Explore topic-wise InterviewSolutions in Current Affairs.

At the time of admission of a new partner, with a object to no injustice with old and new partner, question of revaluation of assets and liabilities arise. To record the accounting effects of revaluation of assets and liabilities, revaluation account is prepared in the books of firm. It is also called as profit and loss adjustment account.

Decrease in assets and increase in liabilities are shown on debit side of Revlauation Account and increase in assets and decrease in liabilities are shown on credit side of Revaluation Account. Profit or Loss of revaluation account is distribution among the old partners in old profit-loss sharing ratio.

Revaluation Account-Debit side.

The increase in the value of assets or decrease in the value of liabilities will be credited to revaluation account. 

Sometime, at the time of admission, the partners’ agreed that their capitalsare adjusted to the  to proportionate their profit sharing ratio.

Revaluation Account- Credit side.

The assets are revalued and liabilities of a firm are reassess, at the time of admission of a partner because the new partner should; neither benefit nor suffer because change in the value of assets and liabilities as on the date of admission.

Retirement of a partner is one of the modes of reconstituting the firm in which old partnership comes to an end and a new partner among the continuing (remaining) partners (i.e., partners other than the outgoing partner) comes into existence.

Correct option is (A) debited to old partners’ capital accounts in their old profit-loss sharing ratio and good¬will account is credited

Any accumulated profit or reserve appearing in the balance sheet at the time of admission of a new partner is credited  in the existing partner’s capital account in existing profit sharing ratio.

By following accounting standard -10, the existing goodwill (i.e. goodwill appearing in the Balance Sheet ) is written off to the old partners Capital a/c in their old profit sharing ratio.

Old partners capital A/c  Dr. .....

To Goodwill A/c      

[Being the existing g/w written off in the old ratio.]

The matter that needs adjustment of the time of admission of a new partner is: 

(i) Adjustment in profit sharing ratio and adjustment of capital

(ii) Adjustment for goodwill 

(iii) Adjustment of Profit/Loss arising from the Revolution of Assets and Reassessment of Liabilities. 

(iv) Adjustment of accumulated profits, reserves and losses.

If the capital of a partners will be keep in new profit- loss ratio then there will be change in the capital of old partners. Under this situation, adjustment of difference amount of capital of partners will be done to cash account or partners’ current account.

At the time of retirement or death of a partner, assets are revalued and liabilities are reassessed so that the profit or loss arising on account of such revaluation up to  the  date of retirement or death of a partner may be ascertained and adjusted in all partners’ capital accounts in their old profit-sharing ratio.        

Correct option is (C) New ratio

Correct option is (C) On liabilities side of Balance Sheet

New partner becomes entitled to share future profits and future assets of the firm.

• Revaluation Account
• Capital accounts of partners
• Current accounts of partners
• Cash/Bank Account
• Balance sheet after admission of a New partner.

 It is necessary to revalue assets and reassess liabilities at the time of admission of new partners as if assets and liabilities are overstated or understated in the books then its benefits or loss should not affect the near partner. 

At the time of admission of a new partner, following points are taken into consideration.

1. Change in Profit and Loss sharing ratio : After the admission of a new partner in the firm, new profit and loss ratio is came into existence. After admission of a new partner, profit share of existing partner is reduced. It is necessary to determine the profit share of new partner and new profit and loss ratio of existing partners. On the basis of old partners’ profit-loss ratio, profit share of a new partner and sacrifice done by old partners, new profit-loss sharing ratio is determined by keeping different situation in the mind. When the capital of all partners are keep in new profit and loss ratio then it is necessary to find out new profit and loss sharing ratio.

2. Sacrificing ratio of Existing (old) Partners : At the time of admission of a new partners in existing partnership firm, old partners have to give certain share of profit in favour of the new partner. This ratio of sacrifice is known as sacrificing ratio.

Sacrifice of partner in profit = Old share of profit – New share of profit

 Amount of goodwill bring by a new partner in the ratio of sacrifice done by old partners is credited to their accounts. Goodwill is compensation of sacrifice of profit done by old partners.

3. Accounting Treatment of Goodwill: To compensate the profit share acquired by the new partner, he is required to give his share in goodwill to the firm which is called as premium for goodwill.

Sacrificing Ratio : A sacrifice = \(\frac{1}{20}\) from his share and B sacrifice = \(\frac{3}{40}\) from his share in favour of D.

