Re-adjustment of Partners’ Capital Giving due Influence of New Admittance
In your partnership, you may decide to add new partners. Sometimes, after the admission of the new partner, all the partners may decide to make their capital proportionate to the new profit sharing ratio or any other ratio. In this case, the base capital determined at first and the adjustments are done accordingly. A partner can be added to an existing partnership in four ways, including:
- A new partner can purchase part of the interest of another partner.
- A new partner can invest cash or other assets in the business.
- A new partner can pay a bonus to exist partners by paying more than the interest percentage received.
- A new partner can receive a bonus from the partnership by paying less than the interest percentage received.
If the new partner’s capital is taken as the base, the other old partners’ capitals are calculated and due adjustments (withdrawals/introduction) of capital are done.
Again if the combined capital of old partners is taken as the base, firstly, the total capital of the new firm is calculated as per the profit-sharing ratio and then only the new partner’s capital to be brought in is determined.
Journal entries are as follows:
In case of deficiency of capital:
To partner’s capital A/C
(Being shortage of capital brought in by……..in cash)
In case of the excess over new capital:
Partners’ capital A/C………………Dr.
To Cash A/C
Partners’ current/loan A/C
(Being excess capital withdrawn by…./transferred to current/loan A/C)
Note: In the absence of any agreement, deficiency or surplus should be adjusted in cash, not by transferring the current account.