What traumatic event does Zitkala-Sa describe at the school?

The forcible cutting of her long hair

Why was the cutting of her hair so humiliating to Zitkala-Sa?

Among her people, shingled hair was worn by cowards and mourners

What is meant by reconstitution of a partnership firm?

It is any change in the existing agreement of partnership, such as admission, retirement, death or a change in the profit-sharing ratio, which dissolves the old partnership.

What two main rights does a new partner acquire?

A right to share in the future profits of the firm and a right to share in the assets of the firm.

What is the sacrificing ratio and why is it computed?

It is the ratio in which the old partners surrender profit to the new partner; it is needed to credit them with the premium for goodwill.

Name the three methods of valuing goodwill.

Average profit method, super profit method and capitalisation method.

Why is a Revaluation Account prepared on admission?

To revalue assets and reassess liabilities so that any resulting profit or loss is shared by the old partners in their old ratio before the new partner joins.

How is the sacrificing ratio calculated?

Sacrificing ratio = old share minus new share for each old partner.

How is premium for goodwill brought in cash treated?

It is credited to the sacrificing partners in their sacrificing ratio, while cash or bank is debited.

What is super profit?

It is the excess of actual average profit over the normal profit expected on the capital employed.

When are partners' capitals adjusted after admission?

When the partners decide that their capitals should be in proportion to the new profit-sharing ratio, surplus or deficiency being adjusted through cash or current accounts.

Reconstitution of a Partnership Firm – Admission of a Partner

Q: How are accumulated reserves treated on admission?

Reserves and the credit balance of the Profit and Loss Account are distributed among the old partners in their old profit-sharing ratio.

Class 12 Accountancy · Accountancy Part I · Chapter 2

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CBSE Class 12 · Accountancy

Partnership Accounts: 36 of 80 theory marks

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Summary

Any change in the existing agreement among partners results in the reconstitution of a partnership firm. One of the most common forms is the admission of a new partner, who is admitted to bring in additional capital, managerial skill or business connections. On admission, the new partner acquires two rights: a share in the future profits and a share in the assets of the firm. Because the new partner gains a share of profit, the existing partners sacrifice part of theirs, so a new profit-sharing ratio and the sacrificing ratio must be calculated. The incoming partner usually pays a premium for goodwill to compensate the sacrificing partners; goodwill is valued by the average profit, super profit or capitalisation methods and is treated according to whether it is paid privately, brought in cash or adjusted through capital accounts. At the time of admission the firm also revalues its assets and reassesses its liabilities through a Revaluation Account, so that profits or losses up to the date of admission belong to the old partners. Accumulated reserves and the balance of the Profit and Loss Account are distributed among the old partners in their old ratio, and the capital accounts may be adjusted to make them proportionate to the new profit-sharing ratio. Finally, a new balance sheet of the reconstituted firm is prepared.

Meaning of reconstitution and admissionNew ratio and sacrificing ratioValuation and treatment of goodwillRevaluation of assets and liabilitiesAdjustment of reserves and capitals; new balance sheet

Key terms

Reconstitution

A change in the existing agreement of partnership that ends the old partnership while the firm may continue.

Sacrificing Ratio

The ratio in which existing partners give up a part of their share of profit in favour of the new partner.

Goodwill

The value of a firm's reputation that enables it to earn higher than normal profits, valued by average profit, super profit or capitalisation methods.

New Profit-sharing Ratio

The ratio in which all partners, including the new one, share future profits after admission.

Revaluation Account

An account prepared to record the changes in the value of assets and liabilities at the time of reconstitution; its profit or loss belongs to the old partners.

Premium for Goodwill

The amount brought in by the incoming partner to compensate sacrificing partners for the share of profit they give up.