Reconstitution of a Partnership Firm: Admission of a Partner, Class 12

What Reconstitution of a Partnership Firm – Admission of a Partner is about

Weightage: This chapter is part of Part A: Accounting for Partnership Firms, which carries 36 of the 80 theory marks together with Accounting for Partnership: Basic Concepts, Reconstitution of a Partnership Firm – Retirement/Death of a Partner and Dissolution of Partnership Firm.Source: CBSE Accountancy (055) syllabus 2026-27, Part A: Accounting for Partnership Firms

In real board papers: asked in 2 of the 2 board papers we hold (2026 to 2026), on average 18 marks per paper. See the questions

Key concepts

Reconstitution and what a new partner gets

NCERT section 2.1, 2.2

A partnership is reconstituted whenever the agreement changes: a change in the profit sharing ratio among existing partners, admission of a new partner, retirement, death or amalgamation of firms. The business continues, but the old agreement ends.

Under the Partnership Act a new partner can be admitted only with the consent of all existing partners (unless the deed says otherwise). He gets two rights: a share in the assets of the firm and a share in its future profits. For these he brings capital and, usually, a premium for goodwill to compensate the old partners for the profit they give up.

Worked example

List the adjustments needed at the time of admission of a partner. [3 marks]

Try it first, then show the solutionSolution

1. New profit sharing ratio and sacrificing ratio.
2. Valuation and treatment of goodwill.
3. Revaluation of assets and reassessment of liabilities; distribution of reserves and accumulated profits or losses.
4. Adjustment of partners' capitals (if required).

Answer: Ratios, goodwill, revaluation, reserves and accumulated profits/losses, and capital adjustment (any of these with a line of explanation).

New profit sharing ratio and sacrificing ratio

NCERT section 2.3, 2.4

Sacrificing ratio = the ratio in which old partners give up their shares to the new partner. For each old partner, sacrifice = old share − new share.

Three common cases:

• Only the new partner's share is given: old partners are assumed to sacrifice in the old ratio, so the old ratio continues among them. New share of an old partner = old share × (1 − new partner's share). Sacrificing ratio = old ratio.
• New partner takes his share from one partner: only that partner's share falls.
• Each old partner surrenders a stated fraction or a stated part of his share: subtract each surrender from the old share.

Always check that the new shares add to 1.

Worked example

Suppose A and B share profits 3 : 2. C is admitted for 1/4 share, which he acquires 1/6 from A and 1/12 from B. Calculate the new profit sharing ratio and the sacrificing ratio. [3 marks]

Try it first, then show the solutionSolution

1. A: 3/5 − 1/6 = 18/30 − 5/30 = 13/30 = 26/60.
2. B: 2/5 − 1/12 = 24/60 − 5/60 = 19/60. C: 1/4 = 15/60. Check: 26 + 19 + 15 = 60.
3. Sacrificing ratio = 1/6 : 1/12 = 2 : 1.

Answer: New ratio 26 : 19 : 15; sacrificing ratio 2 : 1.

Goodwill: meaning, factors and need for valuation

NCERT section 2.5.1, 2.5.2, 2.5.3

Goodwill is the value of a firm's reputation and connections, which lets it earn more than a normal business with the same capital. It is an intangible asset but not a fictitious one: it can be sold with the business.

Factors that raise goodwill: a good location, efficient management, market situation (monopoly or little competition), special advantages such as cheap raw materials, licences or long-term contracts, the nature of the business (stable demand) and reputation built over time.

Goodwill must be valued whenever the profit sharing ratio changes or a partner enters or leaves (admission, retirement, death, change in ratio, amalgamation, sale of the business), because one partner gives up future profit and must be compensated.

Worked example

Suppose two firms have the same capital and the same staff, but one sits next to a busy railway station and the other on a quiet lane. Which firm is likely to have more goodwill and why? [1 mark]

Try it first, then show the solutionSolution

1. Goodwill comes from the ability to earn above-normal profit.
2. A favourable location brings more customers and so more profit.

Answer: The firm next to the station, because location is a factor that raises its earning capacity and hence goodwill.

