Question

Sanjay and Vijay were partners in a firm sharing profits and losses in the ratio of 4 : 3. On 1st April, 2025 they admitted Babul as a new partner for `2/5`th share in the profits of the firm. On Babul’s admission, the following was agreed upon:

1. The new profit sharing ratio of Sanjay, Vijay and Babul will be 3 : 3 : 4.
2. The goodwill of the firm will be valued at four years’ purchase of the average profits of the last three years. The profits of the previous three years were:
   

   Year	Profit (₹)
   2022-23	16,500
   2023-24	17,500
   2024-25	18,500

3. Babul will bring his share of goodwill premium in cash, half of which will be withdrawn by Sanjay and Vijay.
4. On Babul’s admission, revaluation of assets and reassessment of liabilities resulted in a loss of ₹ 70,000.
5. At the time of Babul’s admission, the firm had a General Reserve of ₹ 28,000.
6. After making necessary adjustments relating to goodwill, loss on revaluation and general reserve, the capital accounts of Sanjay and Vijay showed balances of ₹ 3,50,000 and ₹ 2,50,000, respectively. Babul brought proportionate capital for his `2/5`th share in the profits of the firm.

Showing your workings clearly, pass the necessary journal entries for the above transactions in the books of the firm on Babul's admission.

Answer 1

Journal Entries in the Books of the Firm
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
(i)	Bank A/c ... Dr.		28,000	-
	To Premium for Goodwill A/c		-	28,000
	(Being goodwill premium brought in cash by Babul)
(ii)	Premium for Goodwill A/c ... Dr.		28,000	-
	To Sanjay’s Capital A/c		-	19,000
	To Vijay’s Capital A/c		-	9,000
	(Being premium shared by old partners in a sacrifice ratio of 19 : 9)
(iii)	Sanjay’s Capital A/c ... Dr.		9,500	-
	Vijay’s Capital A/c ... Dr.		4,500	-
	To Bank A/c		-	14,000
	(Being half of the goodwill premium withdrawn by old partners)
(iv)	Sanjay’s Capital A/c ... Dr.		40,000	-
	Vijay’s Capital A/c ... Dr.		30,000	-
	To Revaluation A/c		-	70,000
	(Being revaluation loss distributed in old ratio 4:3)
(v)	General Reserve A/c ... Dr.		28,000	-
	To Sanjay’s Capital A/c		-	16,000
	To Vijay’s Capital A/c		-	12,000
	(Being general reserve distributed in old ratio)
(vi)	Bank A/c ... Dr.		4,00,000	-
	To Babul’s Capital A/c		-	4,00,000
	(Being proportionate capital brought in by Babul)

Working Notes:

1. Calculation of Sacrificing Ratio:

Sacrifice = Old Share – New Share

Sanjay = `4/7 - 3/10`

= `(4 xx 10)/(7 xx 10) - (3 xx 7)/(10 xx 7)`

= `40/70 - 21/70`

= `19/70`

Vijay = `3/7 - 3/10`

= `(3 xx 10)/(7 xx 10) - (3 xx 7)/(10 xx 7)`

= `30/70 - 21/70`

= `9/70`

Sacrificing Ratio = 19 : 9

2. Valuation of Goodwill:

Average Profit = `(16,500 + 17,500 + 18,500)/3`

= `(52,500)/3`

= 17,500

Firm’s Goodwill = 17,500 × 4 year

= 70,000

Babul’s Share of Goodwill = `70,000 xx 2/5`

= 28,000

3. Calculation of Babul’s Proportionate Capital: Adjusted Capital of Sanjay & Vijay (given after all adjustments) = ₹ 3,50,000 + ₹ 2,50,000

= ₹ 6,00,000

Combined Share of Sanjay & Vijay in the new firm = `1 - 2/5`

= `3/5`

Total Capital of New Firm = `6,00,000 xx 5/3`

= 10,00,000

Babul’s Capital = `10,00,000 xx 2/5`

= 4,00,000