Admission Of A New Partner -
The Affecting Factors

On admission of a new partner, the old partners sacrifice a portion of their share to adjust the new partner. This affects factors like profit ratio, goodwill, assets and liabilities that needs to be revalued and demand accounting treatment.

At the time of admission of a new partner, it is necessary to reconstitute a new partnership and is also desirable for partnership firm to ascertain its true and fair value of the assets and liabilities as because the book value of the assets may not be equal to its real or market value.

Inorder to ascertain the actual value of the assets and liabilities, Revaluation account is prepared at the time of admission of a new partner to record any fluctuations (increase or decrease) in the value of assets and liabilities.

The Revaluation Account opened normally falls under nominal account wherein the rule for nominal account is followed (Debit: All Expenses and Losses and Credit: All Incomes and Gains)

If the value of any asset increases, it signifies income or gain and as such Revaluation Account is credited and respective Asset Account is debited. And likewise, any decrease in the value of asset signifies loss and so Revaluation Account is debited and respective Asset Account is credited.

In case of liabilities, any increase signifies expense or loss and as such Revaluation Account is debited and respective Liability Account is credited. And likewise, any decrease in the value of liability signifies income or gain and so Revaluation Account is credited and respective Liability Account is debited.

The profit or Loss that arises due to revaluation of assets and liabilities is divided among the old partners in their old ratio.

Journal Entries Passed On Revaluation:

1. For Any Increase in The value of Asset:

Particular Asset A/C --------------------------------Dr.

         To Revaluation A/C

(Being increase in the value of asset recorded on revaluation on admission of a new partner)

2. For Any Decrease in The value of Asset:

Revaluation A/C --------------------------------Dr.

      To Particular Asset A/c

(Being decrease in the value of asset recorded on revaluation on admission of a new partner)

3. For Any Decrease in The value of Liability:

Particular Liability A/C --------------------------------Dr.

      To Revaluation A/C

(Being decrease in the value of liability recorded on revaluation on admission of a new partner)

3. For Any Increase in The value of Liability:

Revaluation A/C --------------------------------Dr.

      To Particular Liability A/c

(Being increase in the value of liability recorded on revaluation on admission of a new partner)

4. For Recording Unrecorded Asset (If any): (Signifying Increase in Assets)

Asset A/C --------------------------------Dr.

      To Revaluation A/c

(Being asset not recorded earlier now taken into account at market value on admission of a new partner)

5. For Recording Unrecorded Liability (If any): (Signifying Increase in Liabilities)

Revaluation A/C --------------------------------Dr.

      To Liabilities A/c

(Being liability not recorded earlier now taken into account on admission of a new partner)

4. Ascertainment of Profit or Loss on Revaluation:

      After revaluation of assets and liabilities, it becomes necessary to ascertain the amount of profit or loss on revaluation. The amount of profit and loss can be ascertained by totalling Revaluation A/c credit and deducting the same with the total of all Revaluation A/c debit. The resultant will show either profit or loss.

(a)In case of Profit: (Revaluation Credit heavier than Revaluation Debit.)

Revaluation A/C --------------------------------Dr.

      To Old Partners' Capital A/c

(Being the amount of profit transferred       To old partners capital account in their old profit sharing ratio)

(b)In case of Loss: (Revaluation Debit heavier than Revaluation Credit.)

Old Partners' Capital A/C --------------------------------Dr.

      To Revaluation A/c

(Being the amount of loss transferred to old partners capital account in their old profit sharing ratio)