Partnership Accounts
Partnership Accounts
This domain tests partnership profit sharing, capital and current accounts, goodwill, admission, retirement and death adjustments.
Core rules
- Partners share profits in the agreed ratio; in the absence of an agreement, profits and losses are shared equally.
- On admission, the sacrificing ratio = old share - new share; the new partner's share of goodwill is credited to sacrificing partners.
- Revaluation profit or loss, reserves and accumulated profits are shared by old partners in the old ratio.
- On retirement or death, the retiring partner's capital account is settled with share of goodwill, revaluation, reserves and accumulated profits.
Worked example
A and B share profits 3:2. C is admitted for 1/5 share. Remaining 4/5 is divided 3:2, so A gets 12/25, B gets 8/25 and C gets 5/25. Sacrifice: A = 15/25 - 12/25 = 3/25; B = 10/25 - 8/25 = 2/25; sacrificing ratio 3:2. If C brings goodwill Rs.50,000 for 1/5 share, his goodwill contribution is Rs.10,000, credited to A Rs.6,000 and B Rs.4,000 in the sacrificing ratio.
Traps
Crediting goodwill in the old ratio instead of the sacrificing ratio; giving revaluation profit to the new partner; confusing sacrificing ratio with gaining ratio; and ignoring interest on capital and drawings while distributing profits.