Final answer:
When a bonus is given to a new partner without an additional contribution from them, the existing partners' capital accounts are reduced to account for this incentive. This effectively reduces their individual equity in the business, reflecting the value of the bonus granted to the new partner. It's an important aspect of partnership business structures, especially in general partnerships where personal liability is a factor.
Step-by-step explanation:
When a bonus is allowed to a new partner, it involves adjusting the capital accounts of the existing partners to account for the value of the bonus given. If no additional investment is made by the new partner corresponding to the bonus, this entry will reduce the capital accounts of the old partners. Essentially, the old partners are purchasing the extra share for the new partner as an incentive for the new partner to join the partnership. This is similar to the concept of entry in a competitive market, where new firms come in response to industry profits, except here, the new partner is specifically invited and given a bonus as encouragement.
In the case of a general partnership, each partner is responsible for all of the business debts, and hence giving a bonus to a new partner means that existing partners take on an additional risk. A bonus to a new partner without additional contribution results in a redistribution of the ownership stake and a decrease in individual partner equity accounts, reflecting the cost of the bonus on the existing partners' assets in the business.
These financial dynamics can have significant implications when considering the structure and the inherent disadvantages of a general partnership, especially in relation to personal liability and shared profits.