Methods of valuing goodwill

NCERT section 2.5.4

• Average profit method: goodwill = average profit × number of years' purchase. Use a weighted average if profits show a trend and weights are given. Adjust past profits for abnormal items before averaging.
• Super profit method: normal profit = capital employed × normal rate of return; super profit = average profit − normal profit; goodwill = super profit × number of years' purchase.
• Capitalisation method: (a) capitalisation of average profit: capitalised value = average profit × 100 / normal rate of return; goodwill = capitalised value − capital employed. (b) capitalisation of super profit: goodwill = super profit × 100 / normal rate of return.

Capital employed = total assets (excluding goodwill) − outside liabilities. Both capitalisation methods give the same goodwill from the same data, which is a handy check.

Worked example

Suppose a firm's average profit is ₹3,60,000, the normal rate of return is 12%, total assets (excluding goodwill) are ₹32,00,000 and outside liabilities are ₹7,00,000. Find goodwill by (i) capitalisation of super profit, (ii) capitalisation of average profit. [3 marks]

Try it first, then show the solutionSolution

1. Capital employed = 32,00,000 − 7,00,000 = ₹25,00,000. Normal profit = 12% of it = ₹3,00,000.
2. (i) Super profit = 3,60,000 − 3,00,000 = ₹60,000; goodwill = 60,000 × 100/12 = ₹5,00,000.
3. (ii) Capitalised value = 3,60,000 × 100/12 = ₹30,00,000; goodwill = 30,00,000 − 25,00,000 = ₹5,00,000.

Answer: ₹5,00,000 by both methods.

Treatment of goodwill under AS 26

NCERT section 2.5.5

AS 26 does not allow internally generated goodwill to be recorded, so on admission no goodwill account is raised. Instead:

• Premium brought in cash: Bank A/c Dr, To Premium for Goodwill A/c; then Premium for Goodwill A/c Dr, To sacrificing partners' capital accounts (sacrificing ratio). If old partners withdraw it: their capital accounts Dr, To Bank.
• Premium not brought (fully or partly): New Partner's Current A/c Dr, To sacrificing partners' capital accounts, for the part not brought.
• Goodwill already in the books: written off to old partners' capital accounts in the old ratio.
• Hidden goodwill: if no value is given, infer it: total capital of the new firm implied by the new partner's capital and share, minus the actual combined capital (after adjustments) of all partners.

Worked example

Suppose Sunita and Varun share profits 3 : 2 and admit Wasim for 1/5 share. Wasim brings ₹1,00,000 as capital and ₹30,000 as premium for goodwill in cash. Pass the journal entries. [2 marks]

Try it first, then show the solutionSolution

1. Particulars	Dr (₹)	Cr (₹)
   Bank A/c ... Dr	1,30,000
   To Wasim's Capital A/c		1,00,000
   To Premium for Goodwill A/c		30,000
   (Being capital and premium brought in by Wasim)
   Premium for Goodwill A/c ... Dr	30,000
   To Sunita's Capital A/c		18,000
   To Varun's Capital A/c		12,000
   (Being premium credited to sacrificing partners in 3 : 2)

Answer: Premium of ₹30,000 is credited ₹18,000 to Sunita and ₹12,000 to Varun (sacrificing ratio = old ratio).

Revaluation of assets and reassessment of liabilities

NCERT section 2.7

Book values may not equal current values. A Revaluation Account (also called Profit and Loss Adjustment Account) records the changes: credit it for an increase in an asset or a decrease in a liability; debit it for a decrease in an asset or an increase in a liability (including a new provision or an unrecorded liability). The balance is profit or loss on revaluation, transferred to old partners in the old ratio, because the change happened while they owned the firm.

The assets and liabilities then appear at their revised values in the new balance sheet.

