Question

A and B are partners sharing profits and losses in 3 : 2. They admit C into partnership for 1/5th share in the profits. C pays in cash ₹ 40,000 for his capital. Goodwill of the firm is valued at ₹ 25,000 but C is unable to bring his share of goodwill in cash. Pass the necessary journal entries.

Answer 1

Journal Entries
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
	Cash/Bank A/c   ...Dr.		40,000
	To C's Capital A/c			40,000
	(Being capital amount brought in cash by C)
	C's Current A/c   ...Dr.		5,000
	To A's Capital A/c			3,000
	To B's Capital A/c			2,000
	(Being C's share of goodwill adjusted through his current account into old partners' capital accounts in their sacrificing ratio of 3 : 2)

Working Notes:

A. Calculate C's Share of Goodwill

Total Goodwill value of the firm = ₹ 25,000

C's Profit Share = `1/5`

C's Share of Goodwill:

`25,000 xx 1/5 = 5,000`

B. Determine the Sacrificing Ratio

Since the problem states that C is admitted for a `1/5` share but does not specify individual sacrifices, the old partners (A and B) will sacrifice in their Old Profit-Sharing Ratio.

Sacrificing Ratio (A : B) = 3 : 2

C. Accounting Treatment for Unpaid Goodwill

When a new partner is unable to bring their share of goodwill in cash, the amount is adjusted by debiting C's Current Account and crediting the old partners' capital accounts in their sacrificing ratio:

A's Share: `5,000 xx 3/5 = 3,000`

B's Share: `5,000 xx 2/5 = 2,000`