Revision: Accountancy I : Accounting for Partnership Firms and Companies >> Reconstitution of a Partnership Firm – Admission of a Partner Accountancy Commerce (English Medium) Class 12 CBSE

• ''The term goodwill is generally used to denote the benefit arising from connections and reputation.'' - Lord Lindley
• ''Goodwill is nothing more than the probability that the old customers will resort to the old place.'' - Lord Eldon
• ''Goodwill may be said to be that element arising from the reputation, connections or other advantages possessed by a business which enables it to earn greater profits than the return normally to be expected on the capital represented by the net tangible assets employed in the business.'' - Spicer and Pegler 
• "When a man pays for goodwill, he pays for something which places him in the position of being able to earn more than he would be able to do by his own unaided efforts." - Dicksee

(i) New Partner's Share = Sum of Profit Shares Given by Old Partners

(ii) New Share of Old Partner = Old Share – Share Given to New Partner

(i) Old Partner’s New Share = Old Share – Sacrificed Share

(ii) New Partner’s Share = Sum of Sacrificed Shares (as per agreed ratio)

(i) Old Partners’ New Shares = Remaining Share × Old Ratio

(ii) Remaining Share = 1 – New Partner’s Share

Sacrificing Ratio = Old Profit - Sharing Ratio

Sacrificed Profit Share = Old Profit Share - New Profit Share

New Partner’s Share = Sum of Profit Share Sacrificed by Old Partners

New Share of Old Partner = Old Share − Sacrificed Share

Sacrifice Ratio = Old Ratio - New Ratio

Goodwill = Capitalised Average Profit – Actual capital employed/net assets

Where Capitalized Average Profit = `"Average Profit" xx 100/"Normal Rate of Return"`

Actual capital employed = Assets (excluding purchased Goodwill and fictitious assets) – Outside liabilities

(i) Goodwill = Average Profits × No. of years purchased

(ii) \[\text{Average Profit}=\frac{\text{Total Profit}}{\text{No.of years}}\]

(i) \[\text{Goodwill}=\text{Average Profit}\times\text{Number of Years' Purchase}\]

(ii) \[\text{Average Profit}=\frac{\text{Total of Profits}}{\text{Number of Years}}\]

(i) Goodwill = Weighted Average Profit x Number of Years' Purchase

(ii) \[\text{Weighted Average Profit}=\frac{\text{Total of Weighted Profit}}{\text{Total of Weights}}\]

(i) Goodwill = Super Profit x No. of Years Purchased 

(ii) Super Profit = Actual or Average Profit - Normal Profit

(iii) \[\text{Normal Profit}=\frac{\text{Capital Invested}\times\text{Normal Rate of Return}}{100}\]

Goodwill = Capitalised Value of Average Profits - Actual Capital Employed

\[\text{Capitalised Value of Average Profits}=\text{Average Profits}\times\frac{100}{\text{Normal Rate of Return (Profit)}}\]

Capital Employed/Net Assets of the Firm = Total Assets - Liabilities

\[\text{Goodwill}=\text{Super Profit}\times\frac{100}{\text{Normal Rate of Return}}\]

\[\text{Total Capital of the New Firm}=\frac{\text{Total adjusted Capital of Old Partners}}{\text{Total Profit Share of Old Partners}}\]

\[\text{Total Capital of the New Firm}=\frac{\text{Capital of the New Partner}}{\text{Share of Profit of New Partner}}\]

• Need for Admission: A new partner may be admitted to bring additional capital, skilled management, improve goodwill, or reward a capable employee.
• Legal Requirement: As per Section 31(1) of the Indian Partnership Act, a new partner can be admitted only with the consent of all existing partners.
• New Partner's Rights: Share in profits, assets, and liable for future debts.
• Goodwill & Capital: A new partner brings capital and goodwill to gain a share in profits and assets; existing partners sacrifice a share of profits in return.
• Adjustments at Admission: New profit-sharing ratio, Valuation of goodwill, Revaluation of assets and liabilities, and Adjustment of reserves, profits, and capital.

• Meaning: Goodwill is the reputation of a business that helps it earn more than normal profits.
• Nature: It's an intangible but valuable asset, sold only with the full business. Only purchased goodwill is recorded.
• Features: Attracts customers, earns extra profits, value keeps changing, can't be sold alone, and hard to measure.
• When Valued: On partner admission, retirement, change in profit-sharing, sale, or merger.
• Factors Affecting: Management, location, age, profit trend, quality, licenses, and market conditions.

A. Premium for Goodwill is paid privately:

No Entry is passed

B. Premium for Goodwill is brought in cash by the New Partner:

1. When the Premium for Goodwill brought in by the New Partner is Retained in the Business:

(i) Cash/Bank A/c     ...Dr.

     To Premium for Goodwill A/c

(Amount of goodwill/premium brought in cash by new partner) 

(ii) Premium for Goodwill A/c    ...Dr.

       To Old Partners' Capital A/cs

(Amount of goodwill/premium transferred to old partners' capital accounts in sacrificing ratio)

2. When Goodwill/Premium brought in by the New Partner is Withdrawn by the Old Partners:

Old Partner's Capital A/cs    ...Dr.

     To Cash/Bank A/c

(Amount of goodwill/premium withdrawn by the old partners)

C. Premium for Goodwill is brought in kind

1. For assets brought by the incoming partner:

Assets A/c      ...Dr.

