Admission

PP
of a partner 2017

Aknowledgement
The unflagging and persistent support that the resourced person gave for the completion of our
project entitled “Admission of a partners” will be rewarded exceedingly and wholeheartedly
from our side to our accountancy madam P.K Devi. I also owes special expression of gratitude to
many people those esteemed figures who sacrificed their time and potential to equip us with
precious knowledge, information and skills to shape our project. Indeed their efforts and
struggles could shade a vivid light in our path and gave a green signal signifying a satisfactory
struggle. We were highly motivated and inspired to do this project which is very helpful for
today, tomorrow and future. Without their support and guidance, this project would have never
been completed. It is noteworthy to say that accomplishment of this task would have been
difficult if not impossible, if our madam did not put a significant focus and consideration in our
work. It was the precious words and pure actions and attempts of our madam which enabled us to
put the first and foremost hesitating step of this project with a full confidence.

And I also use this opportunity to pass our heartfelt gratitude my friend Karma Tshering
providing the information for my project despite his daily schedule. His supportive information
can surely lift us on the apex of success. No doubt, each and every individuals put effort to
complete and make it a great and successful project. We would also like to acknowledge our
school Management for the provision of the internet and library facilities for gathering
necessary information required for the successful and completion of the project. The credit of
this success also goes to our friends who helped in various stages of project. Lastly we would
like to thank all the helping hands for their valuable time, ideas and knowledge.

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Introduction
Admission of a partner is one of the modes of the reconstitution of the firm under which old
partnership comes to an end and the new partnership begins between all the partners including
the incoming partner. Indian Partnership Act states that a new partner can be admitted only
when the existing partners give their free consent for the same. So, when the existing partners
of a firm permit a new person to join as their new partner, is called admission of the new
partner. A new partner is admitted when the firm needs additional capital or managerial help
or both for the expansion of the business.

Reason for the admission of the new partner:

A new partner is admitted in the partnership for the following reasons:

To expand the business.

To meet the requirements for the additional capital.

To increase the managerial capabilities of the firm.

To take the advantage of the reputation of the new partner.

To reduce the competition.

To avail the benefit of the technical skills of the new partner.

To better understand about the concepts in detail we have written it on topic basis.

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Content

SL.NO TOPICS PAGES

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Partnership Accounts
Admission of a partner
Nature of partnership firm:-There are certain limitations of a sole trader. In a sole trading
concern only one man invest capital, undertakes the risk involved in the business and controls
the whole affairs of the business. But one man’s capital, skill, controlling and risk taking capacity
are generally limited. Therefore, some persons may combine and enter into an agreement to
form a partnership.

Definition of partnership: Section 4 of the Indian Partnership Act, 1932, defines partnership as
follows:

“Partnership is the relation between persons who have agreed to share the profits of a business
carried on by all or any of them acting for all.”

(Main features or essential elements or characteristics of partnership)

1. Two or more persons:-There must be at least two persons to form a partnership.
Partnership Act does not specify the maximum number of persons, but the Indian
Company Act, 1956, restricts the number of partners to 10 for a partnership carrying on
banking business and 20 in case of other kinds of business.
2. Agreement: - Partnership is the result of an agreement. It must come into existence by
an agreement and not by the operation of law. On the contrary, a Hindu undivided
family comes into existence by the operation of law and not by an agreement. Such an
agreement can be either oral or in writing. The agreement forms the basis of mutual
rights and duties of each partners.
3. Existence of business and Profit motive:- Partnership can be formed for the purpose of
carrying on some business with the intention of earning profits and such business must
be legal. A joint ownership of some property by itself cannot be called a partnership.
4. Sharing of profits:- The agreement between the partners must be aimed at sharing the
profits of the business. If some persons join hands to run some charitable activity, it will
not be called partnership. Further, if a partner is derived of his rights to share the profits
of business, he cannot be called a partner. But it is not necessary that all partners should
share the losses also. It may be agreed between the partners that one or more of them
shall not be liable for losses.

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5. . Relationship of principal and Agent:- Each partners is an agent as well as a partner of

the firm. An agent, because he can bind the other partners by his acts and a principal,
because he himself can be bound by the acts of other partners.
6. Business carried on by all or any of them acting for all:- It means that each partner can
participate in the conduct f business and each partner is bound by the acts of other
partners in respect to the business.

Therefore Partnership cannot come into existence in the absence of any one of the
above mentioned essential features

Rights of a partner:
 Every partner has the right to share profits or losses with other partners in the
agreed ratio.
 Every partner has the right to take part in the conduct of the business.
 Every partner has the right to be consulted in the matters related to partnership
business.
 Every partner has the right to inspect and have a copy of the books of accounts.
 Every partner has a right to disallow the admission of a new partner.
 Every partner is the joint owner of the partnership property.
 If a partner has given loan to the firm, he has a right to receive interest at agreed
rate. If the rate of interest is not agreed, it is paid @ 6 % p.a.
 If a partner incurs expenses or make payment on behalf of the firm, he has a
right to be indemnified by the firm.
 Every partner has a right to retire from the firm after giving a proper notice.

Partnership Deed
Since partnership is the outcome of an agreement, it is essential that there must be some terms
and conditions agreed upon by all the partners. Such terms and conditions may be either oral
or written. The law does not make it compulsory to have a written agreement. However, in
order to avoid all misunderstanding and disputes, it is always the best to have a written
agreement duly signed and registered under the act. Such a written document which contains
the terms of agreement is called “Partnership Deed.” It is also called “Articles of Partnership.”