Worked example

Suppose on admission: machinery is revalued from ₹2,50,000 to ₹2,80,000, stock is reduced by 10% from ₹1,20,000, a 5% provision is created on debtors of ₹1,00,000, and creditors of ₹3,000 are not payable. Old partners Meera and Nikhil share 3 : 2. Find the revaluation profit or loss and its split. [3 marks]

Try it first, then show the solutionSolution

1. Gains: machinery 30,000 + creditors 3,000 = ₹33,000.
2. Losses: stock 12,000 + provision 5,000 = ₹17,000.
3. Profit ₹16,000: Meera ₹9,600, Nikhil ₹6,400.
4. Revaluation Account

   Dr: Particulars	₹	Cr: Particulars	₹
   To Stock A/c (10% of 1,20,000)	12,000	By Machinery A/c	30,000
   To Provision for Doubtful Debts A/c (5% of 1,00,000)	5,000	By Creditors A/c	3,000
   To Profit on revaluation: Meera's Capital A/c (3/5)	9,600
   To Profit on revaluation: Nikhil's Capital A/c (2/5)	6,400
   Total	33,000	Total	33,000

Answer: Revaluation profit ₹16,000: Meera ₹9,600 and Nikhil ₹6,400.

Reserves, accumulated profits and losses

NCERT section 2.6

A general reserve, a reserve, or a credit balance of Profit and Loss Account belongs to the old partners, because it was earned before admission. It is transferred to their capital (or current) accounts in the old ratio. An accumulated loss (debit balance of Profit and Loss Account) or deferred revenue expenditure is debited to them in the old ratio.

If the partners instead want reserves to remain in the books, an adjustment entry is passed only for the new partner's share: the new partner (gaining nothing from the old reserve) is debited and the sacrificing partners credited.

Worked example

Suppose Rajat and Simran share 4 : 1. On admission of Tara, the books show a general reserve of ₹50,000 and a debit balance of ₹15,000 in the Profit and Loss Account. Pass the journal entries. [2 marks]

Try it first, then show the solutionSolution

1. Particulars	Dr (₹)	Cr (₹)
   General Reserve A/c ... Dr	50,000
   To Rajat's Capital A/c		40,000
   To Simran's Capital A/c		10,000
   (Being general reserve transferred in old ratio)
   Rajat's Capital A/c ... Dr	12,000
   Simran's Capital A/c ... Dr	3,000
   To Profit and Loss A/c		15,000
   (Being accumulated loss written off in old ratio)

Answer: Reserve credited ₹40,000 and ₹10,000; loss debited ₹12,000 and ₹3,000.

Adjustment of capitals and change in ratio among existing partners

NCERT section 2.8, 2.9

Capitals proportionate to the new ratio: (a) if the new partner's capital is given, total capital of the new firm = his capital ÷ his share; each old partner's required capital = total × his new share; compare with his adjusted capital (after goodwill, revaluation and reserves) and bring in the shortage or withdraw the surplus (or adjust through current accounts). (b) If the new partner must bring capital proportionate to his share, his capital = combined adjusted capital of old partners ÷ their combined new share × his share.

Change in ratio among existing partners (no one joins): find each partner's gain or sacrifice (new − old). The gaining partners compensate the sacrificing partners for goodwill: Gaining Partner's Capital A/c Dr, To Sacrificing Partner's Capital A/c. Reserves and revaluation go in the old ratio.

Worked example

Suppose X and Y's capitals after all adjustments are ₹2,10,000 and ₹85,000. Z is admitted for 1/4 share and brings ₹1,00,000 as capital. The new ratio is 2 : 1 : 1 and capitals are to be in that ratio, with cash brought in or withdrawn. Pass the entries. [3 marks]

Try it first, then show the solutionSolution

1. Total capital = 1,00,000 ÷ 1/4 = ₹4,00,000. Required: X 2/4 = ₹2,00,000; Y 1/4 = ₹1,00,000.
2. X has ₹10,000 surplus (withdraws); Y is short by ₹15,000 (brings in).

3. Particulars	Dr (₹)	Cr (₹)
   X's Capital A/c ... Dr	10,000
   To Bank A/c		10,000
   (Being surplus capital withdrawn by X)
   Bank A/c ... Dr	15,000
   To Y's Capital A/c		15,000
   (Being shortfall of capital brought in by Y)

Answer: X withdraws ₹10,000; Y brings ₹15,000.

