Page 87 - DEBKVOL-1

Chapter 5 Admission of a Partner 5.3
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• Need to Revalue Assets and Reassess Liabilities: Assets are revalued and liabilities are reassessed at
the time of admission of a partner so that the new partner is not put to an advantage or a disadvantage
because of changes in the value of assets and liabilities as on the date of admission.

• Revaluation Account is prepared:
1. To ascertain the Gain (Profit)/Loss arising on account of Revaluation of Assets and Reassessment of
Liabilities.

2. To record the effect of Revaluation of Assets and Reassessment of Liabilities at their revised values.
• Accumulated Profits or General Reserve are also credited to the old partners in their old profit-sharing
ratio. If there are any undistributed losses, they will be debited to the Old Partners’ Capital Accounts.
• Excess of Workmen Compensation Reserve over the Workmen Compensation Claim (Liability) should
be credited to Old Partners’ Capital Accounts in their Old Profit-sharing Ratio.

• Excess of Investment Fluctuation Reserve over difference between Book Value and Market Value of
investment should be credited to Old Partners in their Old Profit-sharing Ratio.
• Adjustment of Capital:
(a) Adjustment of old partners’ capitals on the basis of new partner’s capital:
Step 1. Calculate the total capital of the firm on the basis of capital of new partner.

Capitalof IncomingPartner
Total Capital of the Firm = .
Share of Profit of IncomingPartner
Step 2. Determine the new capital of each partner.

New Capital of Old Partner = Total Capital of New Firm × Share of Profit of Old Partner.
Step 3. Ascertain the present capitals of old partners (Adjusted).
Step 4. Find out Surplus/Deficit Capital by comparing Step 2 and Step 3.
Step 5. Adjust the surplus or deficit through Cash or Current Accounts (as the case may be).
(b) Calculation of new partner’s capital on the basis of old partners’ capitals:
Step 1. Determine the total adjusted capitals of the old partners.
Step 2. Determine the total capital of the new firm.
Total Adjusted Old Capital of Old Partners
Total Capital of New Firm = .
Total Combined New Share of Old Partners
Step 3. Determine the total capital of the incoming partner as follows:
Total Capital of New Firm (Step 2) × Share of incoming partner.

Important Notes:
1. In the absence of an agreement, Surplus or Shortage of Capital is adjusted in Cash and not by transfer
to Current Accounts.
2. There is a difference between ‘Z is to contribute 1/5th of the total Capital of the New Firm’ and ‘Z is to
contribute 1/5th of the combined capital of the old partners’.