State True or False with reason.
1) A new Partner can bring capital in cash or kind.
As per the provision of partnership deed, when any person is admitted to the firm, he has to bring some amount as capital which can be in cash or in-kind of assets to get rights in the assets and definite share in the future profit of the firm.
2) When goodwill is paid privately to the partners, it is not recorded in the books.
When goodwill is paid privately to the partners, by a newly admitted person, then in such case no transaction takes place in the business and firm as such is not all benefited. Hence it is not recorded in the books of accounts.
3) The gain ratio is calculated at the time of admission of a partner.
At the time of admission of a person, in the business, sacrifices are made by the old partners in favour of a new partner. It means there is no question of any gain to the partners, so we can say that Gain ratio is not calculated at the time of admission of a partner.
4) Revaluation profit is distributed among all partners including new partners.
Revaluation profit arises due to efforts and hard work of the old partners in the past and hence profit earned on revaluation of assets and liabilities at the time of admission of a person as a partner in the business belongs to old partners. So, such profit is not distributed among all partners including a new partner. It distributed only among old partners.
5) Change in the relationship between the partners is called the Reconstitution of partnership.
When any person joins the business as a partner, a change in the relationship takes place. The old agreement is terminated and a new agreement is prepared. There is a change in profit or loss sharing ratio and the relationship of the partners which is known as the Reconstitution of Partnership.
6) A new partner always bring his share of goodwill in cash.
When a new person is admitted to the partnership firm, the old partners surrender a certain share in profit and give it to a new partner. In exchange for that new partner is required to bring goodwill in cash or in kind. If he is unable to bring cash for goodwill, then Goodwill is raised and adjusted to the new partner’s capital A/c.
7) When the goodwill is written off, a goodwill account is debited.
To write off goodwill means to decrease or wipe out the value of goodwill. When goodwill as an asset of the business is raised, Goodwill A/c is debited in the books of Account. Conversely, when Goodwill is written off from the business, the Goodwill A/c is credited in the books of business.
8) The new ratio minus old ratio is equal to the sacrifice ratio.
When a new partner is admitted, old partners have to sacrifice their profit share in favour of new partner and their old ratio gets reduced and whatever ratio left becomes a new ratio. Hence, as per equation: New Ratio = Old Ratio – Sacrifice Ratio. By interchanging the terms, Sacrifice Ratio = Old Ratio – New Ratio.
9) Usually, when a new partner is admitted to the firm there will be an increase in the capital of the firm.
When a new partner is admitted to the firm, he brings his share of capital and goodwill, in cash or in-kind, to enjoy the right of sharing the future profit, and hence there will be an increase in the capital of the firm.
10) Cash/ Bank Account is credited when goodwill is withdrawn by the old partners.
When a new partner brings his share of goodwill, old partners have the right to withdraw it in cash. Therefore, when old partners withdraw the amount of goodwill, cash goes out of the firm and not goodwill. Hence Cash/Bank A/c is credited.