Adjustments required at the time of admission of a partner

Adjustments required at the time of admission of a partner

On admission, the new partner may bring capital in cash or in kind or both. The following journal entry is passed to record the capital brought in.

On the admission of a partner, generally there is a change in the mutual rights of the partners. The new partner becomes liable for all the acts which are carried out by the firm from the date of his / her admission into the firm. Hence, the accumulated profits, losses and reserves before admission are to be distributed to the existing partners. Similarly, assets and liabilities are to be revalued and the profit or loss on revaluation is to be distributed to the existing partners. The following adjustments are necessary at the time of admission of a partner:

1.     Distribution of accumulated profits, reserves and losses

2.     Revaluation of assets and liabilities

3.     Determination of new profit-sharing ratio and sacrificing ratio

4.     Adjustment for goodwill

5.     Adjustment of capital on the basis of new profit sharing ratio (if so agreed)