Reconstitution of a Partnership Firm – Admission of a Partner in real life

Each concept, met in an everyday situation. Read the situation, answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

Topics in this chapter

• Valuation of Goodwill
• Treatment of Goodwill on Admission
• Revaluation Account and Reserves on Admission

Reconstitution of a Partnership Firm – Admission of a Partner: key facts

Sacrifice of an old partner

Old share − new share

Negative means a gain.

New share when old ratio continues

Old share × (1 − new partner's share)

Average profit method

Goodwill = average (or weighted average) profit × number of years' purchase

Super profit method

Super profit = average profit − capital employed × NRR/100; goodwill = super profit × years' purchase

Capitalisation of super profit

Goodwill = super profit × 100/NRR

Capitalisation of average profit

Goodwill = average profit × 100/NRR − capital employed

Capital employed = assets (excluding goodwill) − outside liabilities.

New partner's share of goodwill

Firm's goodwill × new partner's share

Hidden goodwill

New partner's capital ÷ his share − (combined adjusted capitals of all partners)

How the board asks Reconstitution of a Partnership Firm – Admission of a Partner

The question patterns to expect, and the method that works for each.

Tricks to remember Reconstitution of a Partnership Firm – Admission of a Partner

Short memory aids. Say each one aloud once, then use it on a question the same day.

• R-G-R-C-B order

  Ratio, Goodwill, Revaluation (and reserves), Capitals, Balance sheet.

  Use it when: Planning any 6-mark admission question.

• Old ratio for old things

  Reserves, accumulated profits or losses, revaluation, existing goodwill: always the old ratio.

  Use it when: Choosing the ratio for each adjustment.

• Sacrifice = old − new

  Old minus new: positive is a sacrifice, negative a gain.

  Use it when: Admission and change in ratio.

• Both capitalisation methods agree

  Capitalised super profit = capitalised average profit − capital employed. Do both to self-check.

  Use it when: Goodwill valuation.

Reconstitution of a Partnership Firm – Admission of a Partner: board-level solved questions

Ordered from board level to HOTS. Cover the solution, write your own, then compare step by step.

Case-study practice (Section E style)

Read the situation, then answer every part. In the board paper this is a 4-mark question split into 1 + 1 + 2 marks.

Where the marks are

How a typical answer is split into step marks. Show every step: a right final answer alone rarely earns full marks.

Where students lose marks in Reconstitution of a Partnership Firm – Admission of a Partner

The slips examiners see most often, and what to write instead.

• ✗Mistake: Opening a Goodwill Account for the full value of goodwill

  Older methods taught raising goodwill.

  Wrong working

  Goodwill A/c Dr 2,40,000 To old partners' capital accounts

  Right working

  Premium for Goodwill A/c / New Partner's Current A/c Dr To sacrificing partners' capital accounts (new partner's share only)

  ✓Do this: AS 26: no goodwill account; adjust only the new partner's share.

  Usually costs: All marks for the goodwill entries.

• ✗Mistake: Crediting premium in the old ratio when the sacrificing ratio is different

  Assuming the two ratios are always the same.

  ✓Do this: Calculate the sacrificing ratio whenever a new ratio or specific sacrifices are given.

  Usually costs: 1-2 marks.

• ✗Mistake: Giving the new partner a share of the general reserve or revaluation profit

  Using the new ratio.

  ✓Do this: Reserves, accumulated profits and revaluation go to old partners in the old ratio.

  Usually costs: 1-2 marks and a wrong balance sheet.

• ✗Mistake: Leaving old values in the new balance sheet

  Forgetting to carry revaluation into the balance sheet.

  ✓Do this: Show every revalued asset and liability at its new figure, and add the cash brought in to bank.

  Usually costs: 1-2 marks; the balance sheet will not tally.

• ✗Mistake: Including goodwill or fictitious assets in capital employed

  Taking total assets straight from the balance sheet.

  ✓Do this: Capital employed = assets excluding goodwill and fictitious assets − outside liabilities.

