--- title: "Chapter 2: Reconstitution of a Partnership Firm — Admission of a Partner" type: "Article" site_name: "TheSushant." publisher: "TheSushant." published_status: "publish" content_format: "markdown" author: "Sushant Kumar" published: "2026-04-17 21:33:29" modified: "2026-10-04 10:08:17" slug: "chapter-2-reconstitution-of-a-partnership-firm-admission-of-a-partner" canonical: "https://thesushant.in/chapter-2-reconstitution-of-a-partnership-firm-admission-of-a-partner/" excerpt: "Why This Chapter Matters This chapter is where real accounting starts. You are no longer just understanding concepts—you are now applying them in real business situations: A new partner enters..." reading_time: 5 word_count: 851 featured_image: "" featured_image_alt: "" categories: - "Accounts" - "Chapters" - "Class 12th" - "Commerce" tags: generator: "WP Markdown TS" generator_version: "1.1" language: "en-US" --- # Chapter 2: Reconstitution of a Partnership Firm — Admission of a Partner ![Chapter 2: Reconstitution of a Partnership Firm — Admission of a Partner](https://thesushant.in/img/og.php?id=3424&w=768&h=403) ## Why This Chapter Matters This chapter is where real accounting starts. You are no longer just understanding concepts—you are now **applying them in real business situations**: * A new partner enters * Old partners lose profit share * Assets and liabilities change * Goodwill comes into play If this chapter is clear, **half of partnership accounting is under control**. --- ## 1. What is Reconstitution of a Partnership Firm Reconstitution means **any change in the existing agreement between partners**. This does NOT end the business. It only changes: * Partners * Profit-sharing ratio * Relationship among partners > Reconstitution results in a new agreement but the same firm continues. --- ## 2. Modes of Reconstitution A partnership firm can be reconstituted in the following ways: ### 1. Admission of a New Partner When a new partner joins the firm ### 2. Change in Profit Sharing Ratio Existing partners change their ratio ### 3. Retirement of a Partner One partner leaves the firm ### 4. Death of a Partner Firm continues with remaining partners --- ## 3. Admission of a New Partner A new partner is admitted when: * Business needs more capital * Business needs better management ### Important Rule: A new partner can be admitted **only with consent of all existing partners**. --- ## Rights of New Partner 1. Right to share profits 2. Right to share assets But for this, the partner must bring: * Capital * Goodwill (in many cases) --- ## 4. Key Adjustments at the Time of Admission This is the most important part of the chapter. At the time of admission, the following adjustments are required: 1. New Profit Sharing Ratio 2. Sacrificing Ratio 3. Goodwill valuation and adjustment 4. Revaluation of assets and liabilities 5. Distribution of reserves and profits 6. Adjustment of capital --- ## 5. New Profit Sharing Ratio When a new partner enters: * Old partners **sacrifice** part of their profit * New partner gets that share ### Basic Formula: New Share = Remaining Share × Old Ratio ### Key Concept: If not specified → new partner gets share from old partners in their **old ratio** --- ## 6. Sacrificing Ratio Sacrificing ratio tells: **How much each old partner is giving up** ### Formula: Sacrifice = Old Share – New Share ### Why It Matters: This ratio is used to distribute **goodwill compensation** --- ## 7. Goodwill (Critical Concept) Goodwill is the **value of reputation of a business**. It is an intangible asset. > Goodwill is the value of expected excess profits of a firm over normal profits. --- ## Why Goodwill is Important When a new partner enters: * He benefits from existing reputation * Old partners lose part of future profits So: New partner must compensate old partners → called **premium for goodwill** --- ## 8. Factors Affecting Goodwill * Nature of business * Location * Management efficiency * Competition * Special advantages (brand, patents, contracts) --- ## 9. Methods of Valuation of Goodwill ### 1. Average Profit Method Goodwill = Average Profit × Number of Years --- ### 2. Super Profit Method Super Profit = Actual Profit – Normal Profit Goodwill = Super Profit × Number of Years --- ### 3. Capitalisation Method Two approaches: * Capitalisation of average profits * Capitalisation of super profits --- ## 10. Treatment of Goodwill ### Case 1: New Partner Brings Goodwill in Cash Entry: * Debit Bank * Credit Premium for Goodwill * Transfer to old partners in sacrificing ratio --- ### Case 2: Goodwill Not Brought * Debit new partner’s current account * Credit old partners’ capital accounts --- ### Case 3: Goodwill Already Exists in Books * First write it off * Then adjust new goodwill --- ## Hidden Goodwill Sometimes goodwill is not given. It is calculated using: Hidden Goodwill = Total Capital (implied) – Actual Capital --- ## 11. Adjustment of Accumulated Profits and Losses Old profits belong only to old partners. ### Examples: * General Reserve * Profit & Loss Balance These are transferred to old partners in **old ratio** --- ## 12. Revaluation of Assets and Liabilities Before admitting a new partner: * Assets must reflect real value * Liabilities must be correct --- ## Revaluation Account Used to record: * Increase in assets → gain * Decrease in assets → loss * Increase in liabilities → loss * Decrease in liabilities → gain Final profit/loss is transferred to **old partners in old ratio** --- ## 13. Important Journal Entries ### Increase in Asset Asset A/c Dr. To Revaluation A/c ### Decrease in Asset Revaluation A/c Dr. To Asset A/c ### Increase in Liability Revaluation A/c Dr. To Liability A/c ### Decrease in Liability Liability A/c Dr. To Revaluation A/c ### Transfer of Profit Revaluation A/c Dr. To Old Partners’ Capital A/c --- ## 14. Adjustment of Capital After admission: * Capital may be adjusted based on new ratio * Excess or deficiency is adjusted in cash --- ## 15. What Students Get Wrong * Confusing sacrificing ratio with new ratio * Skipping goodwill adjustment * Ignoring revaluation account * Using new ratio instead of old ratio in adjustments * Forgetting hidden goodwill --- ## Final Understanding This chapter is about **fairness in partnership**. When a new partner enters: * Old partners must be compensated * Assets must reflect true value * Profits must be fairly distributed If you understand: * Sacrificing ratio * Goodwill * Revaluation Then numericals become systematic, not confusing. --- **Enjoyed this?** Share it with others S ### [Sushant Kumar](https://thesushant.in/author/sushant/) Founder As a current B.Com (Hons) student at DU SOL and an active Chartered Accountancy (CA) aspirant, I understand the exact pressure, syllabus confusion, and administrative hurdles students face daily. TheSushant.in was built to provide first-hand, stress-tested guidance. 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