Admission of Partner: Balance Sheet and Comprehensive Problems

Understand Preparation of Balance Sheet and Comprehensive Problems

Key rules to remember

Sacrificing ratio

Sacrificing ratio = Old share − New share (for each old partner)

A positive result means the partner sacrificed. Goodwill premium is shared in this ratio.

Revaluation profit or loss

Revaluation profit = Increase in assets + Decrease in liabilities − Decrease in assets − Increase in liabilities

Shared by old partners in the old ratio. The new partner has no share, because it relates to the period before admission.

Reserves and accumulated profits

Credit to old partners = Reserve or profit balance × old ratio

Accumulated losses are debited in the same way. The new partner does not share them.

Goodwill already in books

Write off: Dr Old partners' Capital (old ratio), Cr Goodwill

Do this before or along with the new goodwill entry, as the question directs.

Joint life policy with surrender value

Policy shown at surrender value; JLP reserve credited to old partners in old ratio

Any difference between the book value of the policy and its surrender value passes through Revaluation Account.

Cash in new Balance Sheet

New cash = Old cash + Capital brought in + Goodwill premium brought in (− any amount withdrawn by old partners)

If goodwill is paid privately to the old partners, it does not enter the firm's cash.

Balance Sheet check

Total assets = Total capitals + Reserves left + Outside liabilities

Use it as the final proof of your solution.

How to solve Preparation of Balance Sheet and Comprehensive Problems questions

1. 1Read the full question and list every adjustment: revaluation items, goodwill, reserves, joint life policy, unrecorded items, capital terms. Tick each as you post it.
2. 2Find the new ratio and the sacrificing ratio. Show the working in a small note.
3. 3Prepare the Revaluation Account. Put losses and increased liabilities on the debit side. Put gains and unrecorded assets on the credit side. Find the profit or loss and share it in the old ratio.
4. 4Deal with goodwill, existing goodwill write-off and reserves. Work out each partner's share in the proper ratio.
5. 5Prepare the Partners' Capital Accounts in columnar form. Show opening balance, revaluation, goodwill, reserves, cash brought in and any withdrawal. Balance each column.
6. 6Prepare the new Balance Sheet. Use revised values for assets and liabilities. Show cash after new capital and goodwill premium. Show capitals from the closing balances.
7. 7Check that both sides agree. If not, look for a missed hidden item, a wrong ratio or a cash entry not posted.

Quickest way: Capital Account columns first, journal entries only if asked

Common mistakes in Preparation of Balance Sheet and Comprehensive Problems

• Sharing revaluation profit in the new ratio, or giving the new partner a share.

  Students see the new ratio and apply it to everything after admission.

  Fix: Revaluation profit, reserves and accumulated profits belong to the period before admission. Share them among old partners in the old ratio.

• Sharing goodwill premium in the old ratio instead of the sacrificing ratio.

  The old ratio is already in use for revaluation and reserves, so it is applied again out of habit.

  Fix: Work out the sacrificing ratio first. Share the premium only in that ratio, even if it comes out equal to the old ratio.

• Ignoring hidden items such as unrecorded assets, outstanding expenses or the surrender value of a joint life policy.

  These appear in a note or a single line and are overlooked.

  Fix: List every adjustment before you start and tick each one off. Treat unrecorded assets as gains in Revaluation Account and unrecorded liabilities as losses.

• Forgetting to add goodwill premium to cash in the new Balance Sheet.

  Students add only the capital brought in, because goodwill goes to the Capital Accounts, not to an asset.

  Fix: If the premium is brought in cash and kept in the firm, add it to cash along with the new partner's capital.

• Showing existing goodwill in the new Balance Sheet when it should be written off.

  The old Balance Sheet figure is copied across without reading the adjustment.

  Fix: Where the question says to write off or raise only the new goodwill, debit old partners' capitals in the old ratio and show goodwill as nil.

• Treating the reserve as a liability in the new Balance Sheet after it has been distributed.

  Students credit the old partners but forget to remove the reserve line.

  Fix: Once a reserve is credited to partners' capitals it disappears. Show it only if the question says it remains.

Worked examples