Arrange the following accounting treatment steps in order/sequence in case of admission of a partner in a firm.
A. Adjustment of the partner's capital account balance.
B. Transfer of revaluation profit to capital account of partners.
C. Calculation of New Profit Ratio & Gaining Ratio.
D. Transfer of premium of goodwill to old partner's capital account.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → C, D, B, A
The order is fixed by what each step needs to have settled before it can be done.
- (C) The new profit sharing ratio comes first. Nothing can be shared out until it is known how much each old partner has given up and what the new partner gets.
- (D) The premium for goodwill is then credited to the old partners, and it is divided in the sacrificing ratio — which is why the ratio had to be worked out first.
- (B) Revaluation profit or loss is transferred next, to the old partners in the old ratio, so that the change in the value of assets and liabilities up to the date of admission stays with them.
- (A) Only then is each partner’s capital account balance adjusted, because the balance is not known until goodwill, revaluation and reserves have all passed through it.
Note: Step C appears to be misprinted in the original NTA paper. It reads “New Profit Ratio & Gaining Ratio”, but a gaining ratio is computed when a partner retires or dies and the continuing partners take over his share. On admission the old partners give up part of their share, so what is computed is the sacrificing ratio. Read step C that way and the sequence is unchanged. Q25 of this same paper makes the swap in the opposite direction, printing the sacrificing ratio on a death question. Two slips, one lesson — sacrifice on the way in, gain on the way out.