In the case when admission of a partner to a partnership, the old partners will wish to ensure that they receive their full entitlement to partnership profits up to the date of the change in the constitution. Similarly, the new partner will not wish to bear any losses which may have arisen during the period prior to his admission.
Consequently, as in the case of retirement, death of a partner or admission of a partner, the partnership assets (including goodwill) will have to be revalued and the new values introduced (and possibly later eliminated) from the partnership books. If the new partner introduces additional capital into the partnership, the total amount of cash/asset he brings in must be credited to his capital account.
Exercise # 1:
Usman and Fazal, equal partners in a vehicle repair business, agree to Zain becoming a partner on January 1, 2020. Their capitals are Usman Rs. 12,000; Fazal Rs. 9,000; and Zain agrees to introduce Rs. 3,000 capital and Rs. 2,000 for his share of partnership goodwill. The partners agree to share profit in the ratio Usman 2; Fazal 2 and Zain 1, and decide that goodwill should not be shown in the books.
Required: Show partners’ capital accounts in case of admission of a partner.
Mukharji, A., & Hanif, M. (2003). Financial Accounting (Vol. 1). New Delhi: Tata McGraw-Hill Publishing Co.
Narayanswami, R. (2008). Financial Accounting: A Managerial Perspective. (3rd, Ed.) New Delhi: Prentice Hall of India.
Ramchandran, N., & Kakani, R. K. (2007). Financial Accounting for Management. (2nd, Ed.) New Delhi: Tata McGraw Hill.