Admission of a Partner Class 12 Notes

These revision notes follow the 2026-27 session.

They compress Chapter 2 of the NCERT Class 12 Accountancy I textbook — Reconstitution of a Partnership Firm – Admission of a Partner — into the working minimum you need to revise: the new profit sharing ratio, the sacrificing ratio, all three goodwill valuation methods, the journal treatment of goodwill in every situation, revaluation, accumulated profits and losses, capital adjustment, and a change in the profit sharing ratio.

The complete chapter, with every illustration worked out, is available in the official NCERT PDF of this chapter; keep it open alongside these notes when a problem feels unfamiliar. The rest of the book lives in our Class 12 Accountancy notes.

Revise in this order: fix the definition table, master the two ratio skills, then goodwill. The three worked examples below show the exact step format a complete answer should reproduce, and the revision summary at the end is a one-page workflow for any admission problem.

What Changes When a Partner Is Admitted

Partnership is an agreement between two or more persons to share the profits of a business they carry on together. Any change in that existing agreement is reconstitution of the partnership firm: the old agreement ends, a new agreement begins with a changed relationship among the partners, and the firm itself continues (NCERT, p. 48).

Admission happens when the firm needs additional capital or managerial help. Under the Partnership Act 1932, a new partner can be admitted only with the consent of all existing partners, unless the partnership deed provides otherwise (NCERT, p. 49).

A partnership firm can be reconstituted in four ways (NCERT, p. 48–49):

• Admission of a new partner — the firm needs extra capital or management strength.
• Change in the profit sharing ratio among existing partners — for example, a partner brings in more capital and bargains for a larger share.
• Retirement of a partner — due to ill health, old age, or a change in business interest.
• Death or insolvency of a partner — when the remaining partners decide to continue the business.

A newly admitted partner acquires two rights: the right to share in the assets of the firm and the right to share in its profits (NCERT, p. 49). In return, he brings an agreed amount of capital, in cash or in kind.

If the firm earns more than the normal rate of return on its capital, he also brings a premium (goodwill) — the payment that compensates old partners for the share of super profits they give up (NCERT, p. 49–50).

The same set of adjustments repeats when a firm is reconstituted by retirement or death of a partner; that chapter runs the same machinery with the roles reversed.

Six matters need adjustment in the books at the time of admission (NCERT, p. 50):

1. New profit sharing ratio
2. Sacrificing ratio
3. Valuation and adjustment of goodwill
4. Revaluation of assets and reassessment of liabilities
5. Distribution of accumulated profits (reserves)
6. Adjustment of partners’ capitals

Admission of a Partner: The Terms You Must Know

Every problem in this chapter is assembled from a small set of terms introduced across the chapter (NCERT, p. 48–77). Fix these ten before attempting any problem.

New Profit Sharing Ratio: Five Situations, One Method

A new partner acquires his share of profit from the old partners. That single principle drives everything: each old partner’s new share = old share − the share sacrificed to the newcomer. The only question is how the new partner takes his share from them.

Default assumption (NCERT, p. 50–51): if nothing is specified about how the new partner acquires his share, assume he gets it from the old partners in their old profit sharing ratio. There is then a shortcut — multiply each old share by the remaining fraction \( 1 – \text{new partner’s share} \).

Always write this assumption as the first working note when the question is silent.

Self-check in every case: the three new shares must add up to 1. Since the new partner’s share is exactly the sum of the sacrifices, a total other than 1 means a calculation error.

Sacrificing Ratio: Old Share Minus New Share

The sacrificing ratio is the ratio in which the old partners agree to forgo their share of profit in favour of the incoming partner (NCERT, p. 52).

\[ \text{Sacrifice} = \text{Old share} – \text{New share} \]

When the mode of acquisition is given — say, ‘takes 1/6 equally from both’ — the sacrifices are known directly. The difficult case is when the new profit sharing ratio is given instead: then each old partner’s sacrifice must be computed by subtracting the new share from the old share (NCERT, p. 53). Illustrations 6 and 7 in the textbook demonstrate exactly this subtraction method.

