Partnership Accounting Basics

Study Notes

Partnership Admission

Partners A and B share profits and losses in a 3:2 ratio.
A new partner, C, joins the partnership on April 1, 2021.
C contributes capital and goodwill in cash.
The firm's capital is ₹6,00,000, distributed based on the profit ratio of partners A and B.
Future profits will be distributed equally among all partners.
Goodwill is valued at ₹90,000, based on the average net profit of the firm over the last two years.
The nominal profit on capital is 10%.

Goodwill Calculation

Goodwill is calculated based on the average net profit of ₹90,000 per year.
The average net profit is multiplied by a factor to determine the value of goodwill.

Capital Accounts

Partner A's capital account will reflect the original balance and adjustments for goodwill and the new profit-sharing ratio.
Partner B's capital account will reflect the original balance and adjustments for goodwill and the new profit-sharing ratio.
Partner C's capital account will reflect the initial capital contribution and the share of goodwill.

Cash Account

The cash account will reflect the amount invested by C for capital and goodwill.
The cash account will also reflect adjustments for the capital contribution and the profit-sharing ratio.

Balance Sheet

The balance sheet will reflect the updated capital accounts for all partners.
The balance sheet will also reflect the increase in assets due to the cash contribution from C.

Alternative: Methods of Goodwill Valuation

Goodwill valuation methods include:
- Average Profit Method: Determines goodwill based on the average net profit for a specific period.
- Super Profits Method: Calculates goodwill based on the excess of actual profit over normal profit.
- Capitalization of Super Profits Method: Determines goodwill by capitalizing the excess profit using a suitable rate of return.
- Years' Purchase of Average Profit Method: Values goodwill by multiplying the average profit by a specific number of years.
- Market Value Method: Assesses goodwill based on the market value of similar businesses.

Note

The problem requires calculations and adjustments to the original partnership balance sheet to reflect the admission of the new partner.
The calculations involve determining goodwill, adjusting capital accounts, and preparing a new balance sheet for the firm.
The problem also explores different methods for valuing goodwill.

Description

This quiz covers the fundamentals of partnership accounting, including profit sharing ratios, goodwill calculations, and capital account adjustments. It is designed for students and professionals looking to reinforce their understanding of partnership financial principles.