PARTNERSHIPS: ADMISSION OF A PARTNER

1
PARTNERSHIPS ADMISSION OF A PARTNER

• Methods
• Buys an interest from the other partners directly
• Contributes assets to the partnership in exchange
  for a share
• No monetary exchange
• Key aspects
• Profit sharing ratios
• Revaluations
• Goodwill

2
KEY ASPECTS PROFIT SHARING

• Four ways of changing the ratio
• The old partners ratio relative to each other
  changes
• The old partners ratio relative to each other
  stays the same
• The portion they contribute to the new incoming
  partner is unequal
• Alternatively you get given the old and new
  ratios dont do anything then!
• May have to bring capital accounts into alignment
  with ratios
• The entry of a new partner will usually cause the
  capital accounts to go out of line rare if it
  doesnt

3
KEY ASPECTS PROFIT SHARING

• Bringing capital accounts into alignment with
  ratios
• By reallocating the capital between partners
• Payment of cash in/out of the business in respect
  of a partner

4
KEY ASPECTS REVALUATIONS

• Transfer partners current account balances into
  their respective capital accounts
• Done at OLD partnership profit sharing ratios
  before new partner comes in
• All DIFFERENCES on assets and liabilities -
  EXCEPT Goodwill, General Reserve and other types
  of Reserves - are transferred to the revaluation
  account
• If required to not show assets and liabilities at
  revalued amounts then transfer back the
  differences using the NEW profit sharing ratio
• This causes the incoming partner to have to cover
  for value the other partners have built up in the
  business out of his/her capital

5
KEY ASPECTS GOODWILL

• The raising of goodwill is done straight to the
  partners capital accounts if it doesnt exist
  beforehand
• Does not go through revaluation account like
  other assets and liabilities
• Might have to work out how much the goodwill is
• Excess paid by new partner
• Profit performance
• From perspective of new partner (e.g. pg 66)
• Raise it at OLD ratios first then bring new
  partner in
• If required to remove it from the Balance Sheet
  then reverse using NEW ratio

6
RETIREMENT OF A PARTNER

• May involve an existing partner leaving at the
  same time
• Think of the revaluation of assets when admitting
  a new partner this has to happen here too
  because the departing partner wants to be paid
  that value in the business they helped build up!
• Therefore start out like one is admitting a
  partner revaluing items and raising goodwill
• When at the stage just about to admit the new
  partner, pause your workings and pay/transfer to
  a liability the departing partners share
• Bring in the new partner now per normal

7
RETIREMENT OF A PARTNER METHODOLOGY

• Revalue all items and transfer the difference to
  the respective capital accounts in the old
  partnership profit sharing ratio
• Get to the stage immediately before one admits a
  new partner
• Remove the exiting partners capital account
  balance to either a loan account or bank
• Bring in the new partner and their contribution
  after that (ALWAYS AFTERWARDS!)
• Reverse the revalued portions on the assets using
  the new partnership profit sharing ratio

8
DISSOLUTION OF A PARTNERSHIP

• The Revaluation account is now the 'realisation'
  account
• The cash effects are taken through the Bank
  account and against such a realisation account
• All the items are all posted to the realisation
  account to realise them EXCEPT goodwill and
  things like general reserve or revaluation
  reserve
• Remember that if an item is being realised it
  must have a cash entry to the realisation account
  AND a corresponding transfer to that account,
  from the affected account item being realised, on
  the other side of the account
• The goodwill, general reserve and revaluation
  reserve are posted to the capital accounts
  straight away

9
DISSOLUTION OF A PARTNERSHIP

• Watch out for where partners take assets out of
  the partnership - that's effectively a
  realisation but instead of going to bank the
  entry goes to the capital accounts

10
DISSOLUTION METHODOLOGY

• Do the obvious - transfer the assets and
  liabilities per the B/S to the realisation
  account
• Breakup goodwill, general reserves and
  revaluation reserves in the profit share ratios
  and transfer the values straight to the capital
  accounts
• Raise the cash realised from the sale of assets
  and the cash disbursed - to bank and the
  realisation account
• Raise the values that the partners take some of
  the assets at to the capital accounts
• Release the net realisation to the partners in
  their profit sharing ratio
• Transfer out the net amount due to partners from
  their capital accounts to the bank account

11
DISSOLUTION METHODOLOGY

• The Bank account should net off automatically as
  well - all accounts should be nil now