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The partnership deed should contain the following points:-

 The name and addresses of the firm.

 Name and addresses of the partners.
 The type and nature of the business the firm purposes to do.
 Amount of capital to be contributed by each partners and whether the capital
accounts will be fixed or fluctuating.
 Interest on capitals: - Whether interest to be allowed on capitals. If so, the rate of
interest.
 Drawings: - How much amount the partners are entitled to withdraw for personal use.
 Interest on drawings: - Whether interest will be charged on partner’s drawings. If so,
the rate of interest.
 Profit sharing ratio:- The ratio in which profits or losses are to be divided among the
partners.
 Salary:-Whether any partner will be paid salary for the work done by him. If so, how
much?
 Goodwill:-Method of valuation of goodwill in case of admission or retirement of a
partner.
 Accounting period of the firm:-The period after which the final account the firm are to
be prepared. Whether yearly or half-yearly and the date on which accounts are to be
closed every year.
 Method of recording of firm’s accounts and the safe custody of the books of accounts
and other documents of the firm.
 Auditing: - Whether the firm’s books will be audited or not? If so, the mode of
auditor’s appointment .
 Date of commencement of partnership.
 Duration of partnership: - The period for which the partnership has been established
and the mode of dissolution of partnership.
 Bank accounts: - Whether the account in the bank will be opened in firm’s name or in
some partner’s name? Who will have the right to sign the cheques?
 Rules to be followed in case of admission of a partner.
 Rules to be followed while settling the accounts on retirement: - The manner in which
the amount due on the retirement or death of a partner will be calculated and the
manner in which it will be paid.
 Settlement of disputes: - In case of dispute among the partners, how the disputes will
be solved, whether arbitrator will be appointed?

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[Importance of Partnership Deed]

Though, the law does not make it necessary for every firm to have a partnership deed, it is
desirable to have it due to following reasons:-

 It regulates the rights, duties and liabilities of each partners.

 It helps to avoid any misunderstanding amongst the partners because all the terms and
conditions of partnership have been laid down before hand in the deed.
 Any dispute amongst the partners may be settled easily as the partnership deed may be
readily referred to.

{Rules applicable in the absence of partnership deed}

 Profit sharing ratio: Profits and losses are to be shared equally irrespective of their
capital contribution.
 Interest on capital: No interest on capitals shall be allowed to the partners. If there is a
provision for the interest on capitals in the partnership deed, it will be allowed only
when there is a profit.
 Interest on drawings: No interest is to be charged on drawings.
 Salary to a partner: No partner is entitled to any salary or commission for taking part in
running the firm’s business.
 Interest on loan: Interest at the rate of 6 % p.a is to be allowed on a partner’s loan to
the firm. Such interest shall be paid even if there are losses to the firm.
 Admission of a new partner: Without the consent of all existing partners no new
partner can be admitted to the firm.
 Each partner can participate in the conduct of business.
 Each partner can inspect the books of firm and can take a copy of the same.

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Admission of a new partner

Sometimes a new partner is needed into the business due to the following reasons:

1. When more capital is needed for the expansion of the business;

2. When a competent and experienced person is needed for the efficient running of the
business;
3. To increase the goodwill and reputation of the business by taking a reputed and
renowned person into the partnership;
4. To encourage a capital employee by taking him into the partnership.

Admission of a partner is one of the modes of reconstitution of a partnership firm, under which
existing agreement comes to an end and a new one comes into existence.

A new partnership deed is prepared at the time of admission of a new partner, as the old
partnership deed comes to an end. According to section 31 (1) of the Indian Partnership Act, a
new partner can be admitted only with the consent of all the existing partners. At the time of
admission, the new partner brings his share of goodwill and capital. Old partners sacrifice a
share of their profits in his favour and thus he gets a share in the future profits of the firm.

Following adjustments are needed at the time of the admission of new partners:

 Calculation of new profit sharing ratios;

 Accounting treatment of Goodwill;
 Accounting treatment for revaluation of assets and liabilities;
 Accounting treatment of reserves and accumulated profits;
 Adjustment of capitals on the basis of new profit sharing ratio.

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Calculation of new profit sharing ratio:

When a new partner is admitted, he acquires his share of profit from the old partners. This
reduces the old partner’s share of profits; hence the calculation of new profit sharing ratio
becomes necessary.

a) When the new partner is given a certain share out of the total profits of the firm:

PROBLEM 1:

Passang and Thinley were partners sharing profits and losses in the ratio 7:3. Singye was
admitted for 3/9 shares in profits. Calculate new profit sharing ratio and sacrificing ratio.

Sol:

Calculation of new profit sharing ratio:

Old ratio= 7:3 (Passang and Thinley)

Singye gets 3/9 share in future profit.

Let total profit= 1

Therefore balance profit= 1 - 3/9 = 9 - 3/9= 6/9= 2/3

Passang’s new share= 7/10 * 2/3 = 14/30 = 42/90

Thinley’s new share=3/10 * 2/3 = 6/30 = 18/90

Singye’s share = 3/9 * 10/10 = 30/90

New ratio = 42/90 : 18/90 : 30/90 = 7/15 : 3/15 : 5/15 = 7 : 3 : 5(Passang: Thinley: Singye)

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