Introduction of a New Partner (Cambridge International A-Level Accounting)

Spec point — how to prepare partners’ capital and current accounts to record changes required in respect of goodwill and revaluation of assets on: – the introduction of a new partner

Introduction of a new partner

How do I update partners' capital accounts when a new partner is introduced?

• STEP 1 Calculate the net profit or loss on revaluation for each of the existing partners using the old ratio

  • Debit the capital accounts if it is a net loss
  • Credit the capital accounts if it is a net profit

• STEP 2 Calculate the share of the raised goodwill for each of the existing partners using the old ratio

  • **Credit **the capital accounts

• STEP 3 Calculate the share of the** eliminated goodwill** for each of the current partners (including the new partner) using the new ratio

  • Debit the capital accounts

• STEP 4 Balance the capital accounts

  • Include the capital introduced by the new partner

Exam Hint You might be told that the new partner contributes capital so that the capital account balances are in the profit sharing ratio.

For example, suppose the new partner and old partner share profits in the ratio 2:5. And suppose the old partner's capital account has a balance of $60 000. You can find the contribution of capital of the new partner by dividing $60 000 by 5 and then multiplying by 2.

Worked Example Xin and Yuqing were in partnership for many years but they did not have a partnership agreement.

The partnership's statement of financial position at 31 December 2025 was as follows:

	$	$
Assets
Non-current assets
Equipment	200 000
Motor vehicles	150 000	350 000
Current assets
Inventory	65 000
Trade receivables	85 000
Bank	20 000	170 000
Total assets		520 000
Capital and liabilities
Capital
Capital account - Xin	230 000
- Yuqing	190 000	420 000
Current account - Xin	(3 000)
- Yuqing	13 000	10 000
Loan		20 000
Current liabilities
Trade payables		70 000
Total capital and liabilities		520 000

Xin and Yuqing admitted Zuhain as a partner on 1 January 2026. Xin, Yuqing and Zuhain agreed to share profits and losses in the ratio 2:2:1. The following arrangements had also been agreed by all of them.

1. Assets on 31 December 2025 were revalued as follows: Equipment: $210 000 Motor vehicles: $125 000 Inventory: $70 000
2. Goodwill at 31 December 2025 was valued at $80 000. No goodwill account is to be maintained in the books of the partnership business.
3. Zuhain introduced cash to:

• pay his share of goodwill
• contribute capital so that his capital account balance at 1 January 2026 is 50% of Xin's capital account balance at the same date.

Calculate the amount of cash introduced by Zuhain on 1 January 2026.

Answer:

Calculate the net profit or loss on revaluation

		$
Increase in equipment	$210 000 - $200 000	10 000
Decrease in motor vehicles	$150 000 - $125 000	(25 000)
Increase in inventory	$70 000 - $65 000	5 000
Loss on revaluation		(10 000)

Share the net loss using the old ratio

• The profits and losses are shared equally as per the Partnership Act
• These values will be debited to the capital accounts as it was a loss

Xin : 1 half×$ 10 000=$ 5 000

Yuqing: 1 half×$ 10 000=$ 5 000

Calculate the share of goodwill using the old ratio

• These will be credited to the capital accounts

Xin: 1 half×$ 80 000=$ 40 000

Yuqing: 1 half×$ 80 000=$ 40 000

Calculate the share of goodwill using the new ratio

• These will be debited to the capital accounts

Xin: 2 / 5×$ 80 000=$ 32 000

Yuqing: 2 / 5×$ 80 000=$ 32 000

Zuhain: 1 fifth×$ 80 000=$ 16 000

Calculate the balance on Xin's capital account

	$		$
Revaluation	5 000	Balance b/d	230 000
Goodwill	32 000	Goodwill	40 000
Balance c/d	233 000
	270 000		270 000
		Balance b/d	233 000

Calculate the amount of cash that Zuhain introduces

		$
Goodwill		16 000
Capital	50% × $233 000	116 500
		132 500

Final answer: Zuhain introduces $132 500