A negative answer means a gain, not a sacrifice. In Illustration 8, Ramesh alone sacrifices while Suresh’s share actually rises — the ratio of sacrifice exists only among the partners who really lose share (NCERT, p. 54).

Why the sacrificing ratio matters: the premium for goodwill brought by the new partner is shared by old partners in the sacrificing ratio, not automatically in the old ratio (NCERT, p. 52–53). You must compute it correctly before you can split the premium correctly. Worked Example B below shows the subtraction method in full.

Goodwill: Meaning, Factors and the Three Valuation Methods

What Goodwill Is and the Factors That Affect It

Goodwill is the value of a firm’s reputation — an intangible asset that lets an established business earn more than a new business could. The textbook calls it ‘the present value of a firm’s anticipated excess earnings’ (NCERT, p. 55–56). The follow-on is critical: goodwill exists only when the firm earns super profits.

A firm earning only normal profits, or making losses, has no goodwill (NCERT, p. 56).

Goodwill needs valuation whenever the profit sharing arrangement changes: on a change in ratio, admission, retirement, death, dissolution as a going concern, or amalgamation of firms (NCERT, p. 56). The valuation method is settled by agreement between the existing partners and the incoming partner (NCERT, p. 57).

Five factors raise the value of goodwill (NCERT, p. 56):

• Nature of business — high value-added products or stable demand earn more, so goodwill is higher.
• Location — a central site with heavy customer traffic carries higher goodwill.
• Efficiency of management — high productivity and cost efficiency push profits and goodwill up.
• Market situation — monopoly or limited competition means higher profits and higher goodwill.
• Special advantages — import licences, assured cheap power, long-term supply contracts, patents, trademarks, and strong collaborators all add value.

Method 1: Average Profits (Simple and Weighted)

The firm is valued at an agreed number of years’ purchase of its past average profits: a buyer pays, in effect, for the profits he will receive in the first few years, because a brand-new business would earn nothing in that period (NCERT, p. 57).

Simple average:

\[ \text{Average profit} = \frac{\text{Total profit of past years}}{\text{Number of years}} \]

\[ \text{Goodwill} = \text{Average profit} \times \text{Years’ purchase} \]

Weighted average: when profits show a rising or falling trend, recent years are given more weight (NCERT, p. 58):

\[ \text{Weighted average profit} = \frac{\sum (\text{Profit} \times \text{Weight})}{\sum \text{Weights}} \]

\[ \text{Goodwill} = \text{Weighted average profit} \times \text{Years’ purchase} \]

Edge case: the weighted average is used only when the question specifies weights (NCERT, p. 58). If weights are not given, use the simple average even when profits are trending. Also adjust abnormal items — capital repairs charged to revenue, missed depreciation, stock overvaluation — before averaging; Illustration 11 of the textbook does this line by line.

Method 2: Super Profits

The buyer’s real benefit is not total profit but the profit above a normal return on the capital employed. That excess is super profits. Four steps (NCERT, p. 60–61):

1. Calculate the average profit.
2. Calculate the normal profit: \( \text{Normal profit} = \frac{\text{Firm’s capital} \times \text{Normal rate of return}}{100} \). Firm’s capital means partners’ capital plus reserves, excluding fictitious assets and goodwill (NCERT, p. 60).
3. Super profit = average profit − normal profit.
4. Goodwill = super profit × years’ purchase.

Method 3: Capitalisation of Average Profits or Super Profits

Capitalisation answers one question: what capital would produce the firm’s profit at the normal rate of return?

Capitalisation of average profits (NCERT, p. 62):

\[ \text{Capitalised value} = \frac{\text{Average profit} \times 100}{\text{Normal rate of return}} \]

\[ \text{Net assets} = \text{Total assets (excluding goodwill and fictitious assets)} – \text{Outside liabilities} \]

\[ \text{Goodwill} = \text{Capitalised value} – \text{Net assets} \]

Outside liabilities include both long-term and short-term liabilities (NCERT, p. 62).

