Reconstitution of a Partnership Firm - Admission of a Partner
Adjustment of capitals
Find required capitals and the cash or current account adjustment.
Sometimes the partners agree that their capitals should be in proportion to their new profit sharing ratio. There are two ways to fix the required capitals.
- The new partner's capital is the base. Total capital of the firm = new partner's capital ÷ his share. Then each old partner's required capital = total × his share. For example, if C brings 20,000 for a 1/4 share, the total must be 80,000; A, with 2/4, needs 40,000, and B, with 1/4, needs 20,000.
- The total capital is fixed by agreement. Each partner's required capital = total × his share.
Then compare each old partner's required capital with his adjusted capital: his old capital after all the adjustments for goodwill, reserves and revaluation.
- If a partner has a shortfall, he brings in cash.
- If he has an excess, he withdraws it in cash (or it is transferred to his current account).
Total capital = base capital ÷ its share.
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