CMA Intermediate · Financial Accounting

Admission of a Partner: CMA Inter Study Guide

Admission of a partner means a new partner joins a firm, so the old partnership ends and a new one starts. You solve it by fixing the new ratio and sacrificing ratio, treating goodwill, revaluing assets and liabilities, adjusting reserves and capitals, then preparing the new balance sheet.

What this chapter covers

This chapter covers what happens in the books when a new partner joins an existing firm. The old firm is reconstituted. The new partner takes a share of profit, so old partners give up part of theirs. Because the firm already has goodwill, hidden gains or losses and undistributed reserves, these must be settled fairly between old partners before the new partner shares in future profits.

Every problem follows the same chain: new profit sharing ratio, sacrificing ratio, goodwill, revaluation, reserves and accumulated profits or losses, capital adjustment, and finally the balance sheet. Each step uses a small set of journal entries and ledger accounts. If you learn the chain, even long problems become routine.

This chapter links to the rest of Financial Accounting. It builds on partnership basics such as profit sharing, capital and current accounts, and interest on capital. It also leads into retirement and death of a partner, where the same ideas of gaining ratio, goodwill and revaluation return in reverse. A solid grip here makes those chapters much easier.

Admission of a partner is a reliable source of numerical questions in Financial Accounting, and it can also appear as standalone MCQs on the sacrificing ratio, goodwill share or capital calculation. A written problem lets you earn step marks for the ratio, the goodwill entry, the revaluation account, the partners' capital accounts and the balance sheet even if one figure goes wrong. The techniques also carry over to retirement, death and dissolution, so the effort you put in here pays back across the paper.

Admission of Partner: topics in the order to study them

1Admission of a Partner: Meaning and EffectsStart with why the firm is reconstituted and which items need adjustment, so the later steps make sense.
2New Profit Sharing Ratio and Sacrificing RatioEvery later adjustment is shared in the sacrificing or old ratio, so you need these ratios first.
3Goodwill Treatment on AdmissionGoodwill uses the sacrificing ratio directly and is the most tested adjustment, so learn it right after ratios.
4Revaluation of Assets and LiabilitiesRevaluation profit or loss goes to old partners in the old ratio, a different rule from goodwill that you should learn separately.
5Adjustment of Reserves, Accumulated Profits and LossesThese are also shared by old partners in the old ratio, and this topic builds on the revaluation logic.
6Adjustment of Capitals and Capital Brought InOnce all adjustments are posted, you can calculate the new partner's capital and settle capitals in the new ratio.
7Preparation of Balance Sheet and Comprehensive ProblemsThis pulls every step together into the new balance sheet, which is how long exam questions are set.

How to prepare Admission of Partner

Treat this chapter as one fixed sequence of steps. Practise the sequence until you can run it without thinking, then add difficulty.

Learn the chain in order: new ratio, sacrificing ratio, goodwill, revaluation, reserves, capitals, balance sheet. Write it on one page and keep it in view.
Master the ratio work first. Practise sacrifice = old share − new share for each old partner, including cases where the new partner's share is taken from one partner or in a given proportion.
Learn each adjustment with its own rule: goodwill in the sacrificing ratio, and revaluation profit or loss, reserves and accumulated profits or losses in the old ratio. Write the journal entry for each from memory.
Solve problems with the new partner bringing goodwill in cash, goodwill not brought in, and goodwill already in the books. Note how the entry changes in each case.
Practise capital problems both ways: given the new partner's capital and share, find the firm's total capital and the old partners' adjusted capitals, then show the cash brought in or withdrawn.
Finish with full problems. Lay out the Revaluation Account, Partners' Capital Accounts and the new Balance Sheet neatly, with working notes, and time yourself.
For the MCQ section, drill short items such as sacrificing ratio, goodwill credited to each partner and the new partner's capital until you can answer in under two minutes each.

Common mistakes in Admission of Partner

Sharing goodwill in the old ratio instead of the sacrificing ratio.
Fix: Remember the rule: goodwill goes by sacrifice, and revaluation and reserves go by the old ratio. Write this at the top of each solution.
Calculating the sacrificing ratio wrongly when the new partner's share is taken in a stated proportion.
Fix: Compute each old partner's new share first, then subtract it from the old share. Check that the sacrifices add up to the new partner's share.
Posting revaluation gains and losses with the wrong sign.
Fix: Treat an asset increase and a liability decrease as gains, and the reverse as losses. Put gains on the credit side of the Revaluation Account.
Ignoring goodwill or reserves already in the old balance sheet.
Fix: Scan the balance sheet first. Mark existing goodwill, reserves, accumulated profits and losses, and deal with each before admitting the new partner.
Confusing the new partner's capital with the capital of the old partners after adjustment.
Fix: When the new partner's capital and share are given and the firm's capital is to be fixed on that basis, divide the new partner's capital by their share to get total firm capital. Then find each old partner's new capital as total capital × their new share. Compare it to the adjusted old capital to find the cash movement.
Leaving out working notes and an organised layout.
Fix: Show the ratio workings, goodwill calculation, and each account clearly. Examiners award step marks for correct method.

Last-day revision: Admission of Partner

Admission ends the old partnership and creates a new one with a new profit sharing ratio.
Sacrificing ratio = old ratio − new ratio for each old partner. A positive result means a sacrifice.
Goodwill brought in by the new partner is shared by old partners in the sacrificing ratio.
Revaluation profit or loss is shared by old partners in the old ratio.
Reserves and accumulated profits are credited to old partners in the old ratio. Accumulated losses are debited to them in the old ratio.
Increase in an asset or decrease in a liability is a gain on the Revaluation Account. The reverse is a loss.
Existing goodwill appearing in the books is written off to the old partners' capital accounts in the old ratio before the new partner is admitted.
If goodwill is not brought in cash, debit the new partner's capital (or current) account with their share of goodwill and credit the sacrificing partners' capital accounts in the sacrificing ratio.
When the new partner's capital and share are given and the firm's capital is to be fixed on that basis, total firm capital = new partner's capital ÷ new partner's share.
Old partners' new capital = firm's total capital × their new share. The difference from their adjusted capital is cash brought in or withdrawn.
Show every adjustment through the Partners' Capital Accounts and prepare the new balance sheet only after posting them all.
Always give working notes. They earn step marks even when the final figure is wrong.

Admission of Partner practice questions

Admission of Partner in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Admission of Partner: frequently asked questions

What is the sacrificing ratio in admission of a partner?

It is the ratio in which old partners give up part of their profit share to the new partner. You find it by subtracting each old partner's new share from their old share. It is used to share goodwill brought in by the new partner.

Why are revaluation profits shared in the old ratio?

Revaluation relates to the period before the new partner joined, so the gain or loss belongs to the old partners. They therefore share it in the ratio in which they shared profits before admission.

How do I solve admission problems quickly in the exam?

Follow the fixed chain: ratios, goodwill, revaluation, reserves, capitals and then the balance sheet. Write short working notes for each step. This gives you a clear layout and secures step marks.

Is this chapter asked in MCQs as well as long questions?

Yes, it can be tested both ways. MCQs usually test short calculations like the sacrificing ratio, goodwill share or capital needed, while long questions cover the full set of adjustments and the new balance sheet.