Capitalisation of super profits (NCERT, p. 63):

\[ \text{Goodwill} = \frac{\text{Super profit} \times 100}{\text{Normal rate of return}} \]

With consistent data, both capitalisation routes give the same goodwill (NCERT, p. 63).

All Formulas in This Chapter, With Symbol Meanings

Profit amounts are in rupees, years’ purchase is a pure number, and rates are percentages per annum. One caution row at the end: the weighted average applies only when weights are given.

Worked Examples: Three Problems Solved Step by Step

All three problems use original figures. Follow the step format exactly — fractions shown in full, units stated at every money figure, and a check at the end.

Worked Example A: New Profit Sharing Ratio When the Share Is Taken From Both Partners

Worked Example B: Sacrificing Ratio When the New Profit Sharing Ratio Is Given

Worked Example C: Hidden Goodwill With the Journal Entries

If Tanvi instead brought her premium in cash with her capital, the entries would run through the premium account:

The sacrifice-based split (3:2 → Rs 15,000 : Rs 10,000) is unchanged in both routes.

Premium for Goodwill: Journal Entries for Every Situation

However the premium arrives, it is shared by old partners in the sacrificing ratio (NCERT, p. 64). The decision table below is the complete guide for the situations this chapter presents.

Alternative route: the premium can pass through the new partner’s capital account — Bank A/c Dr → new partner’s Capital A/c (capital plus premium together); then new partner’s Capital A/c Dr → old partners’ capital A/cs in the sacrificing ratio (NCERT, p. 65). This avoids opening a separate premium account.

When the New Partner Brings Premium in Cash

Worked-style sample with original numbers: old partners X and Y sacrifice in the ratio 3:1, and new partner Z brings Rs 30,000 as capital and Rs 8,000 as premium by cheque.

If the old partners decide to withdraw the premium fully: X’s Capital A/c Dr 6,000; Y’s Capital A/c Dr 2,000; To Bank A/c 8,000. Withdrawing 50% would debit only half of those amounts (NCERT, p. 66 shows the same three variants: retained, fully withdrawn, half withdrawn).

When the New Partner Does Not Bring the Full Premium

The rule: debit the new partner for what he did not bring and credit the old partners for the full premium (NCERT, p. 69–70). Example: a partner’s share of goodwill is Rs 36,000 but he brings only Rs 12,000.

Entry: Bank A/c Dr 12,000; New partner’s Current A/c Dr 24,000; To sacrificing partners’ capital A/cs 36,000 — split in the sacrificing ratio, say 3:1 → Rs 27,000 and Rs 9,000.

When Goodwill Already Appears in the Books

Goodwill already recorded is written off at admission in the old ratio: old partners’ capital A/cs Dr → Goodwill A/c (NCERT, p. 68). The freshly agreed premium is then recorded separately.

Example: existing goodwill Rs 15,000 with old ratio 3:2 → A’s Capital A/c Dr 9,000; B’s Capital A/c Dr 6,000; To Goodwill A/c 15,000. The new partner’s premium is a separate amount fixed by current valuation; it need not equal the old book figure.

Why write it off? Under AS 26 (Intangible Assets), internally generated goodwill is not recognised as an asset, so goodwill appearing in the balance sheet is written off at reconstitution (NCERT, p. 72–73). The write-off uses the old ratio because the asset was built before the new partner arrived.

Hidden Goodwill: Inferring Value From Capital

When the goodwill value is not given, it can be inferred from the capital arrangement (NCERT, p. 74). The working:

1. Implied total capital of the new firm \( = \text{New partner’s capital} \div \text{His share} \).
2. Firm’s goodwill \( = \text{Implied total capital} – \text{Actual total capital} \).
3. New partner’s share of goodwill \( = \text{Firm’s goodwill} \times \text{His share} \); debit his current account, or record it as premium brought.

Worked Example C above runs this exact calculation with the journal entries for both routes.

