Admission of a new partner into a partnership The two options for being admitted into a...

Admission of a new partner into a partnership

The two options for being admitted into a partnership are by 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.(minimum 2 paragraphs)

Expert Solution

Answer

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 instead, 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 acquire 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.

Normally a new partner is admitted by investing in the partnership. But for better accounting purpose the other option is better, because in that the accounting is very straight forward.

ekkarill92 answered 1 year ago

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