Prepare accounts when a new partner joins
Account for goodwill, revalued assets and capital introduced when a partnership admits a new partner.
Exam scope and assessment notes
Cambridge International AS & A Level Accounting 9706, 2026–2028 syllabus, Version 2. These original lessons map all five Topic 3.1 objectives: financial-statement purpose; partnership changes; clubs and societies; manufacturing accounts; and limited-company financial statements and notes. Practice is self-checked, not an official Cambridge grade. Full timed Papers 1–4 and human subject-teacher review remain outstanding.
Before you begin
- Use the Topic 1.5 adjustment and statement skills: apply accruals, distinguish capital from revenue, reconcile balances, and keep each entity's owners' funds separate from income and cash.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
A and B share 3:2. A new partner receives 1/5 and the old partners retain their old relative ratio. What is A's new share?
What you will learn
- Calculate old partners' sacrifices on admission
- Allocate revaluation gains or losses before admission
- Reconcile new partner capital and goodwill adjustments
Find what the existing partners give up
Compare each old partner's share before admission with the new share after admission. The difference identifies sacrifice or gain. If the incoming partner receives a share, the existing partners may surrender future profit in return for that partner's capital, skills or other contribution.
Where the agreement calls for goodwill compensation, credit the sacrificing partners and debit the incoming/gaining partners according to the relative sacrifice and gain. If the problem says goodwill is to be written off, complete that second step and do not leave the notional amount in assets.
Revalue net assets before the new arrangement
A revaluation gain or loss reflects changed values of existing assets or liabilities. Allocate it to the partners who bore the risk before admission, normally using the old profit-sharing ratio unless the agreement or question states another treatment.
Then record the new partner's cash or other capital contribution separately. A contribution increases partnership assets and equity; a goodwill credit or revaluation reserve allocation changes the partners' claims and is not itself cash.
Pause and explain
An asset is revalued just before C joins. Who normally shares the revaluation gain?
Worked example
A and B share 3:2. C joins for 1/5, with A and B sharing the remaining 4/5 in their old ratio. Goodwill is $20,000. Calculate the goodwill compensation.
Show the worked solution
- A's new share is 3/5 × 4/5 = 12/25; sacrifice = 3/5 − 12/25 = 3/25.
- B's new share is 2/5 × 4/5 = 8/25; sacrifice = 2/5 − 8/25 = 2/25.
- Relative sacrifices are 3:2. C's $20,000 goodwill debit is allocated $12,000 to A and $8,000 to B.
Answer Credit A $12,000 and B $8,000; debit C $20,000 under the direct adjustment. The admission does not itself require $20,000 cash to change hands.
Try a topic test
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Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
A and B share 2:1. C joins for 1/4; A and B retain their old ratio over the remaining 3/4. A building rises $12,000 and inventory falls $2,000. Allocate the net revaluation and find each new share.
Give me a hint
Revalue net assets first; then multiply old shares by the 3/4 retained share.
Compare my reasoning
- Net revaluation gain = $12,000 − $2,000 = $10,000.
- Allocate the gain 2:1: A $6,666.67 and B $3,333.33 (round as instructed).
- New shares: A = 2/3 × 3/4 = 1/2; B = 1/3 × 3/4 = 1/4; C = 1/4.
The old partners share a $10,000 gain in the old 2:1 ratio. The new ratio is A 1/2, B 1/4 and C 1/4.
Look for these in your work
- Net asset change calculated
- Old ratio used
- New shares sum to one
A and B share 4:1. C joins for 1/5, with the old partners retaining their relative ratio. Goodwill is valued at $30,000. Work out each new share, sacrifice and goodwill credit.
Give me a hint
Allocate the remaining 4/5 between A and B in the old ratio.
Compare my reasoning
- A new share = 4/5 × 4/5 = 16/25; sacrifice = 4/5 − 16/25 = 4/25.
- B new share = 4/5 × 1/5 = 4/25; sacrifice = 1/5 − 4/25 = 1/25. C's gain is 1/5 = 5/25, so sacrifice ratio is 4:1.
- $30,000 goodwill is credited A $24,000 and B $6,000, with a corresponding debit to C if the direct adjustment method is used.
New shares are A 16/25, B 4/25 and C 5/25. A and B sacrifice in a 4:1 ratio, so their goodwill credits are $24,000 and $6,000.
Look for these in your work
- New ratio correct
- Sacrifice ratio correct
- Goodwill allocation balances
A new partner contributes $40,000 cash. The existing partners also agree to record goodwill and revalue equipment upward. Explain why the three entries should be shown separately.
Give me a hint
Separate cash, the revaluation of existing net assets and partner-to-partner goodwill compensation.
Compare my reasoning
- Cash contribution adds $40,000 to partnership assets and the incoming partner's capital.
- Equipment revaluation changes reported asset value and is allocated to existing partners under the agreed pre-admission ratio.
- Goodwill compensation reallocates capital/current-account claims; it is not automatically a cash receipt or an additional asset at the reporting date.
Show the $40,000 capital contribution, the equipment revaluation and the goodwill adjustment as separate events. This preserves the distinction between cash invested, value changes and partners' agreed claims.
Look for these in your work
- Cash contribution recorded once
- Revaluation allocated correctly
- Goodwill not mistaken for cash
Common mistakes
- Allocating pre-admission revaluation gains to the incoming partner
- Recording goodwill compensation as cash introduced
What can you explain now?
A new partner receives a share that existing partners surrender. What ratio allocates goodwill compensation to the sacrificing partners?
Compare with the explanation
Their relative sacrificing ratio
Compare old and new shares, then allocate the compensation to those surrendering shares.
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Make it stick
Name the two ratios needed to account for a partnership admission, and state which partners normally receive a pre-admission revaluation gain.
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.