  Usually costs: 1-2 marks in goodwill valuation.

NCERT exercise guide: Reconstitution of a Partnership Firm – Admission of a Partner

What each exercise in the NCERT chapter tests, how to approach it, and a question of the same kind solved step by step. Questions here are written in our own words.

Reconstitution of a Partnership Firm – Admission of a Partner: previous year questions

• Asked in 2 of the 2 board papers we hold (2026 to 2026), on average 18 marks per paper; 16 questions in all, counting OR alternatives. In 4 of 4 sample papers.

Counted from the real papers on our previous year papers page, not estimated. Average marks are over every board paper we hold, with an OR pair counted once. Chapter tags are ours.

Solved board questions from Reconstitution of a Partnership Firm – Admission of a Partner

Real questions from recent papers. Try each one first, then open our step-by-step solution with marks per step.

Every Reconstitution of a Partnership Firm – Admission of a Partner question, by year

Practice questions on Reconstitution of a Partnership Firm – Admission of a Partner

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

1. Q1 · 1 mark · MCQBoard level

   X and Y share profits 3 : 2. Z is admitted for 1/4 share. If X and Y continue to share between themselves in 3 : 2, the new ratio is:
   (a) 3 : 2 : 1
   (b) 9 : 6 : 5
   (c) 6 : 4 : 5
   (d) 12 : 8 : 5

   Hint

   Old share × 3/4.

   Answer

   (b) 9 : 6 : 5 (9/20, 6/20, 5/20).

2. Q2 · 1 mark · MCQBoard level

   On the admission of a partner, a general reserve appearing in the books is transferred to:
   (a) all partners in the new ratio
   (b) old partners in the old ratio
   (c) old partners in the sacrificing ratio
   (d) the new partner only

   Hint

   Who earned it?

   Answer

   (b)

3. Q3 · 3 marks · Short answerBoard level

   Explain any three factors that affect the goodwill of a firm.

   Hint

   Location, management, market, special advantages, nature of business.

   Answer

   Location (a busy site draws customers); efficiency of management (higher productivity and lower costs); market situation (little competition lets the firm earn more); any one more such as special advantages like cheap power or licences.

4. Q4 · 3 marks · Short answerBoard level

   Suppose a firm's profits for the last four years were ₹1,00,000, ₹1,40,000, a loss of ₹20,000, and ₹1,60,000. Calculate goodwill at three years' purchase of average profit.

   Hint

   Subtract the loss when totalling.

   Answer

   Average = (1,00,000 + 1,40,000 − 20,000 + 1,60,000) ÷ 4 = ₹95,000; goodwill = ₹2,85,000.

5. Q5 · 3 marks · Short answerHarder board level

   Suppose profits for 2023-24, 2024-25 and 2025-26 were ₹1,20,000, ₹1,50,000 and ₹1,80,000, with weights 1, 2 and 3. Goodwill is 2 years' purchase of weighted average profit. Calculate goodwill.

   Hint

   Divide by the sum of weights.

   Answer

   Weighted average = 9,60,000 ÷ 6 = ₹1,60,000; goodwill = ₹3,20,000.

6. Q6 · 4 marks · Short answerHarder board level

   Suppose a firm has an average profit of ₹2,50,000 and capital employed of ₹15,00,000; the normal rate of return is 10%. Calculate goodwill (i) at 3 years' purchase of super profit, (ii) by capitalising super profit.

   Hint

   Super profit first.

   Answer

   Normal profit ₹1,50,000; super profit ₹1,00,000. (i) ₹3,00,000. (ii) 1,00,000 × 100/10 = ₹10,00,000.

7. Q7 · 3 marks · Short answerHarder board level

   Suppose A, B and C share profits 3 : 2 : 1 and decide to share 2 : 2 : 1 from 1st April 2026. Goodwill is valued at ₹1,20,000. Pass the adjustment entry for goodwill.

   Hint

   Old and new shares in thirtieths.

   Answer

   Old 15/30, 10/30, 5/30; new 12/30, 12/30, 6/30. A sacrifices 3/30 (₹12,000); B gains 2/30 (₹8,000); C gains 1/30 (₹4,000).