Accumulated Profits and Losses: The New Partner’s Zero Share

The new partner is not entitled to profits the firm accumulated before his admission, so every such balance goes to the old partners in the old ratio (NCERT, p. 76).

Illustration 22 in the textbook shows the pair of entries: the reserve is transferred by crediting old partners, and a debit balance of profit and loss is transferred by debiting them — both in the old ratio (NCERT, p. 76–77).

Revaluation of Assets and Reassessment of Liabilities

On admission the books are checked so that assets and liabilities stand at current values; unrecorded assets and liabilities are brought into the books as well (NCERT, p. 77).

All such changes pass through the Revaluation Account — a nominal account. It is credited with gains (asset appreciation, liability reduction, unrecorded assets) and debited with losses (asset reduction, liability increase, unrecorded liabilities). The net balance is transferred to the old partners’ capital accounts in the old profit sharing ratio (NCERT, p. 77–78).

Original Revaluation Example: Six Changes in One Scenario

The individual item entries follow the same table — for example, Building A/c Dr 15,000 → Revaluation A/c; Revaluation A/c Dr 4,000 → Machinery A/c; Creditors A/c Dr 500 → Revaluation A/c; Investment A/c Dr 3,000 → Revaluation A/c. The revaluation account’s final credit balance of Rs 15,000 is then closed by the transfer entry in Step 5.

Adjustment of Partners’ Capital After Admission

When the partners agree that capitals should be proportionate to the new profit sharing ratio (NCERT, p. 83), two bases are possible:

• Base 1 — the new partner’s capital is given. Use it to derive the total capital of the new firm: \( \text{Total capital} = \text{New partner’s capital} \div \text{His share} \). Then each partner’s required capital \( = \text{His share} \times \text{Total capital} \) (Illustration 25).
• Base 2 — the total capital of the new firm is specified. Work out each partner’s required capital directly as his share of the stated total (Illustration 26).

In both bases, compare each partner’s required capital with his adjusted old capital (after goodwill, revaluation and reserve adjustments). A shortage is brought in, an excess is withdrawn; alternatively the difference is transferred to the partner’s current account (NCERT, p. 83, 85). Illustration 27 shows the current-account route with a complete balance sheet.

Compact example: A and B share profits 2:1; C is admitted for a 1/4 share and brings Rs 24,000 as capital. The new ratio works out to 2:1:1, so total capital \( = 24,000 \times 4 = \text{Rs } 96,000 \). A’s required capital \( = \frac{2}{4} \times 96,000 = \text{Rs } 48,000 \); B’s required capital \( = \frac{1}{4} \times 96,000 = \text{Rs } 24,000 \).

If A’s adjusted capital stands at Rs 45,000, he brings in Rs 3,000; if B’s adjusted capital stands at Rs 27,000, he withdraws Rs 3,000.

Change in Profit Sharing Ratio Among Existing Partners

Partners can also change their ratio without admitting anyone and without anyone retiring. Some partners gain share; others sacrifice (NCERT, p. 93–94).

Goodwill adjustment rule: debit the gaining partners and credit the sacrificing partners with their respective shares of goodwill. Revaluation, accumulated profits and losses, and capital adjustments are then handled exactly as on admission (NCERT, p. 94).

Worked-style check with original numbers: A, B and C share profits 5:3:2 and move to a new ratio 4:4:2. In fractions, A falls from 5/10 to 4/10 (loss 1/10), B rises from 3/10 to 4/10 (gain 1/10), and C stays at 2/10. If goodwill is valued at Rs 40,000, B (the gainer) compensates A (the sacrificer) with \( \frac{1}{10} \times 40,000 = \text{Rs } 4,000 \).

Entry: B’s Capital A/c Dr 4,000 → A’s Capital A/c 4,000.

Common Mistakes in Admission of a Partner Numericals

The errors below are the ones this chapter’s numericals reliably produce. Each row states the wrong move, the correct rule, and a way to verify.

How to Present Your Admission Adjustments Answer

Numerical problems in this chapter follow one skeleton. Use it every time.

