This chapter focuses on the procedures and accounting treatments involved when a new partner is admitted into a partnership firm. It covers adjustments required for profit-sharing ratios, revaluation of assets and liabilities, treatment of goodwill, and adjustments for accumulated profits and losses.
Introduction to CBSE Class 12 Accountancy Chapter "Reconstitution of a Partnership Firm: Admission of a Partner"
Key Adjustments on Admission of a New Partner:
- Capital Adjustment: The capital contributions of existing partners may need to be adjusted based on the new profit-sharing ratio.
- Profit Sharing Ratio: The profit-sharing ratio among partners is revised when a new partner is admitted.
- Goodwill Adjustment: Goodwill is evaluated, and partners who sacrifice their share are compensated.
- Distribution of Accumulated Profits, Reserves, and Losses: These are distributed to old partners according to the old profit-sharing ratio.
- Revaluation of Assets and Liabilities: To reflect their current values, assets and liabilities are revalued, and the resulting profit or loss is shared among existing partners.
Interest on Capital:
- Interest is provided on capital contributed by partners, as per the partnership deed or mutual agreement.
Interest on Drawings:
- Interest is charged on the amount withdrawn by partners for personal use.
Profit and Loss Appropriation Account:
- This account is prepared to distribute the net profits among partners after accounting for interest on capital, salaries, and interest on drawings.
Assignments for CBSE Class 12 Accountancy Chapter “Reconstitution of a Partnership Firm: Admission of a Partner”
- Case Study Analysis: Analyze a case where a new partner is admitted and adjustments for goodwill and revaluation are made.
- Research Project: Investigate the impact of admitting a new partner on the financial statements of a partnership firm.
- Debate Preparation: Prepare for a debate on the importance of revaluing assets and liabilities when admitting a new partner.
- Chart Creation: Create a flowchart illustrating the steps involved in the admission of a new partner and related adjustments.
- Role Play: Conduct a mock partnership agreement negotiation focusing on the terms of admission of a new partner.
Conclusion
The chapter “Reconstitution of a Partnership Firm: Admission of a Partner” provides a comprehensive understanding of the accounting treatments required when a new partner joins a partnership firm. It emphasizes the importance of proper adjustments to ensure fair distribution of profits and losses.
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Questions and Answers for CBSE Class 12 Accountancy Chapter "Reconstitution of a Partnership Firm: Admission of a Partner"
Q1: Identify various matters that need adjustments at the time of admission of a new partner.
ANS: Adjustments needed include capital adjustment, revised profit-sharing ratio, goodwill adjustment, distribution of accumulated profits, and revaluation of assets and liabilities.
Q2: Why is it necessary to ascertain a new profit-sharing ratio even for old partners when a new partner is admitted?
ANS: It is necessary because the existing partners sacrifice their present profit-sharing ratio to allocate a share to the new partner, resulting in a revised ratio that reflects a fair distribution of future profits.
Q3: What is the sacrificing ratio and why is it calculated?
ANS: The sacrificing ratio is the portion of the profit-sharing ratio sacrificed by current partners when a new partner joins. It is calculated to compensate the existing partners for their sacrifice in the form of goodwill.
Q4: On what occasions is the sacrificing ratio used?
ANS: It is used when the profit-sharing ratio among partners changes or when a new partner is admitted, to determine the distribution of goodwill.
Q5: If some goodwill already exists in the books and the new partner brings in his share of goodwill in cash, how will you deal with the existing amount of goodwill?
ANS: The existing goodwill is written off among the old partners in the old profit-sharing ratio, and the new partner’s contribution is credited to the goodwill account.
Q6: Why is there a need for the revaluation of liabilities and assets on the admission of a partner?
ANS: Revaluation is needed to determine the true value of liabilities and assets on the admission date, as their book values may not reflect current market values.
Q7: Explain various methods of valuation of goodwill.
ANS: Goodwill can be valued using the Average Profit Method, Weighted Average Method, Super Profit Method, and Capitalization Method. Each method considers different factors to calculate the firm’s goodwill.
Q8: How will you deal with goodwill when a new partner is not in a position to bring his share of goodwill in cash?
ANS: The goodwill account is adjusted through the old partners’ capital accounts, debiting the new partner’s capital account and crediting the old partners’ accounts.
Q9: How will you deal with the accumulated profits and losses and reserves on the admission of a new partner?
ANS: Accumulated profits and reserves are distributed to the existing partners in their old profit-sharing ratio before the new partner’s admission.
Q10: At what figures do the values of liabilities and assets appear in the books of the firm after revaluation has been done?
ANS: After revaluation, liabilities and assets appear at their revalued amounts, reflecting their current market values.
