Admitting A New Partner
A new partner may be admitted by agreement among the existing partners. When this happens, the old partnership is dissolved and a new partnership is created, with a new partnership agreement.
A new partner may buy into the business in three ways:
- by purchasing an interest directly from existing partners
- by making an investment in the business, or
- by contributing assets from an existing business.
Assume that Partner A and Partner B admit Partner C as a new partner, when Partner A and Partner B have capital interests $30,000 and $20,000, respectively.
Partner C pays, say, $15,000 to Partner A for one-third of his interest, and $15,000 to Partner B for one-half of his interest. These payments go to the partners directly, not to the business. The following entry is made by the partnership.
| Debit | Credit | |
|---|---|---|
| Partner A, Capital | 10,000 | |
| Partner B, Capital | 10,000 | |
| Partner C, Capital | 20,000 |
The extra $5,000 Partner C paid to each of the partners, represents profit to them, but it has no effect on the partnership's financial statements.
Now, assume instead that Partner C invested $30,000 cash in the new partnership. In this case, the following entry would be made to admit Partner C.
| Debit | Credit | |
|---|---|---|
| Cash | 30,000 | |
| Partner C, Capital | 30,000 |
Finally, let's assume that Partner C had been operating his own business, which was then taken over by the new partnership. In this case the balance sheet for the new partner's business would serve as a basis for preparing the opening entry. The assets listed in the balance sheet are taken over, the liabilities are assumed, and the new partner's capital account is credited for the difference.
Read more about this topic: Partnership Accounting
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