Question

Ritesh and Somesh are partners in a firm sharing profits and losses equally. They admit Satvik on 1st April, 2021, for `1/5` share in the profits of the firm; the future profit-sharing ratio between Ritesh and Somesh would be 3 : 2. At the time of reconstitution of a partnership firm, goodwill was valued at two years’ purchase of the average profits of the preceding four years, which were as follows: Year Profit/Loss   2017−18 Profit ₹ 70,000 (after debiting loss of stock by fire ₹15,000) 2018−19 Profit ₹ 50,000 (including insurance claim of ₹ 5,000) 2019−20 Loss ₹ 40,000 (after debiting voluntary retirement compensation paid ₹ 20,000) 2020−21 Profit ₹ 60,000 (excluding insurance premium of ₹ 10,000 on insurance of assets)

Satvik is unable to bring in cash his share of goodwill. The account to be debited to record his goodwill compensation will be:

Options

• Satvik’s Capital A/c

• Satvik’s Current A/c

• Premium for Goodwill A/c

• Old Partners’ Capital A/cs

Answer 1

Satvik’s Current A/c

Explanation:

The crucial detail is that Satvik is unable to bring in cash his share of goodwill. In partnership accounting, when a new partner is admitted and cannot bring their share of goodwill in cash, their Current Account is debited. This is especially true if the firm maintains Fixed Capital Accounts, where the Capital Account reflects only permanent capital contributions and withdrawals, while other adjustments like goodwill (when not brought in cash), interest on capital, drawings, etc., are routed through the Current Account.