     To Incoming Partner's capital A/c

     To Premium for Goodwill A/c

2. For giving credit for goodwill to sacrificing partners in their sacrificing ratio:

Premium for Goodwill A/c     ....Dr.

       To Sacrificing Partners' Capital/Current A/c

D. Premium for Goodwill is brought by New Partner and is withdrawn by the Sacrificing Partners either fully or partly:

1. For premium for goodwill brought in cash by the new partner:

Cash/Bank A/c     ...Dr.

      To Premium for Goodwill A/c

2. For sharing of premium for goodwill:

Premium for Goodwill A/c    ...Dr.

      To Sacrificing Partners' Capital/Current A/c

3. For withdrawal of premium for goodwill amount fully/partly

Sacrificing Partners' Capital/Current A/cs    ...Dr.

       To Cash/Bank A/c

E. New Partner cannot bring his share of Premium for Goodwill; adjustment is made through the Current account of the New Partner:

New Partners' Current A/c    ...Dr.

      To Sacrificing Partners' Capital/Current A/cs

F. New Partner brings a part of Premium for Goodwill in cash or by Cheque or in Kind:

1.Cash/Bank/Assets A/c     ...Dr.

     To Premium for Goodwill A/c

2. New Partners' Current A/c    ...Dr.

Premium for goodwill A/c        ...Dr.

       To Sacrificing Partners' Capital/Current A/cs

G. Goodwill appears (exists) in the Balance Sheet and Incoming Partner brings Premium for Goodwill in full or in part:

1. Write-off of Existing Goodwill

Old Partners' Capital/Current A/cs     ...Dr.

        To Goodwill A/c

2. Entry for Premium for Goodwill Brought by New Partner

Cash/Bank A/c      ...Dr.

      To Premium for Goodwill A/c

3. Distribution of Premium for Goodwill to Sacrificing Partners

Premium for Goodwill A/c       ...Dr.

        To Sacrificing Partners' Capital A/cs

4. Adjustment Entry for Premium Not Brought by New Partner

New Partner's Current A/c     ...Dr.

      To Sacrificing Partners' Capital/Current A/cs

H. Goodwill exists in the Balance Sheet and incoming partner is unable to bring his or her share of Premium for Goodwill in Cash or by Cheque:

1. Write-off of Existing Goodwill

Old Partners' Capital/Current A/cs     ...Dr.

       To Goodwill A/c

2. Adjustment for Incoming Partner’s Share of Goodwill Not Brought in Cash

Incoming Partner's Current A/c    ...Dr.

       To Sacrificing Partners' Capital/Current A/cs

1. For distributing Reserves and Accumulated Profits :

General Reserve A/c                          ...Dr.

Reserve Fund A/c                              ...Dr.

Profit & Loss A/c (Credit balance)   ...Dr.

      To Old Partner's Capital A/cs or Current A/cs

2. For distributing accumulated losses among old partners in the old ratio :

Old Partner's Capital A/c or Current A/c     ...Dr.

      To Profit & Loss A/c (Debit balance) 

      To Advertisement Suspense A/c

      To Deferred Revenue Expenditure A/c

3. For distributing surplus of specific reserves : 

Workmen's Compensation Reserve A/c      ...Dr.

Investment Fluctuation Reserve A/c           ....Dr.

     To Old Partner's Capital Ales or Current A/c

1. For a decrease in the value of assets : 

Revaluation A/c or Profit & Loss Adjustment A/c     ...Dr. 

           To Assets A/c

(Decrease in the value of assets) 

2. For an increase in the value of assets :

Assets A/c      ...Dr.

       To Revaluation A/c or Profit & Loss Adjustment A/c

(Increase in the value of assets) 

3. For an increase in the value of liabilities:

Revaluation A/c or Profit & Loss Adjustment A/c     ...Dr.

         To Liabilities A/c

(Increase in the value of liabilities) 

4. For a decrease in the value of liabilities : 

Liabilities A/c     ...Dr.

      To Revaluation A/c or Profit & Loss Adjustment A/c

(Decrease in the value of liabilities)

5. For accounting unrecorded assets

Unrecorded Assets A/c     ...Dr.

       To Revaluation A/c

(accounting of unrecorded assets)

6. For accounting unrecorded liabilities

Revaluation A/c      ...Dr.

      To Unrecorded Liabilities A/c

(Accounting of unrecorded liabilities)

7. For transferring Gain (Profit):

Revaluation A/c     ...Dr.

     To Old Partner's Capital A/cs

(Gain on revaluation credited to Old Partner's Capital A/cs) 

8. For transferring loss: 

Old Partner's Capital A/cs    ...Dr.

      To Revaluation A/c

(Loss on revaluation debited to Old Partner's Capital A/cs)

                                                     Revaluation Account

Dr.                                                                                                                               Cr.

A. Accounting Entry to Adjust Deficit Capital:

1. If amount is brought in cash or cheque:

Cash/Bank A/c      ...Dr.

     To Concerned Partner's Capital Account

2. If amount is transferred to Current Account of the partner:

Concerned Partner's Current A/c    ...Dr.

     To Concerned Partners Capital A/c

B. Accounting Entry to Adjust Surplus Capital:

1. If amount is paid:

Concerned Partner's Capital A/c     ....Dr.

     To Cash/Bank A/c

2. If amount is transferred to Current Account of the partner:

Concerned Partner's Capital A/c    ...Dr.

      To New Partner's Current A/c 

C. When a new partner brings certain assets towards his capital:

Assets A/c        ...Dr.

       To New Partner's Capital A/c