MANAGER BECOMING A PARTNER

ACCOUNTING FOR PARTNERSHIP FIRMS

LESSON - 8

MANAGER BECOMING A PARTNER

            In partnership firms the partners may mutually agree to appoint the manager of the firm as one of the firm's partner. If the manager is going to become a partner then there should be a certain calculation as the person being the manager and for becoming a partner of the firm should be made, this calculation will be done following the retrospective effect. Retrospective effect means the changes that the partners are going to make regarding the admission of the manager as a partner will apply from the past years also.

            In simple, the benefits the manager had received all the years and the benefits he was suppose to receive for being a partner all these years will be calculated and compared. Usually the benefits of being a partner would be more so in that case the deficiency amount will be compensated by the other partners as agreed and there is also a chance of the opposite, that is the benefits of being a manager may be more so in that case the manager will compensate the partners.

PROCEDURE FOR CALCULATING RETROSPECTIVE EFFECT:

Step 1 - Calculate the beneficial amount the partner would have received as a manager the firm.

Step 2 -  Calculate the beneficial amount the manager will receive if he is becoming the partner of the firm.

Step 3 -  Compare both step 1 and step 2 and determine the difference amount.

Step 4 - If in case the amount as per step 1 is more, that is the benefit he got as a manager is more then the manager has to compensate the difference amount to the partners.

JOURNAL ENTRY

            New partner (Manager) account         Dr.                 XXX

                To old partners account                                                             XXX

            (being the difference amount paid by the manager)

Step 5 - If in case the amount as per step 2 is more, that is the benefit he will receive as a partner is more then the difference amount will be compensated by the partner to the manager.

JOURNAL ENTRY

       Old partners account              Dr.                     XXX

           To new partner (manager) account                              XXX

            (being the difference amount compensated by the partners to the manager)

FORMAT TO FIND RETROSPECTIVE EFFECT

YEARS (1)	PROFIT OR LOSS (2)	SHARE AS MANAGER (3)		SHARE AS A PARTNER (4)		ADJUSTED PROFIT (5)
No of years the retrospective effect is to take place	Profit or loss of all those years                     TOTAL	He might receive salary, interest,   etc             TOTAL	Different items he receives as a manager should be shown   in separate columns    TOTAL	He might receive interest, commission, or any other appropriations            TOTAL	Different items he receives as a partner should be shown in separate columns           TOTAL	The actual profit from which the share as a partner has to be calculated   FORMULA: profit/loss + share as a manager - share as a partner    TOTAL = (2)+(3)-(4)