1. Complete Sequence of Journal Entries at Admission
Step 1: New partner's capital and premium (if any) brought in — Dr Bank A/c
Step 2: Premium for goodwill distributed to old partners in SR
Step 3: Existing reserves/accumulated profit distributed to old partners in OLD ratio
Step 4: Revaluation of assets and liabilities — Revaluation A/c profit/loss distributed in OLD ratio
Step 5: Goodwill adjustment (if not paid in cash — raise & write off)
Step 6: Capital adjustment (if required — adjust to new ratio)
Step 7: Prepare revised Balance Sheet
2. Reserves — Treatment at Admission
At admission, all accumulated reserves and unappropriated profits belong to the old partners and must be transferred to them in the old profit-sharing ratio:
- Dr General Reserve A/c | Cr Old Partners' Capital/Current A/cs (in old ratio)
- Dr P&L A/c (if credit balance) | Cr Old Partners' Capital/Current A/cs
- If P&L has a debit (loss) balance: Dr Old Partners' Capital/Current A/cs | Cr P&L A/c
3. Capital Adjustment at Admission
After all adjustments, partners' capitals may not be in proportion to their new profit-sharing ratios. Two methods of adjustment:
Method 1 — Based on New Partner's Contribution
The new partner's contribution determines the total capital of the firm.
Total Capital = New Partner's Capital ÷ New Partner's Share
Each existing partner's required capital = Total Capital × their new share
Partners with surplus capital withdraw the excess; those with deficit bring in more.
Method 2 — Adjustment via Current Accounts
Net difference is adjusted via Current Account without actual cash movement — the partner with surplus is credited and deficit partner is debited in Current A/c.
4. Fully Worked Comprehensive Example
A and B share profits 3:2. C is admitted for 1/5 share. The following information is given:
- Capital: A = ₹60,000; B = ₹40,000; C to bring ₹30,000
- Goodwill of firm = ₹50,000. C brings goodwill in cash.
- Revaluation: Land appreciated ₹15,000; Machinery depreciated ₹5,000; Provision for bad debts created ₹2,000
- General Reserve (existing) = ₹20,000
New ratio: C gets 1/5; A: 4/5 × 3/5 = 12/25; B: 4/5 × 2/5 = 8/25; C: 5/25 → A:B:C = 12:8:5
SR = A:B = 3:2 (C's share taken from old partners in old ratio)
C's goodwill share = 1/5 × ₹50,000 = ₹10,000 (C pays for her share of goodwill)
Journal Entries:
1. C's admission — capital and goodwill premium:
| Bank A/c Dr | 40,000 | |
| To C's Capital A/c | 30,000 | |
| To Premium for Goodwill A/c | 10,000 |
2. Premium distributed in SR (3:2):
| Premium for Goodwill A/c Dr | 10,000 | |
| To A's Capital A/c (3/5 × 10,000) | 6,000 | |
| To B's Capital A/c (2/5 × 10,000) | 4,000 |
3. General Reserve distributed (old ratio 3:2):
| General Reserve A/c Dr | 20,000 | |
| To A's Capital A/c (3/5 × 20,000) | 12,000 | |
| To B's Capital A/c (2/5 × 20,000) | 8,000 |
4. Revaluation Account:
| Revaluation Account | |||
|---|---|---|---|
| Dr | ₹ | Cr | ₹ |
| Machinery A/c | 5,000 | Land A/c | 15,000 |
| Provision for Bad Debts | 2,000 | ||
| Profit: A (3/5)=4,800; B (2/5)=3,200 | 8,000 | ||
| Total | 15,000 | Total | 15,000 |
Partners' Capital Accounts (Summary):
| Particulars | A ₹ | B ₹ | C ₹ |
|---|---|---|---|
| Opening balance b/d | 60,000 | 40,000 | — |
| Cash (capital + premium) | — | — | 40,000 |
| Premium for Goodwill | 6,000 | 4,000 | — |
| General Reserve | 12,000 | 8,000 | — |
| Revaluation Profit | 4,800 | 3,200 | — |
| Closing balance | 82,800 | 55,200 | 30,000 |
