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Questions and Answers
What happens to the existing partnership when a new partner is admitted through new admission?
What is the effect of admitting a new partner on the profit sharing ratio of the existing partners?
Which account is used to record the increase or decrease in the value of assets and liabilities when a new partner is admitted?
What is adjusted to reflect the value of the business when a new partner is admitted?
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How are the capital accounts of the existing partners adjusted when a new partner is admitted?
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What type of admission of a partner involves the addition of a new partner to the existing partnership?
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What is the primary reason for revaluing assets and liabilities when a new partner is admitted?
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Which method of admission involves the purchase of an existing partner's interest?
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What is the result of merging two or more firms to form a new partnership?
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What is the effect of admitting a new partner on the firm's capital?
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Which of the following is a consequence of admitting a new partner?
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What is the purpose of opening a Revaluation Account?
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Study Notes
Admission of a Partner
Definition
Admission of a partner refers to the process of adding a new partner to an existing partnership firm.
Types of Admission
- New Admission: When a new partner is admitted to the firm, and the existing partnership is dissolved.
- Admission of a Partner to an Existing Partnership: When a new partner is added to the existing partnership, and the firm continues to exist.
Effects of Admission
- Change in Profit Sharing Ratio: The profit sharing ratio of the existing partners changes with the admission of a new partner.
- Revaluation of Assets and Liabilities: The assets and liabilities of the firm are revalued to reflect their current values.
- Adjustment of Goodwill: The goodwill of the firm is adjusted to reflect the value of the business, which may increase or decrease with the admission of a new partner.
Accounting Treatment
- Revaluation of Assets and Liabilities: The increase or decrease in the value of assets and liabilities is recorded in the Revaluation Account.
- Goodwill: The goodwill is adjusted by debiting or crediting the Goodwill Account.
- Capital Accounts: The capital accounts of the existing partners are adjusted to reflect the change in profit sharing ratio.
Journal Entries
-
Revaluation of Assets and Liabilities:
- Debit: Revaluation Account
- Credit: Asset/Liability Account
-
Goodwill:
- Debit: Goodwill Account
- Credit: Capital Accounts of Partners
-
Capital Accounts:
- Debit: Capital Accounts of Existing Partners
- Credit: Capital Account of New Partner
Importance of Admission of a Partner
- Increased Capital: The admission of a new partner brings in additional capital, which can be used to expand the business.
- New Skills and Expertise: A new partner can bring new skills and expertise, which can benefit the business.
- Shared Risk: The admission of a new partner allows for shared risk and decision-making responsibility.
Admission of a Partner
- Admission of a partner refers to the process of adding a new partner to an existing partnership firm.
Types of Admission
- New Admission: When a new partner is admitted, and the existing partnership is dissolved.
- Admission of a Partner to an Existing Partnership: When a new partner is added to the existing partnership, and the firm continues to exist.
Effects of Admission
- Change in Profit Sharing Ratio: The profit sharing ratio of the existing partners changes with the admission of a new partner.
- Revaluation of Assets and Liabilities: The assets and liabilities of the firm are revalued to reflect their current values.
- Adjustment of Goodwill: The goodwill of the firm is adjusted to reflect the value of the business, which may increase or decrease with the admission of a new partner.
Accounting Treatment
Revaluation of Assets and Liabilities
- The increase or decrease in the value of assets and liabilities is recorded in the Revaluation Account.
Goodwill
- The goodwill is adjusted by debiting or crediting the Goodwill Account.
Capital Accounts
- The capital accounts of the existing partners are adjusted to reflect the change in profit sharing ratio.
Journal Entries
Revaluation of Assets and Liabilities
- Debit: Revaluation Account
- Credit: Asset/Liability Account
Goodwill
- Debit: Goodwill Account
- Credit: Capital Accounts of Partners
Capital Accounts
- Debit: Capital Accounts of Existing Partners
- Credit: Capital Account of New Partner
Importance of Admission of a Partner
- Increased Capital: The admission of a new partner brings in additional capital, which can be used to expand the business.
- New Skills and Expertise: A new partner can bring new skills and expertise, which can benefit the business.
- Shared Risk: The admission of a new partner allows for shared risk and decision-making responsibility.
Admission of a Partner
- Admission of a partner involves a change in the partnership structure, affecting profit-sharing ratio, capital, and liabilities of the firm.
Methods of Admission
- A new partner can purchase the interest of an existing partner, either partially or fully.
- A new partner can be admitted for a share of the goodwill of the firm.
- A new partner can invest capital in the firm and become a partner.
- Two or more firms can merge to form a new partnership, resulting in the admission of new partners.
Effects of Admission
- The profit-sharing ratio of the existing partners changes with the admission of a new partner.
- The assets and liabilities of the firm are revalued to reflect their current market value.
- The capital accounts of the existing partners are adjusted to reflect the admission of the new partner.
Accounting Treatment
- A revaluation account is opened to record the increase or decrease in the value of assets and liabilities.
- The capital accounts of the existing partners are adjusted to reflect the admission of the new partner.
- Goodwill is valued and recorded in the books of accounts if the new partner is admitted for a share of the goodwill.
Journal Entries
- Revaluation of assets: Debit asset account, credit revaluation account.
- Revaluation of liabilities: Debit revaluation account, credit liability account.
- Adjustment of capitals: Debit existing partner's capital account, credit new partner's capital account.
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Description
This quiz covers the concept of admitting a new partner to an existing partnership firm, including types of admission and effects on profit sharing ratio.
