Reconstitution of Partnership - Admission, Retirement and Death
Reconstitution of Partnership - Admission, Retirement and Death tests the change in the profit-sharing ratio and the accounting adjustments that follow. Every reconstitution creates new rights and revalues the old firm's assets and goodwill.
Admission
New partner's share comes from old partners' sacrifice. Sacrificing ratio = old ratio - new ratio. Premium for goodwill brought by the new partner is credited to the sacrificing partners in the sacrificing ratio, not to all old partners. Revaluation profit/loss, accumulated reserves and goodwill already in the books are shared by old partners. The new partner may bring capital and goodwill; if goodwill is not brought in cash, the new partner's capital is debited and sacrificing partners' capitals credited.
Retirement
Gaining ratio = new ratio - old ratio. Retiring partner's share of goodwill is debited to continuing partners in the gaining ratio. Revaluation and reserves belong to all old partners. The retiring partner's account is settled as agreed; if unpaid, it becomes a loan.
Death
Profit from the last balance sheet to the date of death is estimated on a time basis or turnover basis. Interest on capital, salary and share of goodwill are credited to the deceased partner's executor's account.
Worked example
A and B share 3:2. C is admitted for 1/5, taking 1/10 from A and 1/10 from B. New A = 3/5 - 1/10 = 5/10; B = 4/10 - 1/10 = 3/10; C = 2/10. New ratio 5:3:2. If goodwill is valued at ₹50,000, C's share is ₹10,000, credited to A and B equally because they sacrificed equally.
Traps
Do not credit the new partner's goodwill to all old partners. Do not use the old ratio for revaluation on admission. On retirement, the gaining ratio is not the old ratio. For death, do not forget the part-year profit and interest on capital.