   Particulars	Dr (₹)	Cr (₹)
   B's Capital A/c ... Dr	8,000
   C's Capital A/c ... Dr	4,000
   To A's Capital A/c		12,000
   (Being adjustment for goodwill on change in profit sharing ratio)

8. Q8 · 4 marks · Short answerHOTS / competency

   Suppose X and Y share 3 : 2. Z is admitted for 1/5 share, which he takes entirely from X, and brings ₹30,000 as premium for goodwill. Find the new ratio and pass the entry for goodwill. What is the implied goodwill of the firm?

   Hint

   Only X sacrifices.

   Answer

   New ratio: X 3/5 − 1/5 = 2/5, Y 2/5, Z 1/5 → 2 : 2 : 1. Premium for Goodwill A/c Dr 30,000 To X's Capital A/c 30,000 (after Bank A/c Dr 30,000 To Premium for Goodwill A/c 30,000). Firm's goodwill = 30,000 ÷ 1/5 = ₹1,50,000.

9. Q9 · 1 mark · MCQHarder board level

   Suppose on revaluation, building increases by ₹50,000, stock falls by ₹14,000, and a claim for damages of ₹6,000 is accepted as a liability. Old partners share 3 : 1. The revaluation result is:
   (a) loss ₹30,000
   (b) profit ₹30,000, credited ₹22,500 and ₹7,500
   (c) profit ₹42,000
   (d) profit ₹30,000, credited equally

   Hint

   New liability is a loss.

   Answer

   (b) 50,000 − 14,000 − 6,000 = ₹30,000 in 3 : 1.

10. Q10 · 3 marks · Short answerHOTS / competency

    Suppose A and B share 3 : 1, and their capitals after all adjustments are ₹2,40,000 and ₹1,20,000. C is admitted for 1/4 share and must bring capital proportionate to his share of the combined capital of A and B. How much capital does C bring, and why is this different from adjusting old partners' capitals?

    Hint

    Old partners hold 3/4 of the new firm.

    Answer

    Total capital = 3,60,000 ÷ 3/4 = ₹4,80,000; C's capital = ₹1,20,000. Here the old partners' capitals are the base and C's capital is calculated; in the other case C's capital is the base and old capitals are adjusted.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1. 1.What is the sacrificing ratio when only the new partner's share is given?Show answer

   The old profit sharing ratio.

2. 2.Which account is credited when the new partner brings premium in cash?Show answer

   Premium for Goodwill A/c, then transferred to sacrificing partners' capital accounts.

3. 3.Where is goodwill not brought in by the new partner debited?Show answer

   New partner's current account.

4. 4.How is existing goodwill in the books treated on admission?Show answer

   Written off to old partners' capital accounts in the old ratio.

5. 5.What is capital employed?Show answer

   Total assets (excluding goodwill and fictitious assets) minus outside liabilities.

6. 6.What is super profit?Show answer

   Average profit minus normal profit.

7. 7.Who bears a revaluation loss on admission?Show answer

   Old partners in the old ratio.

8. 8.In a change of ratio among existing partners, who compensates whom?Show answer

   Gaining partners compensate sacrificing partners for goodwill.

Quick revision checklist

The night before the exam: can you do each of these without looking?

• ☐Can you find the new ratio when the newcomer takes stated fractions from each partner?
• ☐Can you calculate goodwill by average, weighted average, super profit and capitalisation methods?
• ☐Can you compute capital employed correctly?
• ☐Can you pass the premium-in-cash entries and the not-brought entry?
• ☐Can you write off existing goodwill in the old ratio?
• ☐Can you work out hidden goodwill?
• ☐Can you prepare a Revaluation Account and transfer its result in the old ratio?
• ☐Can you transfer reserves and accumulated losses to old partners?
• ☐Can you adjust capitals to the new ratio either way?
• ☐Can you pass the goodwill adjustment on a change in ratio among existing partners?

Reconstitution of a Partnership Firm – Admission of a Partner: frequently asked questions