Admission of a new partner into a partnership
The two options for being admitted into a partnership are making an investment in the partnership or purchasing interest from an existing partner. Describe the difference between the two and explain which option you believe is better.
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There are two ways for a new partner to join a partnership. In both, a new partnership agreement should be drawn up because the existing partnership will come to an end.
The new partner can invest cash or other assets into an existing partnership while the current partners remain in the partnership.
The new partner can purchase all or part of the interest of the current partner, making payment directly to the partner and not to the partnership. If the new partner buys an existing partner’s entire interest, the existing partner leaves the partnership.
Whenever a new partner is admitted to the partnership, a new capital account must be opened for him or her. This will allow the partnership to reflect the new members of the partnership.
The purchase of an existing partner’s ownership by a new partner is a personal transaction that involves the existing partner and the new partner without otherwise affecting the records of the partnership.
Accounting for this method is very straightforward. The only changes that are recorded on the partnership’s books occur in the two partners’ capital accounts. The existing partner’s capital account is debited and, after being created, the new partner’s capital account is credited.
If the new partner invests directly into the partnership, the change increases the assets of the partnership as well as the capital accounts. For the right to earn a share in the assets and profits of the partnership firm, the partner brings an agreed amount of capital either in cash or in kind.
A new partner is admitted by investing in the partnership. But for better accounting purpose the other option is better, because in the accounting method is very straight forward.
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A new partner might join a partnership in one of two ways. While the old partners stay in the partnership, the new partner might invest cash or other assets into it. The new partner can buy all or part of the current partner’s interest, paying the partner personally rather than the partnership. If a new partner purchases the whole interest of an existing partner, the existing member departs the partnership.
A fresh capital account must be formed whenever a new partner is admitted to the firm. As a result, the partnership will be able to reflect the new members.The purchase of an existing partner’s shareholding by a new partner is a private transaction between the existing and new partners that has no effect on the partnership’s records. It’s fairly simple to account for this strategy. The capital account of the existing partner is deducted, and the capital account of the new partner is credited after it is founded. If the new partner instead invests directly in the partnership, the assets and capital accounts of the partnership will increase. The partner contributes a specified amount of capital, either in cash or in kind, in exchange for the opportunity to acquire a portion of the partnership firm’s assets and profits.A new partner is usually accepted by making an investment in the partnership. However, for better accounting purposes, the other method is preferable because the accounting is much simpler.
