This is a private method of acquiring the existing partner’s interest in the firm. Whenever a new person wants to become a partner, he or she negotiates with the existing partner and pays him outside the firm any amount agreed upon to get certain proportion in the business. In this method, firm does not receive any sort of cash or cash equivalent. Entries which are passed are the transfer of capital from one partner to the other.
Journal Entry
| Description | Debit | Credit |
| Adam’s capital | xxx | |
| Boon’s capital | xxx | |
| Donald’s capital | xxx | |
| To record transaction purchasing of interest from old partners) |
Example
Adam and Bevan run a partnership firm of poultry farm with a capital of $ 480,000 & $360,000 respectively. According to the partnership deed, they are entitled to share profit in the ratio of 60 % and 40 %. They are running this firm since 10 years. Following is the balance sheet of the partnership firm:
Adam and Bevan Partnership
Balance Sheet
| Cash in hand Other assets | 120,000 800,000 | Accounts payable Adam’s capital Bevan’s capital | 80,000 480,000 360,000 |
| 920,000 | 920,000 |
Both the current partners have decided to admit a new well known personality in the business sector, Charlie, in the partnership. Charlie purchased 30 % interest from Adam by pashing cash amount of $ 270,000 directly to him. The admission of Charlie will help the firm in attracting further clients and make new sales. It is estimated that the admission will lead to 30 % increase in annual sales.
Requirement
Pass on general entries to record the admission of the new partner Charlie
Prepare balance sheet after admission of new partner Charlie.
Solution
General journal entries
It should be kept in mind that Charlie has paid directly to the Adam. This transaction is done outside the company, so it will not affect any asset of the partnership firm. Only transfer of capital will be recorded.
| Description | Debit | Credit |
Adam’s capital Charlie’s capital (480,000 x 30% ) (In order to record purchase of interest from Adam) | 144,000 | 144,000 |
Balance Sheet
| Cash in hand Other assets | 120,000 800,000 | Accounts payable Adam’s capital Bevan’s capital Charlie’s capital | 80,000 336,000 360,000 144,000 |
| 920,000 | 920,000 |