Reconstitution of Partnership
Reconstitution of Partnership
What is Reconstitution of Partnership?
Reconstitution of partnership refers to any change in the relation between the partners of a firm, except the dissolution of the firm. It happens when the composition of the firm changes but the firm continues to exist.
When does Reconstitution take place?
Admission of a new partner.
Retirement of an existing partner.
Death of a partner.
Resignation or expulsion of a partner.
Change in the profit-sharing ratio among partners.
Key Points:
The firm does not dissolve on reconstitution but the existing partnership agreement is modified or a new agreement is formed.
The reconstitution affects rights, duties, and liabilities of partners.
Goodwill of the firm needs to be valued and adjusted during reconstitution.
Capital accounts of the partners are adjusted as per the new agreement.
Types of Reconstitution
| Type | Description |
|---|---|
| Admission of a Partner | New partner joins and gets a share in profits. |
| Retirement of a Partner | Partner leaves the firm and gets paid his share. |
| Death of a Partner | Partnership reconstituted after death. |
| Change in Profit Sharing | Partners agree to change the profit-sharing ratio. |
Effects of Reconstitution
New Partnership Agreement – Usually made to redefine the rights and duties.
Valuation of Goodwill – Goodwill is valued and adjusted among partners.
Adjustment of Capitals – Partners’ capital accounts are adjusted to reflect the changes.
Accounting for Reconstitution – Special accounts like Revaluation Account and Goodwill Account are prepared.
Admission of a New Partner
The new partner shares profits and losses.
Existing partners agree on the share of the new partner.
Goodwill is adjusted, sometimes the new partner pays for goodwill.
Capital accounts are credited or debited accordingly.
Retirement of a Partner
Retiring partner is paid the value of his share.
Goodwill and revaluation of assets/liabilities are accounted for.
Remaining partners may need to compensate the retiring partner.
Death of a Partner
The firm continues with the surviving partners.
The legal representatives of the deceased partner are paid the value of his share.
Adjustments similar to retirement are made.
Change in Profit-Sharing Ratio
No partner enters or leaves.
The new ratio is agreed upon.
Goodwill and revaluation adjustments may be necessary.
Accounting Treatment (Summary)
| Account | Purpose |
|---|---|
| Goodwill Account | To adjust goodwill on admission/retirement. |
| Revaluation Account | To record increase/decrease in assets/liabilities. |
| Capital Accounts | Adjusted according to new profit-sharing ratio. |
Example:
Suppose A and B share profits equally. C is admitted with 1/4 share. A and B agree to reduce their shares accordingly. Goodwill is valued at ₹40,000. The accounting entries will include:
C paying goodwill to A and B.
Revaluation of assets/liabilities if needed.
Adjustment of capital accounts.
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