Admission of Partners in Accountancy Class 12

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What is the main difference between Admission by Transfer of Assets and Admission by Contribution of Capital?

Transfer of Assets involves cash or investments, while Contribution of Capital involves existing resources like land

Transfer of Assets involves existing resources like land, while Contribution of Capital involves cash or investments (correct)

Transfer of Assets generates unrecorded profit or loss, while Contribution of Capital does not

Transfer of Assets does not affect the balance sheet, while Contribution of Capital does

What accounting implications can arise in Transfer of Assets method due to differences between book value and market value?

An unrecorded profit if market value exceeds book value, and vice versa for a loss (correct)

Market value always matches book value, no implications arise

Unrecorded profit or loss is added directly to the profit and loss account

An unrecorded loss if market value exceeds book value, and vice versa for a profit

How does Contribution of Capital differ from Admission without Contribution of Capital?

Contribution of Capital does not require any contribution, while Admission without Contribution involves cash or investments

Contribution of Capital involves cash or investments, while Admission without Contribution does not require any contribution (correct)

Contribution of Capital does not affect the profit-sharing ratio, while Admission without Contribution does

Contribution of Capital is tax-deductible, while Admission without Contribution is not

What is one common implication on the balance sheet when a new partner is admitted?

Revaluation of assets and liabilities Signup and view all the answers

How are reserves and accumulated profits typically handled when a new partner is admitted?

Adjusted in accordance with the partnership agreement Signup and view all the answers

What may happen to the profit-sharing ratio among existing partners when a new partner is admitted?

Depends on the new partner's capital contribution only Signup and view all the answers

What does it mean when the value of consideration given to the incoming partner is less than his capital?

The incoming partner receives shares in excess of the amount received. Signup and view all the answers

In the context of profit-sharing ratios, what is one primary way to calculate the new share when a new partner enters a partnership firm?

Determine a fair market value per unit and divide it among partners equally. Signup and view all the answers

How is goodwill treated upon admission of a new partner into a partnership firm?

Goodwill is credited with the difference between total assets received and actual payment made towards the stake. Signup and view all the answers

How do partners typically adjust the profit-sharing ratios when one partner leaves a firm?

Allocate the leaving partner's portion evenly among themselves. Signup and view all the answers

What does it signify if a new partner enters a partnership without contributing any cash or property rights?

The new partner is entitled to receive interest based on agreed-upon terms. Signup and view all the answers

How should reserves and accumulated profits typically be treated upon admission of a new partner?

Reserves and accumulated profits should be properly adjusted to reflect the new profit-sharing ratios. Signup and view all the answers

Study Notes

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:

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.
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.
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.

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.

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Description

Explore the process of admitting a new partner into an existing partnership firm in an accountancy class 12 context. Learn about calculating profit-sharing ratios, handling goodwill, updating asset books, adjusting reserves, and more. Understand the types of admissions, including transfer of assets, contribution of capital, and admission without contribution of capital.