Financial Accounting · Admission of Partner

Adjustment of Capitals and Capital Brought In on Admission of a Partner

Updated 10 October 2026 · Fact-checked

When a partner is admitted, the firm often fixes the new partner's capital and wants old partners' capitals in the new profit ratio. Find the total firm capital from the new partner's capital and share, split it by the new ratio, compare with each old partner's adjusted capital, and settle the difference in cash or current accounts.

Understand Adjustment of Capitals and Capital Brought In

A partnership agreement may say that capitals must match profit shares. On admission the profit ratio changes, so old capitals may no longer match. The firm then adjusts capitals.

There are two common cases. In the first, the new partner is told to bring a fixed amount of capital. The total capital of the firm is found by grossing up: new partner's capital ÷ new partner's share. This is the implied total capital. Each old partner's required capital is the total multiplied by that partner's new share.

In the second case, the old partners' capitals are fixed and the new partner's capital is derived from them. Take the old partners' total adjusted capital and divide by their combined new share. This gives the total capital. The new partner's capital is the total multiplied by the new partner's share.

Before comparing, always find each old partner's adjusted capital. Start with the old capital balance, then add or subtract goodwill, revaluation profit or loss, reserves, accumulated profits or losses, and any other admission entries. Only this figure is compared with the required capital.

The difference is settled in one of two ways. A shortfall is brought in as cash, or credited as a current account if the partner leaves it as a balance. A surplus is withdrawn in cash, or moved to the partner's current account. Read the question to see which method is asked.

Key rules to remember

Total capital from new partner's capital: Total capital of new firm = New partner's capital ÷ New partner's share; Use when the new partner's capital is given. Share must be a fraction, not a percentage left unconverted.
Total capital from old partners' capital: Total capital of new firm = Total adjusted capital of old partners ÷ (1 − New partner's share); Use when old capitals are to stay as they are and the new partner's capital is to be found.
Required capital of each partner: Required capital = Total capital × Partner's new share; Apply to every partner, including the new one.
Adjusted capital of an old partner: Old capital ± goodwill, revaluation, reserves, profits/losses, other adjustments; Do this before comparing with required capital.
Adjustment: Adjustment = Required capital − Adjusted capital; Positive means cash brought in or credit to current account. Negative means cash withdrawn or debit to current account.
Check: Sum of required capitals = Total capital; Also, cash brought in by the new partner equals the new partner's required capital, apart from any goodwill premium.

How to solve Adjustment of Capitals and Capital Brought In questions

Use this order for any capital adjustment question. Keep every adjustment entry done before you touch capital comparison.

1Write the old and new profit ratios, and identify the new partner's share.
2Pass or note all admission entries: goodwill, revaluation, reserves, accumulated profits or losses, and cash or goodwill brought in by the new partner.
3Prepare the partners' capital accounts and find each old partner's adjusted capital.
4Find the total capital of the new firm using the correct formula for the case given.
5Multiply the total capital by each new share to get each partner's required capital.
6Compute the difference for each old partner: required minus adjusted capital.
7Pass entries: cash brought in or withdrawn, or transfer to current accounts, as the question directs.
8Complete the balance sheet and, where the agreement requires capitals in the profit ratio, check that the capitals are in the new profit ratio.

Quickest way: Total-capital shortcut

When to use it: Use when the question has a numerical capital target and you only need the adjustment amounts, not every ledger account.

Get the total capital with the right gross-up formula.
Write required capitals in one line, one per partner.
Write adjusted capitals just below, after goodwill and revaluation.
Subtract line by line and mark each result as brought in or withdrawn.
Check the net cash change: net cash change = new partner's capital + premium brought in (if retained in the firm) + cash brought in by old partners − cash withdrawn by old partners − any goodwill withdrawn.

Common mistakes in Adjustment of Capitals and Capital Brought In

Comparing required capital with the old capital before admission adjustments.
Students read the capital figure from the balance sheet and skip goodwill and revaluation.
Fix: Always compute adjusted capital first. Only that figure is compared.
Using the wrong gross-up denominator.
Students divide old partners' capital by the new partner's share instead of by the old partners' combined new share.
Fix: Old capital total ÷ old partners' combined new share. Check that the new partner's capital then equals the total times their share.
Treating goodwill premium as part of the new partner's capital.
The new partner brings one lump sum and students credit it all to capital.
Fix: Credit only the capital portion to the new partner's capital account. Premium goes to the old partners in the sacrificing ratio, unless the question says otherwise.
Reversing the direction of cash for old partners.
Students subtract in the wrong order.
Fix: Use required minus adjusted. A positive figure is cash brought in, a negative is cash withdrawn.
Ignoring the instruction on current accounts.
Students default to cash adjustment.
Fix: Check if the question says capitals are to be adjusted by cash or through current accounts, and pass entries as stated.

