Admission of Partner in Partnership accounts
An existing partnership firm may take up expansion/diversification of the business. In that case it may need managerial help or additional capital. An option before the partnership firm is to admit partner/partners. When a partner is admitted to the existing partnership firm, it is called admission of a partner.
On admission of a new partner, the partnership firm is reconstituted with a new agreement. For example, Rekha and Nitesh are partners sharing profit in the ratio of 5:3. On April 1, 2014 they admitted Nitu as a new partner with 1/4th share in the profit of the firm. In this case, with the admission of Nitu as partner, the firm stands reconstituted.
On the admission of a new partner, the following adjustments become necessary:
(i) Adjustment in profit sharing ratio;
(ii) Adjustment of Goodwill;
(iii) Adjustment for revaluation of assets and reassessment of liabilities;
(iv) Distribution of accumulated profits and reserves; and
(v) Adjustment of partners’ capitals
Adjustment in Profit sharing Ratio
When a new partner is admitted he/she acquires his/her share in profit from the existing partners. As a result, the profit sharing ratio in the new firm is decided mutually between the existing partners and the new partner. The incoming partner acquires his/ her share of future profits either from one or more existing partner. The existing partners sacrifice a share of their profit in the favour of new partner, hence the calculation of new profit sharing ratio becomes necessary.
At the time of admission of a partner, existing partners have to surrender some of their share in favour of the new partner. The ratio in which they agree to sacrifice their share of profits in favour of incoming partner is called sacrificing ratio. Some amount is paid to the existing partners for their sacrifice. The amount of compensation is paid by the new partner to the existing partners for acquiring the share of profit which they have surrendered in favour of the new partner.
Sacrificing Ratio is calculated as follows:
Sacrificing Ratio = Existing Ratio – New Ratio
Following cases may arise for the calculation of new profit sharing ratio and sacrificing ratio:
(i) Only the new partner’s share is given
In this case, it is presumed that the existing partners continue to share the remaining profit in the same ratio in which they were sharing before the admission of the new partner. Then, existing partner’s new ratio is calculated by dividing remaining share of the profit in their existing ratio. Sacrificing ratio is calculated by deducting new ratio from the existing ratio.
Deepak and Vivek are partners sharing profit in the ratio of 3 : 2. They admit Ashu as a new partner for 1/5 share in profit. Calculate the new profit sharing ratio and sacrificing ratio.
New partner’s share = 1/5
Remaining share = 1 – 1/5 = 4/5
Deepak’s new share = 3/5 of 4/5 i.e. 12/25
Vivek’s new share = 2/5 of 4/5 i.e. 8/25
Ashu’s Share = 1/5
The new profit sharing ratio of Deepak, Vivek and Ashu is :
= 12/25 : 8/25 : 1/5 = 12 : 8 : 5/25 = 12 : 8 : 5
So Deepak Sacrificed = 3/5 – 12/25 = 15 – 12/25 = 3/25
Vivek Sacrificed = 2/5 – 8/25 = 10 – 8/25 = 2/25
Sacrificing Ratio = 3 : 2
Sacrificing ratio of the existing partners is same as their existing ratio.
(ii) The new partner purchases his/her share of the profit from the Existing partner in a particular ratio.
In this case : the new profit sharing ratio of the existing partners is to be ascertained after deducting the sacrifice of share agreed from his share. It means the incoming partner has purchased some share of profit in a particular ratio from the existing partners.
Neha and Parteek are partners, sharing profit in the ratio of 5 : 3. They admit Nisha as a new partner for 1/6 share in profit. She acquires this share as 1/8 from Neha and 1/24 share from Parteek. Calculate the new profit sharing ratio and sacrificing ratio.
Neha’s and Parteek’s existing ratio is 5 : 3
Neha’s new share = 5/8-1/8 = 4/8 or 12/24
Parteek’s new share = 3/8-1/24 = 8/24
Nisha’s share = 1/8+1/24 =4/24
The new profit sharing ratio of Neha, Parteek and Nisha is
12/24 : 8/24 : 4/24
= 12 : 8 : 4 = 3 : 2 : 1
(ii) Sacrificing ratio = 1/8 : 1/24 or 3 : 1
Him and Raj shared profits in the ratio of 5:3. Jolly was admitted as a partner. Him surrendered 1/5 of his share and Raj 1/3 of his share in favour of Jolly. Calculate the new profit sharing ratio.
Him surrenders 1/5 of his share, i.e., = 1/5 of 5/8 = 1/8
Raj surrenders 1/3 of his share, i.e., = 1/3 of 3/8 = 1/8
So, sacrificing ratio of Him and Raj is 1/8 : 1/8 or equal.
Him’s new share = 5/8 – 1/8 = 4/8
and Raj’s new share = 3/8 – 1/8 = 2/8
Jolly’s share = 1/8 + 1/8 = 2/8
New profit sharing ratio of Him, Raj and Jolly is
= 4/8 : 2/8 : 2/8 or 4 : 2 : 2 or 2 : 1 : 1.
See also : Gurantee of profit in partnership