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Ch 4 · Partnership · T.S. Grewal — Double Entry Book Keeping

Admission
of a Partner

75 MCQs 50 Flashcards T.S. Grewal Class 12 Updated May 2026
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Chapter Overview

Chapter 4 covers Admission of a Partner — one of the densest and most heavily examined chapters in CBSE Class 12 Accountancy. Under Section 31 of the Indian Partnership Act, 1932, a new partner can be admitted only with the consent of all existing partners. Admission triggers a reconstitution of the firm: the old partnership ends, a new partnership begins, and several adjustments must flow through the books before the new partner takes his share of future profits.

The chapter develops, in order: (i) computation of the new profit-sharing ratio (with cases for surrender of equal shares, surrender of specific fractions, new ratio expressly stated, or share taken from a single old partner), (ii) the sacrificing ratio = Old − New, (iii) treatment of premium for goodwill brought in by the new partner — credited to old partners in sacrificing ratio, with separate entries for cash brought, cash withdrawn, premium not brought, and premium part-brought, (iv) hidden goodwill when the deed is silent, (v) the Revaluation A/c for changes in asset and liability values (profit/loss to OLD partners in OLD ratio), (vi) distribution of accumulated profits, losses, and reserves, (vii) special treatment of WCR and IFF, and (viii) capital adjustment to the new ratio.

The cornerstone rule throughout is AS 26 — self-generated goodwill cannot be raised in the books. All goodwill adjustments are routed through partners' Capital A/cs. Mastery of this chapter unlocks the parallel logic in Ch 5 (Retirement) and Ch 6 (Death), where the same patterns repeat with sacrifice replaced by gain.