Worked examples

Example 1

A and B share profits 3:2 with capitals of ₹3,00,000 and ₹2,00,000. C is admitted for a 1/5 share and brings ₹1,50,000 as capital. The new ratio is A 2/5, B 2/5, C 1/5. Capitals of A and B are to be adjusted in the new ratio through cash. Ignore goodwill and revaluation.

Show the solution

Total capital of the firm = ₹1,50,000 ÷ (1/5) = ₹7,50,000.
Required capitals: A = 2/5 × ₹7,50,000 = ₹3,00,000. B = 2/5 × ₹7,50,000 = ₹3,00,000. C = ₹1,50,000.
Adjusted capital of A = ₹3,00,000, so no change. Adjusted capital of B = ₹2,00,000.
B's adjustment = ₹3,00,000 − ₹2,00,000 = ₹1,00,000, which B brings in cash.
Entry: Bank A/c Dr ₹2,50,000 (C ₹1,50,000 + B ₹1,00,000) to C's Capital ₹1,50,000 and B's Capital ₹1,00,000.

Answer: Total capital is ₹7,50,000. A's capital stays at ₹3,00,000, B brings in ₹1,00,000 to make ₹3,00,000, and C's capital is ₹1,50,000.

Example 2

P and Q share profits 2:1 with capitals of ₹4,00,000 and ₹2,00,000. R is admitted for a 1/4 share. The new ratio is P 1/2, Q 1/4, R 1/4. Assets are revalued, giving a profit of ₹30,000. Capitals of P and Q after revaluation are to remain as they are, and R's capital is to be in proportion to his share. Find R's capital and say how the old partners' capitals are shown.

Show the solution

Revaluation profit ₹30,000 is shared 2:1 in old ratio: P ₹20,000, Q ₹10,000.
Adjusted capital of P = ₹4,00,000 + ₹20,000 = ₹4,20,000. Adjusted capital of Q = ₹2,00,000 + ₹10,000 = ₹2,10,000.
Total adjusted capital of P and Q = ₹6,30,000. Their combined new share = 3/4.
Total capital of the firm = ₹6,30,000 ÷ (3/4) = ₹8,40,000.
R's capital = 1/4 × ₹8,40,000 = ₹2,10,000.
Check: required P = 1/2 × ₹8,40,000 = ₹4,20,000, which equals P's adjusted capital. Required Q = 1/4 × ₹8,40,000 = ₹2,10,000, which equals Q's adjusted capital. No cash adjustment is needed between P and Q.

Answer: R brings ₹2,10,000 as capital. P's and Q's capitals stand at ₹4,20,000 and ₹2,10,000, already in the new ratio.

Exam tips

Write the new ratio and required capitals in a small table before any entry. It earns step marks even if later arithmetic slips.
Read whether the adjustment is by cash or current account. Marks are lost for passing the wrong entry.
In MCQs, check whether a premium or goodwill is hidden in the cash the new partner brings in.
Always show the gross-up working in one line: total capital = amount ÷ share.
Finish by checking that the closing capitals are in the new profit ratio, where the agreement requires capitals in the profit ratio.

Practice questions from Admission of Partner

Adjustment of Capitals and Capital Brought In: frequently asked questions

How do I calculate the new partner's capital from the profit share?

If old partners' capitals are to stay fixed, divide their total adjusted capital by their combined new share to get total capital. Multiply by the new partner's share to get his capital. The answer must be consistent with the new ratio.

What is the difference between adjusted capital and required capital?

Adjusted capital is the old partner's balance after goodwill, revaluation, reserves and other admission entries. Required capital is the total firm capital multiplied by the partner's new share. The gap between them is settled in cash or current account.

When should the adjustment go to current account instead of cash?

Follow the question. If it says that surplus or deficiency is to be carried to current accounts, pass the entries through those accounts. If nothing is said, cash adjustment is the usual approach in exam problems.

Does the new partner's goodwill premium form part of his capital?

No. The capital is the amount credited to his capital account. The premium is shared by the old partners in the sacrificing ratio, unless the question gives a different treatment.