ADVANCED FINANCIAL ACCOUNTING I
PARTNERSHIP
Reconstitution of partnership
Any change in the relation of partners will result in the constitution of the partnership firm.
The partnership act provides that no person shall be admitted as a partner without the consent of
all the other partners.
Logically, any partner admitted into an existing firm is not liable to any debts of the firm
incurred before he/she was admitted as a partner.
Equally, such new partners shall not be liable for acts of the old partners unless:
a. The new partner has assumed liability to pay the old debts.
b. The creditor concerned has agreed to accept the reconstituted firm his debtor and to
discharge the old firm’s liabilities.
A minor who is admitted as a partner and intends to become a partner in the firm upon attaining
the age of majority shall become liable for all act of the firm done since he was admitted to the
business of the firm.
By revaluation, the partners ascertain the market value of the assets before admission.
With historical cost basis, the revaluation would result into a gain to the old partners who would
share such gain in their profit-sharing ratios.
The revaluation of assets would also give the prospective partners insight into the financial
position of the firm.
A revaluation account is normally opened to record capital gains and capital losses.
This account is balanced to show revaluation gain (credit balance) or revaluation loss (debit
balance).
The revaluation profit/loss is then shared out between the old partners in their profits and losses
sharing ratios.
Journal entries
The following journal entries may be made:
1. For increase in the value of an asset:
Debit asset account
Credit revaluation account
Narration: being increase in the value of asset(s).
2. For the decrease in the value of an asset:
Debit revaluation account
Credit asset account
Narration: being reduction in value of an asset.
3. For decrease in the value of liability:
Debit liability account
Credit revaluation account
Narration: being decrease in liability.
4. For increase in the value of liability:
Debit revaluation account
Credit liability account
Narration: being an increase in liability.
5. Any gain on revaluation shall be credited to the partners’ capital account as follows:
Debit revaluation account
Credit partners’ capital accounts
Narration: being distribution of revaluation gain.
6. For revaluation loss:
Debit partners’ capital accounts
Credit revaluation account
Narration: being distribution of revaluation loss.
Example 1
B and C share profits and losses in the ratio 4:1. A is willing to join them. Their financial
statement at the time was as below:
B and C Balance Sheet
As on 1st January 2020
KSHS. KSHS.
Assets
Buildings 350 000
Motor vehicles 250 000
Furniture and fittings 180 000
Inventory 450 000
Debtors 250 000
Cash in hand 9 000
1 489 000
Financed by:
Capital accounts:
B capital account 700 000
C capital account 400 000
Creditors 229 000
Bank overdraft 150 000
1 489 000
Upon admission of A, revaluation was done as:
Buildings 750 000
Furniture and fittings 175 000
Inventory 420 000
The partners created provision for bad debts at 5% of the book debtors.
Required:
i. Journalize the transactions
ii. Show the revaluation account
SOLUTION
Journal Entries
PARTICULARS DR CR
Amount (Kshs.) Amount
(Kshs.)
Buildings a/c 400 000
Revaluation a/c 400 000
(Being an increase in the value of
buildings)
Revaluation a/c 35 000
Furniture and fittings a/c 5 000
Inventory a/c 30 000
(Being revaluation of assets)
Revaluation a/c 12 500
Provision for bad debts a/c 12 500
(Being provision for bad debts created
upon revaluation)
Revaluation a/c 352 500
B’s capital a/c 282 000
C’s capital a/c 70 500
(Being distribution of revaluation gain)
Revaluation a/c
Particulars Amount (Kshs.) Particulars Amount (Kshs.)
Furniture and fittings 5 000 Buildings 400 000
Inventory 30 000
Provision for bad debts 12 500
B’s capital account 282 000
C’s capital account 70 500
400 000 400 000
Example 2
The balance sheet of A and B who share profits and losses in the ratio 6:4 was as below on 31st
December 2020.
Particulars Amount (Kshs.) Amount (Kshs.)
Capital accounts:
A 600 000
B 300 000 900 000
Creditors 300 000
1 200 000
Represented by:
Buildings 600 000
Plant 150 000
Debtors 300 000
Cash 150 000
1 200 000
They have agreed to admit C as a partner with effect from 1st January 2021. The new profit-
sharing ratios shall be 4:4:2. A and B have also given the following additional information:
a) C is to bring in Kshs. 300 000 as his capital contribution.
b) The firm’s goodwill is valued at Kshs. 150 000.
c) Kshs. 60 000 owing to be has been omitted from the list of creditors.
d) Building has been revalued upwards to Kshs. 900 000 while plant is to be shown in the
books at Kshs. 210 000.
Required:
Pass the necessary journal entries and the balance sheet of the reconstituted firm.
Solution
Journal entries
Particulars Dr Cr
Cash a/c 300 000
C’s capital a/c 300 000
(Being capital contribution of C)
Goodwill a/c 150 000
A’s capital a/c 90 000
B’s capital a/c 60 000
(Being distribution of goodwill created)
Revaluation a/c 60 000
Creditors a/c 60 000
(Being recognition of liability initially
omitted)
Building a/c 300 000
Plant a/c 60 000
Revaluation a/c 360 000
(Being revaluation of assets)
Revaluation a/c 300 000
A’s capital a/c 180 000
B’s capital a/c 120 000
(Being distribution of revaluation gain)
Revaluation a/c
Particulars Amount (Kshs.) Particulars Amount (Kshs.)
Creditors 60 000 Building 300 000
A’s capital a/c 180 000 Plant 60 000
B’s capital a/c 120 000
360 000 360 000
Partners’ Capital Account
Particulars Partner A Partner B Partner C
Balance b/d 600 000 300 000 -
Cash a/c - - 300 000
Goodwill a/c 90 000 60 000 -
Revaluation a/c 180 000 120 000 -
870 000 480 000 300 000
Reconstituted Balance Sheet
Amount (Kshs.) Amount (Kshs.)
Capital:
A 870 000
B 480 000
C 300 000 1650 000
Creditors 360 000
2 010 000
Represented by:
Goodwill 150 000
Building 900 000
Plant 210 000
Debtors 300 000
Cash 450 000
2 010 000