What You'll Learn
Key Concepts
Concept
Admission Reconstitution
Old firm ends, new firm begins (Section 31, IPA 1932). Consent of all existing partners required. Triggers revaluation, goodwill, capital adjustment.
Computation
New Profit-Sharing Ratio
Four cases: surrender of equal share, specific fractions, new ratio stated, or share from one old. Reduce all to common denominator.
Formula
Sacrificing Ratio
SR = Old − New. Computed only for OLD partners. Used to distribute the goodwill premium. New partner does not sacrifice — he gains.
Goodwill
Premium for Goodwill (Cash)
Credited to old partners' Capital A/cs in sacrificing ratio. Cash A/c Dr; To Premium A/c; then Premium A/c Dr; To Old Capitals.
Inferred
Hidden Goodwill
When deed is silent. Implied Total Capital = New's Capital × 1/his share. Hidden Goodwill = Implied − Actual Total. New's share to old in sacrificing ratio.
Account
Revaluation A/c
Records changes in asset/liability values. Profit/loss to OLD partners in OLD ratio. Memorandum Reval keeps books at old values.
Distribution
Accumulated Profits/Losses
General Reserve, P&L (Cr/Dr), Reserve Funds — all to OLD partners in OLD ratio. New partner shares no past profits or losses.
Adjustment
Capital Adjustment
Total Capital = New Partner's Cap × 1/his share, split in new PSR. Surplus/shortfall via cash or Current A/c.
Special
WCR / IFF on Admission
WCR: surplus over claim to OLD; shortfall to Reval. IFF: cushions investment fall; surplus to OLD; appreciation via Reval.
Standard
AS 26 — No Goodwill A/c
Self-generated goodwill cannot be recognised. Settle via Capital A/cs. Only purchased goodwill may appear in books.
Sample MCQs
Q1. Sacrificing Ratio is correctly defined as:
A. New Ratio − Old Ratio of each partner concerned
B. The ratio in which the new partner shares with old ones
C. Old Ratio − New Ratio of each old partner concerned
D. Capital Ratio of all partners after the new admission
Sacrificing Ratio = Old Ratio − New Ratio (for OLD partners only). It measures the share each old partner has surrendered in favour of the new partner. The new partner does not sacrifice — he gains.
Q2. A and B share profits 3:2. They admit C for 1/5 share, taken from old partners in their old ratio. The new ratio of A:B:C is:
A. 3:2:1 (the simplest split)
B. 12:8:5 (out of twenty-fifths)
C. 2:2:1 (rounded values)
D. 9:6:5 (out of twentieths)
C's share = 1/5. Remaining for A and B = 4/5, shared in old ratio 3:2. A = 4/5 × 3/5 = 12/25; B = 4/5 × 2/5 = 8/25; C = 5/25. New ratio = 12:8:5.
Q3. A and B (adjusted capitals ₹3,00,000 and ₹2,00,000) admit C for 1/5 share. C brings ₹1,50,000 as capital. The Hidden Goodwill of the firm is:
A. ₹1,50,000 (equal to C's capital)
B. ₹50,000 (a partial computation)
C. ₹1,00,000 (per the standard inferred formula)
D. ₹2,50,000 (a different fractional split)
Implied firm capital = 1,50,000 × 5 = ₹7,50,000. Actual total = 3,00,000 + 2,00,000 + 1,50,000 = ₹6,50,000. Hidden Goodwill = 7,50,000 − 6,50,000 = ₹1,00,000.
Frequently Asked Questions
What is admission of a partner?
Admission of a partner is a reconstitution of the firm under Section 31 of the Indian Partnership Act, 1932. The old firm ends and a new firm — including the incoming partner — comes into existence. The business continues uninterrupted. Admission requires the consent of all existing partners (subject to any contract to the contrary), and it triggers revaluation of assets and liabilities, treatment of goodwill, distribution of accumulated profits/losses, and capital adjustment to the new ratio.
How is the new profit-sharing ratio calculated when old partners surrender an equal share?
Two senses of "equal":
• If each old partner surrenders an equal fraction of his own share (e.g., each gives up 1/4 of his share), the absolute amounts surrendered remain in the old PSR — so sacrificing ratio = OLD ratio.
• If the new partner takes an equal absolute share from each old partner (e.g., 1/8 from each of two old partners), the sacrifice is 1:1 in absolute terms, even if old shares were unequal.
Always read the deed carefully and reduce all shares to a common denominator.
How is premium for goodwill treated on admission?
Premium for goodwill brought by the new partner is credited to old partners' Capital A/cs in the sacrificing ratio. The entries are: (1) Cash A/c Dr; To Premium for Goodwill A/c (record receipt) and (2) Premium for Goodwill A/c Dr; To Old Partners' Capital A/cs (in sacrificing ratio) (distribute). If the old partners then withdraw the premium, a third entry: Old Partners' Capital A/cs Dr; To Cash A/c. If the new partner cannot bring the premium, the adjustment is via Capital A/cs only — never a Goodwill A/c (AS 26).
What is hidden goodwill and how is it calculated?
Hidden Goodwill is the goodwill implied by the new partner's capital and profit share when the deed is silent on goodwill value. Formula: Implied Total Firm Capital = New Partner's Capital × (1 / his share); then Hidden Goodwill = Implied Total − sum of actual adjusted capitals (all partners). The new partner's share of hidden goodwill = Hidden Goodwill × his profit share. This is debited to his Capital A/c and credited to old partners' Capital A/cs in their sacrificing ratio.
Why is goodwill not raised in the books on admission of a partner (AS 26)?
AS 26 (Intangible Assets) prohibits the recognition of self-generated goodwill. Only goodwill that has been actually purchased may be shown in the books. On admission, the firm's goodwill is self-generated — it has not been bought — so a Goodwill A/c cannot be raised. The settlement is done by adjusting the partners' Capital A/cs only: premium for goodwill (in cash or by adjustment) is credited to old partners in sacrificing ratio. If old goodwill already exists in the books, it must be written off by debiting OLD partners in OLD ratio before the admission entries are passed.
How are accumulated profits and reserves distributed?
All accumulated profits — General Reserve, Profit & Loss A/c (Cr balance), Reserve Funds — and accumulated losses (P&L Dr balance) belong to the OLD partners alone. They are distributed to OLD partners in their OLD profit-sharing ratio. The new partner does not share any past profit or past loss. Workmen Compensation Reserve: provide for any actual claim first; the SURPLUS over the claim is distributed to OLD partners in OLD ratio. Investment Fluctuation Fund: cushions falls in investment value first; any surplus to OLD in OLD ratio.