1. Modes of reconstitution of a partnership firm, Admission of a new partner

(MODES OF RECONSTITUTION)

A partnership firm may go for reconstitution for various reasons such as;

• Change in the profit-sharing ratio among the Existing Partners.
• Admission of a Partner.
• The Retirement of an Existing Partner.
• Death or Insolvency of a Partner.

ADMISSION OF A PARTNER

• Admission of a partner is one of the modes of reconstitution of partnership firm because when a new partner is admitted, the existing agreement among the partners comes to an end & a new agreement comes into existence which results in change in profit sharing ratio, goodwill valuation & reassessment of assets & liabilities.
• The capital contribution of the new partner, his liabilities, and share of profits is decided upon.
• As per Section 31 of the Indian Partnership Act, the new partner shall not be admitted to the firm without the consent of all existing partners.
• After admission, the new partner gets the following two rights :

• Right to share future profits of the firm
• Right to share in the assets of the firm
• He/she  also becomes liable for any liability of the business incurred after admission & any loss incurred by the firm

• The new/incoming partner receives share in future profits that is equal to the sacrifice of profit by an existing partner/partners of the firm & the same new partner has to compensate the partner/partners who are sacrificing their share in profits in his/her favor.
• Such amount paid by the incoming partner is known as Goodwill or Premium for Goodwill.
• Besides Goodwill/Premium for Goodwill, the new partner also contributes in Capital to get the rights in the assets of the firm.

Effects of Admission of Partner

1. Old partnership agreement comes to an end & a new agreement is formed.
2. New or incoming partner becomes entitled to the future share of profits & losses of the firm.
3. New or incoming partner contributes an agreed amount of capital in the firm.
4. New or incoming partner gets a right to the assets of the firm.
5. Adjustments are made regarding the accumulated profits & losses
6. Assets are revalued & liabilities are reassessed & the net change is adjusted in existing or old partner’s capital accounts in their old profit sharing ratio.
7. Goodwill of the firm is valued in order to pay the sacrificing partner for their sacrificed share by the gaining partners through their capital accounts.

What are the adjustments required on the admission of a partner?

1. Determining new profit sharing ratio
2. Valuation of adjustment of goodwill
3. Adjustment of profit/loss arising from revaluation of assets & reassessment of liabilities.
4. Adjustments of accumulated profits, reserves & losses.
5. Adjustment of capital (if agreed)