1. Advanced Financial Accounting FIN-611
Mian Ahmad Farhan
Lecture-18
Partnership

2. Admission of Partners (Issues)
Change of profit sharing ratio
Revaluation of assets and liabilities or revaluation of Net Assets
Calculation of goodwill
Accounting treatment of goodwill

3. Journal Entries
Introduction of capital by new partner in term of cash:
Cash Account xxx
Partner’s Capital Account xxx
Introduction of capital in shape of assets:
Stocks xxx
Furniture xxx
Machinery xxx

4. Change in Profit Sharing ratio

5. Interest on capital
Partner’s salary
Profit sharing ratio

6. QUESTION Old partner’s profit sharing ratio A 3/5 B 2/5
C entered as a new partner. He will get 1/6 profit share.
Required:
What will be the new profit sharing ratio?

7. Solution
Shares of A & B:
Balance share = 1- 1/6 = 5/6
A’s Share = 3/5 = 5/6 x 3/5 = 3/6
B’s Share = 2/5 = 5/6 x 3/6 = 2/6
C’s Share = 1/6
New profit sharing ratio:
3/6 : 2/6 : 1/6
3 : 2 : 1

8. Question
A and B’s share = 3: 2
C’s Share = ¼
Share of A & B:
= 1 – ¼ = ¾
A = ¾ x 3/5 = 9/20
B = ¾ x 2/5 = 6/20
C = ¼ x 5/5 = 5/20
9/20 : 6/20 : 5/20
9 : 6 : 5

9. A & B profit sharing ratio= 3:2
Offer to C = ¼
Balance for A & B = 1 – ¼ = ¾
A’s share = ¾ x ½ = 3/8
B’s share = ¾ x ½ = 3/8
A : B : C
3/8 3/8 ¼
C’s share = ¼ x 2/2 = 2/8
New profit sharing ratio

10. Sacrifice Ratio

11. Old ratio
A’s old ratio = 3/5
B’s old ratio = 2/3
New ratio
A 3/8
B 3/8
C 2/8

12. = 9 = 1 A’s sacrifice ratio Old ratio – New ratio 3/5 – 3/8 24-15 40
B’s sacrifice ratio
2/5 – 3/8
16-15
Sacrifice ratio = 9:1
= 9
= 1

13. Admission of New Partner (Revaluation of Assets & Liabilities)

14. Revaluation No change in the value Increase in the value
Decrease in the value

15. Revaluation Increase in assets Assets A/c xxx Revaluation A/c xxx
Decrease in assets
Increase in liabilities
Liabilities A/c xxx
Decrease in liabilities

16. Revaluation Increase in assets Rs. 10,000 Decrease in assets Rs. 2,000
Increase in liabilities Rs. 3,000
Increase in liabilities Rs. 500
Increase in assets
Assets A/c 10,000
Revaluation A/c 10,000
Decrease in assets
Revaluation A/c 2,000
Assets A/c xxx 2,000
Increase in liabilities
Revaluation A/c 3,000
Liabilities A/c 3,000
Decrease in liabilities
Liabilities A/c 500
Revaluation A/c 500

17. Revaluation Account Particulars Amount Assets (Dec.)
Liabilities (Inc.)
Balance
2,000
3,000
5,500
Assets (Inc.)
Liabilities(Dec.)
10,000
5,00
10,500
First Assets (Inc)
Then Assets (Dec.)
Then Liabilities (Inc.)
Then Liabilities(Dec.)
Total 10,500
Balance 5,500
Then 5,500

18. A & B old ratio = 3:2
A’s share = 5,500 x 3/5 = 3,300
B’s share = 5,500 x 2/5 = 2,200
Accounting Entry
Revaluation A/c 5,500
Old partner’s capital A/c 5,500
(Old sharing ratio)

19. Goodwill Calculation

20. Average Purchase Method

21. Goodwill is three times of the average profit of previous five years.
Goodwill = 20 x 3 = 60