goodwill, then only the goodwill can be provided in the books. Now we should learn the following situations that are related to the accountingtreatment of goodwillat the time of admission of a new partner:

  1. When the amount of goodwill (premium) is paid privately:No entries are needed to be passed if the new partner has made the payment of the amount of goodwill in cash privately to the old partners, outside the business.
  2. When the share of goodwill (premium) in cash is brought by the new partner:This method contains two alternatives:
  3. When the amount of goodwill/premium brought in by the new partner is retained in the business:The amount of goodwill that is, the share of the new partner of goodwill in cash, which is retained in the business, is credited to the Capital accounts of old partners in their sacrificing ratio.
  4. When goodwill/premium brought in by the new partner is withdrawn by the old partners:Sometimes, the old partners withdraw the amount of goodwill that was brought by the new partners.
  5. When the new partner does not bring his share of goodwill/premium in cash:Goodwill should be adjusted through capital accounts of the partners when the goodwill of the firm is evaluated, and the share of goodwill is not brought by the new partner.

Calculation of New Profit-Sharing Ratio:

A new partner acquires his share of profit from the old partners when admitting a new partner in the firm. This reduces the share of profit from the old partners; therefore it becomes important for the new profit-sharing ratio to be calculated. When a new partner is admitted, at the time ofcalculation of profit-sharing ratio, there may arise some following problems:

  • In the absence of any other agreement, when only the information of the ratio of the new partner is given in the question, then it is automatically assumed that the old partners will keep on sharing the remaining profits in the ratio same as they had shared the profits before the admission of the new partner.
  • At times, the share from the old partners is purchased by the new partner, in a specific ratio. As for these cases, the sacrifice made by a partner from his existing share of profit will be deducted and then the new profit-sharing ratio of the old partners will be calculated.
  • The share of profit from the old partners is purchased by the new partner equally. In such cases, the old partners new profit-sharing ratios would be set on by deducting the amount sacrificed by them from their existing share profits.

Revaluation of Assets and Liabilities

It is necessary to revalue the assets and liabilities of the firm to their true and fair values at the time of admission of a new partner. This is so because the value of certain assets might have increased while the value of some other assets might have reduced, with time.

Therefore, the value stated in the balance sheet may be different from the actual values of various assets and liabilities. Reduction in the value of assets should not affect the new partner and he might not suffer, nor the rise in the value of assets should benefit him. The old partners distribute the entire profit or loss arising from revaluation, in their old profit-sharing ratio.

It is based on a scale of preference that says that a partner can prefer any combination of two firms depending upon his need or situation. It also gives an equal amount of satisfaction to the partners since it shows various combinations of two commodities.

The consumer has the right to be informed about the quantity, purity, price, quality, potency and standard of the goods he is willing to purchase. The manufacturer and distributor should give complete information about the product including its technical specifications, ingredients, date of manufacture, etc.

Adulterated and unsafe products, overcharging, misleading advertisements, under weighing are some of the examples of exploitation of the consumers. Consumers can also be exploited because of greedy and unscrupulous businessmen. As a result , consumers cannot enjoy their basic rights.

The place where the buyers and sellers meet personally or through different means of communication such as fax, Internet, e-mail, telephone, etc. is known as a market. The forces of demand and supply operate in this either directly or by means of any type of communication. In a market, the demand for a product or service is affected by attitudes, resources and activities of buyers and sellers. All the activities that are related with the flow of goods and services from producers to consumers is known as marketing.

The new account known as Revaluation Account helps to revalue the assets and liabilities. Sometimes it is also called Profit and Loss Adjustment a/c. This account has the nature of a nominal account. Therefore, the revaluation account is debited when there is a loss because of revaluation, and the revaluation account is credited if the revaluation results in a profit.

Hence, these were a few points about the admission of a partner that must be understood for further concepts of accounts, and which require essential focus when referring for business acts help.Related ItemsPartner in a firmPartnership Actprofit-sharing ratioresearch papersBusinessSeptember 7, 2021

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