Arrange the following statements in proper sequence in context of admission of a partner. (A) Finalizing terms for admission of new partner (B) Calculation of sacrificing/gaining ratio (C) Finalizing balance in partner’s capital A/c (D) Calculation of new profit-sharing ratio (E) Valuation and adjustment of goodwill
(A), (D), (B), (E), (C)
Sequence of Steps on Admission of a Partner
When a new partner is admitted into an existing partnership firm, several accounting adjustments and calculations are necessary to reflect the changes in the partnership structure. These steps follow a logical sequence to ensure proper accounting treatment.
Understanding the Typical Process
The process generally begins with establishing the terms of the new partnership and the new partner's entry. This is followed by calculations related to profit sharing and the impact on existing partners. Adjustments for intangible assets like goodwill are made, and finally, the financial position, including partners' capital accounts, is updated.
Let's analyze the given statements and place them in the logical order for the admission of a partner:- Finalizing terms for admission of new partner (A): This is the foundational step. Before any calculations or adjustments can be made, the existing partners and the incoming partner must agree on the terms and conditions of admission. This includes the new partner's share in future profits, the amount of capital they will bring, and any premium for goodwill. This must happen first.
- Calculation of new profit-sharing ratio (D): Once the new partner's share is agreed upon as part of the terms (A), the new profit-sharing ratio among all partners (including the new one) needs to be calculated. This ratio will determine how future profits and losses are distributed. This calculation relies directly on the terms finalized in step (A).
- Calculation of sacrificing/gaining ratio (B): After the new profit-sharing ratio (D) is determined, the sacrificing ratio (by existing partners) and potentially gaining ratio (by the new partner, or even an existing partner if the arrangement is complex) is calculated by comparing the old profit-sharing ratio with the new profit-sharing ratio. This ratio is crucial for the adjustment of goodwill. This calculation depends on the new ratio calculated in step (D).
- Valuation and adjustment of goodwill (E): Goodwill is a significant item in partner admission. Its value is determined (valuation), and then it is adjusted through the partners' capital accounts. The adjustment is typically made among the sacrificing partners in their sacrificing ratio and credited to the gaining partner(s). This step requires the sacrificing/gaining ratio calculated in step (B).
- Finalizing balance in partner’s capital A/c (C): After all necessary adjustments are made (including revaluation of assets/liabilities, treatment of reserves and accumulated profits/losses, and adjustment for goodwill (E)), the final balances in the partners' capital accounts are determined. This is the culmination of all previous steps and adjustments.
Summary Table of Admission Steps
| Step No. | Statement | Description | Dependency |
|---|---|---|---|
| 1 | (A) Finalizing terms for admission | Agreeing on the new partner's share, capital, etc. | None (Initial step) |
| 2 | (D) Calculation of new profit-sharing ratio | Determining the new ratio for all partners. | Depends on Step (A) |
| 3 | (B) Calculation of sacrificing/gaining ratio | Comparing old and new ratios for existing partners. | Depends on Step (D) |
| 4 | (E) Valuation and adjustment of goodwill | Determining goodwill value and distributing it based on sacrifice/gain. | Depends on Step (B) |
| 5 | (C) Finalizing balance in partner’s capital A/c | Updating capital accounts after all adjustments. | Depends on Step (E) (and other adjustments) |
The correct sequence is (A), (D), (B), (E), (C).
Revision Table: Key Ratios in Partner Admission
| Ratio | Calculation | Purpose |
|---|---|---|
| Old Ratio | Pre-admission profit sharing ratio among existing partners. | Basis for comparison to determine sacrifice/gain; distribution of old reserves/profits. |
| New Ratio | Profit sharing ratio among all partners (including new partner) after admission. | Distribution of future profits/losses. |
| Sacrificing Ratio | Old Ratio − New Ratio (for existing partners). | Ratio in which existing partners give up their share of profit; used for goodwill adjustment. |
| Gaining Ratio | New Ratio − Old Ratio (usually for incoming partner, or sometimes existing partner). | Ratio in which a partner's share increases; used for goodwill adjustment. |
Additional Information: Goodwill on Partner Admission
Goodwill represents the value of the reputation and standing of the firm. When a new partner is admitted, they acquire a share in the firm's future profits, which includes a share of profits attributable to existing goodwill. Therefore, the new partner usually compensates the existing partners for the share of goodwill they are acquiring.
Methods of dealing with goodwill upon admission:
- Premium Method: The new partner brings in their share of goodwill in cash or in kind. This amount is distributed among the sacrificing partners in their sacrificing ratio.
- Revaluation Method (or raising goodwill): Goodwill account is raised in the books at its full value or new partner's share. If raised at full value, it is credited to old partners in their old ratio. If goodwill is not to appear in the books, it is subsequently written off among all partners (including the new one) in the new profit-sharing ratio.
- Memorandum Revaluation Method: Goodwill is adjusted through partners' capital accounts without opening a Goodwill Account in the books. The gaining partner(s) compensate the sacrificing partner(s) through their capital accounts.
The method used depends on the agreement between the partners and whether goodwill is to be shown in the balance sheet.
Important Questions from Accounting for Not-for-Profit Organisations
The proper steps in the preparation of Income and Expenditure accounts are:
(A) Exclude Capital receipt and Capital payment
(B) Close the account to find out surplus or deficit for the current year
(C) Consider only revenue receipts and revenue payments
(D) Pursue the receipts and payment account
(E) Make adjustment for outstanding and prepaid expenses and income
Choose the correct answer from the options given below:
A club received ₹20,000 as a subscription during the year 2016-17, of which ₹3,000 relates to the year 2015-16, and ₹2,000 relates to the year 2017-18; and at the end of year 2016-17, ₹6,000 are still receivable. The amount to be shown in the Income and Expenditure account for the year 2016-17 is:
The item that is not recorded in the Income and Expenditure account is:
Amount paid for the purchase of medicine during the year 2014-15 was ₹73,000. The amount of medicine consumed during the year 2014-15 was:
Particulars 01.04.2014 (₹) 31.03.2015 (₹) Creditor for medicines 25,000 17,000 Stock of medicines 62,000 54,000 Advance to supplier 11,500 12,800 Receipt and payment account records:
