1. Legal Requirements for Admission
- A new partner can only be admitted with the consent of all existing partners [Section 31, IPA 1932].
- A new partner is not liable for acts of the firm done before their admission.
- Admission requires adjustment of goodwill, revaluation of assets/liabilities, and redistribution of existing reserves.
2. New (Reconstituted) Profit-Sharing Ratio
The new ratio depends on how the new partner's share is carved out from the existing partners:
Case 1 — New partner's share given; remaining divided in old ratio
A : B = 3 : 2. C is admitted for 1/5 share. Remaining 4/5 is divided by A and B in their old ratio 3:2.
- A's new share = 4/5 × 3/5 = 12/25
- B's new share = 4/5 × 2/5 = 8/25
- C's share = 1/5 = 5/25
- New ratio A : B : C = 12 : 8 : 5
Case 2 — Each existing partner sacrifices a specific fraction
A sacrifices 1/6 and B sacrifices 1/6 in favour of C. (A: 3/5 − 1/6 = 13/30; B: 2/5 − 1/6 = 7/30; C: 1/6 + 1/6 = 2/6 = 1/3)
Case 3 — New ratio directly given
New ratio stated as A : B : C = 4 : 3 : 2. SR = Old − New for each partner.
3. Sacrificing Ratio at Admission
At admission, only existing partners sacrifice — the new partner gains. The sacrificing ratio determines how much goodwill (premium) each existing partner receives.
Sacrificing Ratio (of each old partner) = Old Ratio − New Ratio
Example from Case 1 above:
A's sacrifice = 3/5 − 12/25 = 15/25 − 12/25 = 3/25
B's sacrifice = 2/5 − 8/25 = 10/25 − 8/25 = 2/25
SR = A : B = 3 : 2 (same as old ratio — because C's share came equally from A and B proportionally)
4. Treatment of Goodwill at Admission
The new partner must compensate the old partners for acquiring a share of the goodwill built before their admission. Four situations arise:
Situation 1 — New Partner Brings Goodwill (Premium) in Cash
Entry 1: Dr Cash/Bank A/c | Cr Premium for Goodwill A/c
Entry 2: Dr Premium for Goodwill A/c | Cr Old Partners' Capital/Current A/cs (in SR)
The premium is credited to sacrificing partners in their sacrificing ratio.
Situation 2 — New Partner Brings Goodwill and It Is Raised in Books
Entry 1: Dr Cash/Bank A/c | Cr C's Capital A/c (full admission amount)
Entry 2: Dr Goodwill A/c (firm's goodwill) | Cr Old Partners' Capital/Current A/cs (in SR)
Situation 3 — New Partner Cannot Pay Goodwill (Goodwill Raised and Written Off)
Entry 1: Dr Goodwill A/c | Cr Old Partners' Capital/Current A/cs (in SR)
Entry 2: Dr All Partners' Capital/Current A/cs (in new ratio) | Cr Goodwill A/c
Situation 4 — Hidden (Implied) Goodwill
When the problem gives capital paid by new partner and the new ratio, but doesn't explicitly state goodwill — goodwill must be calculated.
Formula:
Implied Total Firm Value = New Partner's Capital ÷ New Partner's Share
Goodwill = Implied Total Firm Value − Actual Net Assets (before admission)
Hidden Goodwill Example:
C pays ₹50,000 for 1/4 share. Net Assets of firm before admission = ₹1,60,000.
Implied firm value = ₹50,000 ÷ 1/4 = ₹2,00,000
Goodwill = ₹2,00,000 − ₹1,60,000 = ₹40,000
This ₹40,000 is raised and distributed to old partners in SR.
Worked Journal Entry — Premium for Goodwill
A : B = 5 : 3 (old ratio). C admitted for 1/4 share (SR = 5:3). C pays ₹60,000 as premium for goodwill.
| Journal Entry | Dr ₹ | Cr ₹ |
|---|---|---|
| Bank A/c Dr | 60,000 | |
| To Premium for Goodwill A/c | 60,000 | |
| (C brings premium in cash) | ||
| Premium for Goodwill A/c Dr | 60,000 | |
| To A's Capital A/c (5/8 × 60,000) | 37,500 | |
| To B's Capital A/c (3/8 × 60,000) | 22,500 | |
| (Premium distributed in SR 5:3) |