∴ Sacrifice of A = \(\frac{1}{20}\) and B = \(\frac{3}{40}\) (making denominator equal)

∴ Sacrifice ratio = \(\frac{2}{40}:\frac{3}{40}\) = 2 : 3

∴ Share of D = Sacrifice of A + Sacrifice of B= \(\frac{2}{40}+\frac{3}{40}=\frac{5}{40}\)

New Profit and Loss sharing ratio :

New share = Old share – Sacrifice

∴ New share of A = \(\frac{5}{10}-\frac{2}{40}=\frac{20-2}{40}=\frac{18}{40}\)

∴ New share of B = \(\frac{3}{10}-\frac{3}{40}=\frac{12-3}{40}=\frac{9}{40}\)

∴ New share of C = 210 (making denominator equal)

= \(\frac{2}{10}\times\frac{4}{4}=\frac{8}{40}\)

∴ New share of D = \(\frac{5}{40}\)

∴ New Profit and Loss sharing ratio A, B, C and D = 18 : 9 : 8 : 5

A, B and C are partners sharing profit in the ratio of 20%, 40% and 40%, means their profit-loss ratio = 2 : 4 : 4 = 1 : 2 : 2.

Share of new partner D = \(\frac{1}{8}\) ;

B’s sacrifice = \(\frac{3}{5}\) ;

C’s sacrifice = \(\frac{2}{5}\).

Now, sacrifice of old partners = News partner’s share x Sacrificing ratio of old partners

B’s sacrifice = \(\frac{1}{8}\times\frac{3}{5}=\frac{3}{40}\)

C’s sacrifice = \(\frac{1}{8}\times\frac{2}{5}=\frac{2}{40}\)

Now, New share = old share – sacrifice

B’s new Share = \(\frac{2}{5}-\frac{3}{40}=\frac{16-3}{40}=\frac{13}{40}\);

C’s new Share = \(\frac{2}{5}−\frac{2}{40}=\frac{16−2}{40}=\frac{14}{40}\)

There is no change in the A’s share i.e = \(\frac{1}{5}\) ;

D’s share = \(\frac{1}{8}\)

∴ New profit and loss ratio of partners A, B, C and D = \(\frac{1}{5}:\frac{13}{40}:\frac{14}{40}:\frac{1}{8}\)= 8 : 13 : 14 : 5

D receives his share from B and C in the ratio of 3 : 2 and not receiving anything from A.

∴ Sacrificing ratio of partners B and C = 3 : 2.

At the time of the admission of a new partner following accounting adjustments are to be considered.

• New profit and loss sharing ratio and old partners sacrificing ratio.
• Accounting effects relating to goodwill, profit/ loss arising from the revaluation of assets and liabilities, and accumulated profit, losses and reserves.
• Adjustments of change in capital.

There will be no accounting effect in the books of the firm if the new partner pays goodwill amount in cash to old partners outside the business.

A new partner may be admitted in a continuing firm because of the following reasons :

• When continuing firm needs additional capital, additional managerial ability.
• For the distribution of risk of the partnership firm.
• When any continuing partner retires or dies.
• When services or skilled and efficient employees of the firm is required.

Correct option is (B) premium for goodwill

(i) Retirement of a partner (ii) Death of a partner.

General Reserve   A/c   Dr.  50,000

To P’s   Capital  A/c 20,000 

To Q’s Capital   A/c    20000

To R’s   Capital   A/c     10000

(Being Reserve distributed in old ratio)

Correct option is (B) his new share in new profit-loss ratio is more than his old share

According to Indian Partnership Act 1932, a new partner shall be admitted in the firm with the consent of all the existing partners, otherwise by the partners in the partnership agreement.

Correct option is (B) internally generated

All Partners Capital (including retiring) A/c    Dr.

To Goodwill A/c

(Being old goodwill written off among all partners in, old ratio)

Correct option is (B) nominal

Correct option is (B) old ratio

Correct option is (D) old partners, old ratio

Correct option is (B) profit and loss adjustment account

Assets A/c   Dr.    (with the amount of increase)

Liabilities A/c Dr.    (with the amount of decrease)

To Revaluation A/c    (with the total amount of gain)

(Being revaluation of assets and liabilities)

The correct answer is : (c) Both

(b) Old Partners’ Capital A/c

(a) Sacrifice from the old ratio

The correct answer is : (a) Gain

(b) Old Partners only

(a) The old partners

(b) 13 sub – groups

(c) Assets, Liabilities, Income and Expenses

The correct answer is : (b) F1

(b) Special purpose report

1. Day books/Journal 

2. Ledger 

3. Trial Balance 

4. Income statement

5. Balance sheet

(c) small and medium company

(a) Alt + F3

Tally has two pre – defined ledgers, cash and profit and loss A/c. The user has to create various other ledgers based on their requirements. Predefined group/ledger cannot be deleted.