Page 45 - ISCDEBK-12

Admission of a Partner 3.3

• Revaluation Account or Profit and Loss Adjustment Account is prepared to revalue the assets and reassess
SUMMARY OF THE CHAPTER the liabilities of the firm at the time of reconstitution of the firm.

Dr. REVALUATION ACCOUNT Cr.
(i) Decrease in the value of assets. Increase in the value of assets.
(ii) Increase in amount of liabilities. Decrease in amount of liabilities.
(iii) Unrecorded liabilities. Unrecorded assets.
(iv) Gain (Profit)—difference. Loss—difference.
• Need to Revalue Assets and Reassess Liabilities: Assets are revalued and liabilities are reassessed at the
time of admission of a partner because new partner should neither benefit nor suffer because of changes in
the value of assets and liabilities as on the date of admission.
• Any Past Profits or General Reserve are also credited to Old Partners’ Capital Accounts in their profit-sharing
ratio. If there are any past losses, they will be debited to Old Partners’ Capital Accounts.
• Workmen Compensation Reserve is a reserve created out of profit to meet the workmen compensaton
claim, if any arise in future. Excess of Workmen Compensation Reserve over the Workmen Compensation Claim
should be credited to old partners’ Capital Accounts in their old ratio.
• Investments Fluctuation Reserve is created out of profit to guard against the fall in the price of the investment.
Excess of Investment Fluctuation Reserve over difference between book value and market value should be credited
to old partners in their old profit sharing ratio.
• Accounting Treatment of Accumulated Profits, Reserves and Losses through Single Journal Entry: The net effect
of accumulated profits, reserves and losses is adjusted through the following entry:
(i) In Case of Net Profit: Gaining Partners’ Capital/Current A/cs ...Dr.
To Sacrificing Partners’ Capital/Current A/cs
(ii) In Case of Net Loss: Sacrificing Partners’ Capital/Current A/cs ...Dr.
To Gaining Partners’ Capital/Current A/cs
Note: Adjustment of the incoming partner’s share to be made through his Current Account, similar to the
treatment of goodwill not brought in cash.
• Employees’ Provident Fund is a statutory liability. Hence, is not distributed among the partners.
• Adjustment of Capital:
(i) Adjustment of Old Partners’ Capitals on the basis of New Partner’s Capital:
Step 1: Calculate the total capital of the new firm.
Step 2: Determine the new capital of each partner.
Step 3: Ascertain the present capitals of old partners (Adjusted).
Step 4: Find out the surplus/deficit capitals by comparing Step 2 and Step 3.
(ii) Calculation of the New Partner’s Capital on the basis of Old Partners’ Capitals:
Step 1: Determine the total adjusted capital of the old partners.
Step 2: Determine the total capital of the new firm.
Step 3: Determine the total capital of the incoming partner as follows:
Total capital of the new firm (Step 2) × Share of incoming partner.
In the absence of any contract, Shortage or Surplus of Capital should be adjusted in Cash and not by
transfer to Current Account.

Solved Questions

Illustration 1.
A and B are partners in a firm sharing Profits and Losses in the ratio of
17 : 16. They admit C as a partner on 1st April, 2016 on the basis of his buying
5/17th of A’s share and 4/16th of B’s share. On 1st April, 2018 they permit C to purchase
a further 1/12th of their remaining shares. Goodwill is agreed to be valued at 2 years’
purchase of the average profits of 3 years immediately before any change. Profits for the
5 years ended 31st March, 2018 are: