Calss 12 Bk & Accountancy Lecture 2 | Chapter 3 Admission of Partnership | Valuation of Goodwill

📘 What is Admission of a Partner?
When a new person joins an existing partnership firm as a partner, it's called the Admission of a Partner. This usually happens when the firm wants to:
• Raise more capital
• Acquire new skills/talents
• Expand business operations
• Share risks and responsibilities


📄 Key Aspects of Admission of a Partner
1. Consent of All Partners
• As per the Indian Partnership Act, a new partner can be admitted only with the consent of all existing partners, unless otherwise stated in the partnership deed.
2. Rights of the New Partner
The new partner gets:
• Right to share profits and losses
• Right to take part in the management
• Right to access books of accounts
In return, they may have to bring capital and/or goodwill.


🧮 Accounting Adjustments During Admission
When a new partner is admitted, some important financial adjustments are made:
A. New Profit-Sharing Ratio
• Existing partners and the new partner agree on a new ratio for sharing profits and losses.


🔁 Example:
Old Ratio: A:B = 3:2
New partner C is admitted
New Ratio: A:B:C = 5:3:2


B. Sacrificing Ratio
• It shows how much share each old partner sacrifices for the new partner.
Sacrificing Ratio = Old Ratio – New Ratio
This is useful in calculating goodwill contribution.


C. Goodwill
• The new partner compensates the old partners for their sacrifice in profit share.
Two ways to treat goodwill:
• Premium Method: New partner brings goodwill in cash.
• Adjustment Method: Goodwill is adjusted through capital accounts.


D. Revaluation of Assets and Liabilities
• The firm revalues its assets and liabilities to show current values.
• A Revaluation Account is prepared to record profit or loss on revaluation.


E. Adjustment of Reserves and Accumulated Profits
• Any general reserves or retained profits/losses are distributed among old partners before the new partner joins.


F. Capital Adjustment
• Partners may agree to adjust their capital accounts in the new profit-sharing ratio.