Study Material & Notes for the Chapter 4
Partnership - Admission of a Partner
II. DETERMINATION OF NEW PROFIT-SHARING RATIO & SACRIFICING RATIO
A. Adjustment in Profit Sharing Ratio
The new profit-sharing ratio is decided mutually between the existing partners and the new partner. The incoming partner acquires his share of future profits either from one or more existing partner.
B. Sacrificing Ratio
C. Premium For Goodwill
- New partner compensates the existing partners who sacrifice their share of profits in his/her favour.
- The amount new partners pays against this sacrifice is known as Premium For Goodwill
D. Adjustments on Admission
- Adjustment in profit sharing ratio;
- Adjustment of Goodwill;
- Adjustment for revaluation of assets and reassessment of liabilities;
- Distribution of accumulated profits and reserves; and
- Adjustment of partners’ capitals.
E. Sacrificing/(Gaining) Share
Sacrificing/(Gaining) Share = Old Share – New Share
- If a Partner’s Old Share – New Share is Positive (+) figure then the partner has made a sacrifice
- If a Partner’s Old Share – New Share is Negative (-) figure then the partner has made a gain
Case-1 New partner share from old partners is already given - From Case
- In this case, the new profit sharing ratio of the existing partners is to be ascertained after deducting the sacrifice of share agreed from his share. It means the incoming partner has purchased some share of profit in a particular ratio from the existing partners.
- Sacrificing ratio is share surrendered
Case-2 New partner gets his share from existing partners in a particular ratio – OF Case
- In this case, the new profit sharing ratio of the existing partners is to be ascertained after deducting the sacrifice of share agreed from his share. It means the incoming partner has purchased some share of profit in a particular ratio from the existing partners.
- Sacrificing ratio is share surrendered
Case-3 Only new partner share as a portion of firm’s profits is given- Certain Case
- In this case, it is presumed that the existing partners continue to share the remaining profit in the same ratio in which they were sharing before the admission of the new partner. Then, existing partner’s new ratio is calculated by dividing remaining share of the profit in their existing ratio. Sacrificing ratio is calculated by deducting new ratio from the existing ratio.
- Sacrificing ratio is old partners existing ratio