Admission of a New Partner

The admission of a new partner refers to the situation when a new person joins the existing partnership of any firm. The other members of the partnership need to sacrifice their profit sharing ratio after the admission of this new partner i.e. the reconstitution of partnership. The company usually approaches the new partners when they need funding or guidance and mentorship of the new partner. The admission of a new partner must be a mutual agreement between all other existing partners. As all the existing partners will need to sacrifice a portion of the profit for the new partner. The Indian Partnership Act 1932, states the reasons for admission of new partners and also the rights of the partner after admission. The rights of the new partner involve the right to share profits of the partnership firm and the right to share in the assets of the firm. Moreover, he also becomes liable for any liability incurred on the firm after his admission in it. 

Reasons for Admission of a New Partner

The reasons for the need for admission of a new partner in the existing partnership or the firm are as follows:

• The most significant reason for the admission of a new partner is the need for funding for the expansion of the business.
• If there is a requirement of an experienced and well-trained person for the efficient running of any business.
• If the company needs to increase the goodwill by adding the name of any reputed and renowned business person in the company.

According to the section Partnership Act 1932, a new deed forms on the entry of the new partner. This simply states that the old deed will eventually come to an end. Moreover, all the existing partners must agree to the entry of a new partner. 

Adjustment Required at the Time of Admission of a New Partner

During admission, the new partner brings his shares of goodwill and capital with him. There are some necessary adjustments made on the entry of a new partner in the firm. These adjustments are as follows:

• Calculation of new profit sharing ratio among the present partners of the firm
• Accounting treatment of the goodwill.
• Accounting treatment for the revaluation of assets and liabilities of the firm.
• Distribution of accumulated profits and reserves of the firm.
• The capital adjustment on the basis of new profit-sharing ratios of the firm.

Calculation of New Profit Sharing Ratio

On the admission of the new partner, the shares of profit old partners decrease. Therefore, it is necessary to calculate the new profit sharing ratio among the existing partners (including the new partner). 

Different situations while the calculations of new profit sharing ratio are as follows:

1. When the question only contains the ratio of the new partner, and there is no presence of any agreement. Then, we shall assume that the old partners continue to share their profits in the same old profit sharing ratio only.
2. When a new partner purchases the shares from the old partners of the firm equally, then the profit-sharing ratios of old partners of the firm will be ascertained by deducting the sacrifices they made from their existing profit-sharing ratios.
3. When a new partner purchases the shares from the old partners of the firm in a specific ratio, then the calculation of the new profit sharing ratio of the old partners of the firm is after deducing the sacrifice made by a partner from his share of profits.
4. Sometimes, the partners of the firm shall surrender some portion of their share in the favour of new partner. Thus, the calculation of the new profit sharing ratio is by the addition of the surrendered portion of the share of the old partners. Moreover, the calculation of the old partner’s share is by deducing the surrendered share from their old shares.

Accounting Treatment of Reserves and Distribution of Accumulated Profits and Losses

At the time of admission of new partners, if there is an appearance of any Reserve Fund, General Fund, or the balance of profit and loss account in the balance sheet, then it is necessary to transfer them to the Old Partner’s Capital Account in their old profit sharing ratio. As the new partner is not entitled to any of such shares of profits or reserves. Similarly, if there is any loss like Advertisement Suspense A/c etc. then it shall debit from the capital accounts of the old partners only in their old profit sharing ratio. Any specific reserves of a company like ‘Workmen’s compensation reserve’, at the time of admission are also transferred to the capital accounts of old partners.

Conclusion

Admission of a new partner is the entry of a new business person to the existing partnership or firm. The main reasons for admission of a new partner are the need for funding and guidance or mentorship. According to section 31 of the new Partnership Act 1932, the entry of any new partner is only allowed after the agreement of all existing partners. The sharing ratio of profits of a partnership firm changes after the entry of a new partner. There are other changes such as the distribution of accumulated profits and reserves of the firm.