By January 2027 Singh & Tremblay Landscaping has outgrown two people. Singh's capital is $70,000, Tremblay's is $50,000, and they still share income 3:2. D. Okafor, a horticulturist, wants to join. There are two very different ways that can happen. Okafor could buy part of an existing partner's share, paying that partner directly, so no new money enters the business. Or Okafor could invest new money in the business itself, so the partnership's assets and total capital grow. Because a partnership has limited life, admitting Okafor legally ends the old partnership and starts a new one, and the entries must show exactly how each partner's capital changes.
Admission by purchasing a partner's interest
When Okafor buys an interest from an existing partner, the deal is a personal transaction between the two people. Cash goes from Okafor's pocket to Tremblay's pocket, not to the partnership. The partnership's assets do not change, and neither does its total capital. The only entry transfers capital from the selling partner's account to the new partner's account at book value. The price paid does not matter to the partnership's books, even if it is more or less than book value.
| Date | Account | Debit | Credit |
|---|---|---|---|
| Jan. 2, 2027 | L. Tremblay, Capital | $25,000 | |
| D. Okafor, Capital | $25,000 | ||
| To record Okafor's purchase of half of Tremblay's interest |
Admission by investing in the partnership
When Okafor invests assets in the partnership itself, both total assets and total capital increase. The agreement states what share of total capital Okafor receives, for example a one-quarter interest. To find Okafor's capital credit, add the new investment to the old capital to get total capital after admission, then multiply by Okafor's share. If Okafor invests $40,000 for a one-quarter interest, new total capital is and a quarter of that is exactly $40,000. The investment equals the capital credit, so there is no bonus: debit Cash $40,000, credit D. Okafor, Capital $40,000.
Often the investment and the capital credit differ, and the difference is a bonus. If the business is successful, a new partner may have to pay more than book value to get in: the extra is a bonus to the old partners, shared in their income ratio. If the business badly needs the new partner's cash or skills, the old partners may give up some of their capital: a bonus to the new partner, charged to the old partners in their income ratio.
| Date | Account | Debit | Credit |
|---|---|---|---|
| Jan. 2, 2027 | Cash | $60,000 | |
| D. Okafor, Capital | $45,000 | ||
| P. Singh, Capital | $9,000 | ||
| L. Tremblay, Capital | $6,000 | ||
| Okafor invests $60,000 for a 1/4 interest; bonus to old partners 3:2 |
| Date | Account | Debit | Credit |
|---|---|---|---|
| Jan. 2, 2027 | Cash | $24,000 | |
| P. Singh, Capital | $7,200 | ||
| L. Tremblay, Capital | $4,800 | ||
| D. Okafor, Capital | $36,000 | ||
| Okafor invests $24,000 for a 1/4 interest; bonus to new partner |
Withdrawal of a partner
A partner can also leave by selling the interest to another partner or an outsider (a personal transaction: only the capital accounts change, exactly as in a purchase admission) or by being paid out of partnership assets. Payment from partnership assets reduces total assets and total capital. Later in the partnership's life, suppose Okafor has been admitted and the new partnership agreement shares income 2:2:1 (Singh, Tremblay, Okafor). Tremblay retires on Dec. 31, 2028, and on that date, the date of withdrawal, the capital balances are Singh $80,000, Tremblay $60,000 and Okafor $40,000. If he is paid exactly his book value, $60,000, the entry is simply: debit L. Tremblay, Capital $60,000 and credit Cash $60,000.
If the remaining partners pay Tremblay more than his book value (perhaps the business is worth more than its books show, or they want him to leave quickly), the extra is a bonus to the retiring partner, charged to the remaining partners in their income ratio. If Tremblay accepts less than book value (perhaps to leave immediately), the difference is a bonus to the remaining partners. Singh and Okafor share income 2:1 between themselves, so any bonus is split two-thirds and one-third.
| Date | Account | Debit | Credit |
|---|---|---|---|
| Dec. 31, 2028 | L. Tremblay, Capital | $60,000 | |
| P. Singh, Capital | $6,000 | ||
| D. Okafor, Capital | $3,000 | ||
| Cash | $69,000 | ||
| Tremblay paid $69,000; bonus to retiring partner charged 2:1 | |||
| Dec. 31, 2028 | L. Tremblay, Capital | $60,000 | |
| Cash | $51,000 | ||
| P. Singh, Capital | $6,000 | ||
| D. Okafor, Capital | $3,000 | ||
| Alternative: Tremblay paid $51,000; bonus to remaining partners 2:1 |