Admission of Partners in Accountancy Class 12

Admission of Partners in Accountancy Class 12 refers to the process by which a new partner is introduced into an existing partnership firm. This can happen due to several reasons such as retirement of one of the old partners, addition of new talent, or expansion of business. In this context, we will explore various aspects involved in admitting a partner under different conditions, including calculation of their share in business profits, handling goodwill, updating asset books, adjusting reserve accounts, and other related matters.

Types of Admissions

Partnerships can admit new partners through three main methods: Admission by Transfer of Assets, Admission by Contribution of Capital and Admission without Contribution of Capital. Each method has its specific accounting implications for the business's financial statements and tax returns:

1. Transfer of Assets: When a person joins with his existing resources like land, building, etc., there is said to be transfer of assets from him to the partnership firm. Here, the cost price recorded in the balance sheet may not tally with market value. So, an unrecorded profit might arise here if the market price exceeds book value, vice versa; loss occurs.

2. Contribution of Capital: This involves contribution of cash and investment in shares or debentures of the company. It does not refer to any additional capital. If the value of consideration given to the incoming partner is less than his capital, it implies that he gets shares in excess for the amount received. On the other hand, if the value is more than his capital, it means he pays some extra money over and above his capital. Thus, it leads to either giving away a part of equity shares free or charging premium rates on it.

3. Without Contribution of Capital: A potential future member becomes a partner by virtue of future services rendered. No cash or property rights are transferred. However, these members have legal status similar to those admitted by transferring assets or contributing capital. They do not contribute anything initially, but they receive interest based upon agreed terms such as percentage to fees earned by them during a period specified in the agreement between lawyers who draft such agreements.

Profit Sharing Ratio

When a new partner enters into the partnership firm, the current partners need to calculate the new profit-sharing ratio. There are two primary ways to calculate this new share. First, you could simply divide the total assets contributed by each partner equally among themselves, assuming all contributors received equal proportions of goods. Alternatively, determining a fair market value per unit and dividend it amongst themselves might also apply.

For instance, let's say there are four partners - A, B, C, D. Partner B leaves the firm after receiving 30% of total profits. To maintain consistency within the remaining partners (A, C, & D), they decide to reallocate B's portion evenly among them. Hence, the new profit-sharing ratio would become A=19%, C=19%, and D=62%. Now, instead of dividing B's share equally among A, C, and D, they could determine a fair market value per unit and distribute accordingly.

Goodwill Treatment

Goodwill arises when the purchase price paid for the acquisition of a business is higher than the net tangible and intangible assets acquired. Upon the admission of a new partner, goodwill must be treated appropriately in order to ensure a proper reflection of the firm's worth on paper. One common approach to treat goodwill upon admission is by crediting goodwill account with the difference between the total assets received by the incoming partner and the actual payment made towards their stake. For example, if new partner X contributes $10 million worth of assets but only pays $8 million for her share, the difference ($2 million) could be credited against the firm's goodwill account.

Update Asset Books and Liability Statements

On admission, balancing of entries reflecting changes in ownership interests often results in the creation of 'New General Ledger'. Moreover, transfer of assets necessitates appropriate journal entries too, such as recording receivables, inventories, prepaid expenses, plant and machinery, furniture, fittings, vehicles, etc. Similarly, if there were outstanding payables before commencement of partnership, they should be adjusted proportionately according to respective contributions of partners.

Reserves and Accumulated Profits

Reserves and accumulated profits represent past earnings available for distribution among the partners but not yet distributed. These funds signify a buffer against losses or unexpected expenditure. After admission, it's important to update relevant records because resumes payments or distributions may affect both existing and incoming partners differently depending on their terms of association.

In conclusion, admitting a partner into an accountancy class 12 requires careful planning and execution involving calculations of new profit-sharing ratios, managing goodwill, updating asset books, treating reserves and accumulated profits, and ensuring compliance with all applicable laws governing partnership firms.