1. Assumptions — if the question does not say how the new partner takes his share, state the old-ratio assumption outright.
2. Working notes — the new profit sharing ratio, then the sacrificing ratio, shown in fractions.
3. Journal entries — with narrations, debit and credit amounts on both sides.
4. Ledger accounts — capital, current, and revaluation accounts balanced and totalled.
5. New balance sheet — both sides must add to the same total.

For the chapter’s end questions (NCERT, p. 98–99):

• Short answer questions (the six ‘why’ questions) — define the term in the first line, then give the reason in the next.
• Long answer questions (the eight explain/describe questions) — define the concept, list the factors or methods completely, and support the point with a small imaginary example.
• Numerical questions — the first ten compute new profit sharing ratios; the next two compute the sacrificing ratio; the next five value goodwill by the three methods; the later problems need journal entries for premium (retained, withdrawn, private, partial, or absent), including existing and hidden goodwill; the problems that follow build toward full revaluation, capital adjustment, and balance-sheet work.

A complete numerical answer therefore contains every journal narration, both amounts of each entry, and balanced ledger accounts — not just the final figures.

Revision Summary: The Admission Workflow in One Page

Run every admission problem in this order:

1. New profit sharing ratio
2. Sacrificing ratio
3. Goodwill valuation and treatment
4. Revaluation of assets and liabilities
5. Accumulated profits and losses
6. Capital adjustment
7. Revised balance sheet

Memory device: the first letters spell NSGRAC — remember the sentence ‘New Study Group Revises All Concepts’.

One line of sense-check: the new ratio plans the future, the old ratio settles the past (write-offs, reserves, revaluation), and only the sacrificing ratio settles the premium. The full set of chapters is gathered in the Class 12 notes index, itself part of the wider CBSE notes library.

Frequently Asked Questions About Admission of a Partner

Why is sacrificing ratio different from the old profit sharing ratio when a partner is admitted?

Because sacrifice equals old share minus new share, and the new partner may take his share equally, in specified amounts, as a fraction of each partner’s own share, or wholly from one partner. When the new profit sharing ratio is given, sacrifices must be computed partner by partner.

The premium is shared in the sacrificing ratio so that only the partners who actually forgo share are compensated (NCERT, p. 52–53).

Why is the existing goodwill in the balance sheet written off before recording the new partner’s premium?

Goodwill already in the books may be purchased, and under AS 26 it is written off at reconstitution (NCERT, p. 72–73). At reconstitution it is written off in the old ratio, and the newly agreed premium — a separate amount based on current valuation — is recorded in the sacrificing ratio.

How is hidden goodwill calculated when the value of goodwill is not given?

Work from the new partner’s capital and share: implied total capital = new partner’s capital ÷ his share; firm’s goodwill = implied total capital − actual total capital of all partners; the new partner’s share of that goodwill is then debited to his current account or brought as premium (NCERT, p. 74).

Do new partners get a share of accumulated profits and reserves on admission?

No. Reserves, credit balances, and even accumulated losses belong to the old partners and are transferred to their capital accounts in the old ratio, because they arose before admission (NCERT, p. 76).

What is the difference between the premium brought by the new partner and the goodwill that already appears in the books?

The premium is what the new partner pays now for his share of the firm’s future super profits; it is credited to the old partners in the sacrificing ratio. The goodwill appearing in the books is an earlier recorded value of the firm’s reputation; it is written off in the old ratio.

They are different amounts, use different ratios, and get different entries (NCERT, p. 64–68).

How are capitals adjusted when they must be proportionate to the new profit sharing ratio?

Find the total capital of the new firm — either from the new partner’s capital divided by his share, or from a specified total. Each partner’s required capital = his share × that total. Compare with the adjusted old capital: a deficiency is brought in cash, an excess is withdrawn, or the difference is transferred to the partner’s current account (NCERT, p. 83–85).

Reference: NCERT Class 12 Accountancy textbook, chapter Reconstitution of a Partnership Firm – Admission of a Partner.

Official source: download the NCERT textbook free from ncert.nic.in.