In this topic
Learning outcomes
- Explain the relevant accounting rule and terminology.
- Prepare a correctly classified calculation or statement.
- Show working notes and verify the debit-credit or balance check.
Key vocabulary
Concepts to know
The shares in which all partners—including the incoming partner—will share future profits.
The old partners’ reduction in share, used to allocate compensation for goodwill.
Compensation brought by the incoming partner for the share of future profits received.
A two-part method that records revaluation but restores book values in the second part when assets/liabilities are not to appear at revised amounts.
Core notes
Sequence of admission adjustments
First calculate the new ratio and each old partner’s sacrifice. Then account for goodwill, revalue assets and liabilities, transfer existing reserves and accumulated profits/losses, adjust capital if required, and prepare the post-admission balance sheet. Following one sequence prevents omission and accidental double counting.
Premium brought in cash is credited to sacrificing partners in their sacrifice ratio. If the new partner cannot bring the full premium, adjust the shortfall through capital/current accounts only when the question directs. The new partner’s capital contribution is distinct from goodwill premium.
Core notes
Revaluation and reserves
Record increases in assets and decreases in liabilities by crediting Revaluation Account; decreases in assets and increases in liabilities are debited. Transfer resulting profit/loss to old partners in their old ratio. Distribute old reserves, accumulated profits and losses among old partners in the old ratio before the new partner joins.
If a liability is unrecorded but now recognised, debit Revaluation Account and credit the liability. If an unrecorded asset is brought into the books, debit the asset and credit Revaluation Account. Confirm whether values are to be revised permanently or only adjusted between partners.
Core notes
Capital and balance sheet
If the new partner’s capital is given for a known fraction, infer total capital: total implied capital = new partner capital ÷ new share. Compare existing adjusted capitals with target capitals based on the new ratio. Bring in or withdraw cash only as specified. The new balance sheet includes revised assets/liabilities, cash introduced and all adjusted capitals.
Before preparing the new balance sheet, distribute accumulated profits and reserves among the old partners in their old ratio. Record revaluation gains or losses in that same ratio. Goodwill compensation is credited to the sacrificing partners according to their sacrifice ratio; capital contribution is a separate transaction. These steps preserve the distinction between amounts earned before admission and the incoming partner’s share of future profits.
Worked example
Step-by-step illustration
A and B share 3:2. C is admitted for 1/5, acquired from A and B in their old ratio. C’s share is 1/5, so the old partners retain 4/5: A gets 3/5 × 4/5 = 12/25, B gets 2/5 × 4/5 = 8/25. New ratio = 12:8:5. Sacrifices = A 3/25 and B 2/25, i.e. 3:2.
If C brings ₹40,000 goodwill premium, A receives ₹24,000 and B ₹16,000.
| Journal entry | Dr (₹) | Cr (₹) |
|---|---|---|
| Bank A/c Dr. To Premium for Goodwill A/c | 40,000 | 40,000 |
| Premium for Goodwill A/c Dr. To A’s Capital A/c To B’s Capital A/c | 40,000 | 40,000 |
Board preparation
Original practice questions
- Find the new ratio and sacrifice when an incoming partner’s share comes from the old partners in a stated ratio.
- Show the treatment of an unrecorded liability at admission.
- Why are accumulated reserves distributed before the new partner joins?
Write all shares as fractions before calculating. Keep goodwill premium, capital contribution, revaluation and reserves as separate adjustments; then check the new capital ratio and balance sheet.
These are original practice questions, not claimed previous-year questions. Follow the exact method and rounding instructions in your prescribed text and school guidance.
Current syllabus
How this topic fits the course
Accounting for Partnership Firms is part of the CBSE Class XII Accountancy course structure. Computerised Accounting is an alternative to Financial Statement Analysis, not an additional compulsory unit.
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