If goodwill already exists in the books of the firm at the time of admission of a partner, then it will be dealt in the following manner.
Old Partner’s Capital A/c – Dr; Goodwill A/c – Cr
Handling Existing Goodwill on Partner Admission
When a new partner is admitted into a partnership firm, the existing assets and liabilities of the firm are typically revalued. Goodwill is one such asset that requires specific accounting treatment, especially if it already appears in the books of the firm before the new partner joins.
Existing goodwill in the books represents a value that the old partners might have recognized in the past. At the time of admitting a new partner, this existing goodwill is usually written off. This is because the new partner should not share the burden of the goodwill value that was created or recognized before their admission. Writing off existing goodwill brings its value in the books down to zero.
Journal Entry for Writing Off Existing Goodwill
The rule for dealing with existing goodwill at the time of a new partner's admission is to write it off by debiting the old partners' capital accounts in their old profit sharing ratio and crediting the goodwill account to eliminate its balance.
The journal entry to record the write-off of existing goodwill is:
Old Partners' Capital A/c (in old ratio) Dr. To Goodwill A/c
This entry reduces the capital balances of the old partners and removes the goodwill figure from the balance sheet.
Analyzing the Provided Options
Let's examine the given options based on the accounting principle for writing off existing goodwill:
- Old Partner’s Capital A/c – Dr; Goodwill A/c – Cr: This option matches the standard journal entry for writing off existing goodwill. The old partners' capital accounts are debited (reduced) because they bear the burden of writing off the old goodwill, and the Goodwill account is credited to eliminate the asset from the books.
- New Partner’s Capital A/c – Dr; Goodwill A/c – Cr: This is incorrect. The new partner is not responsible for the goodwill that existed before their admission, so their capital account should not be debited to write off existing goodwill.
- Gaining Partner’s Capital A/c – Dr; Sacrificing Partner’s Capital A/c – Cr: This entry is related to the adjustment of goodwill when a new partner brings in their share of goodwill or when goodwill is valued but not brought in cash. It represents a distribution of the new goodwill value among partners and is not used for writing off *existing* goodwill.
- Sacrificing Partner’s Capital A/c – Dr; Gaining Partner’s Capital A/c – Cr: This is the reverse of option 3 and is also related to adjusting new goodwill among partners based on changes in profit sharing ratio. It is not the entry for writing off existing goodwill.
Conclusion on Goodwill Treatment
Based on the analysis, the correct method to deal with goodwill that already exists in the books at the time of a partner's admission is to write it off among the old partners in their old profit sharing ratio. The journal entry involves debiting the old partners' capital accounts and crediting the goodwill account.
| Account Debited | Account Credited | Ratio |
|---|---|---|
| Old Partners' Capital A/c | Goodwill A/c | Old Profit Sharing Ratio |
Revision Table: Goodwill upon Partner Admission
| Situation | Accounting Treatment | Journal Entry (Example) |
|---|---|---|
| Existing Goodwill in Books (at admission) | Write off among old partners | Old Partners' Capital A/c (Dr) To Goodwill A/c (Cr) (In old ratio) |
| New Partner brings Goodwill in Cash (Premium Method) | Credit Goodwill/Premium for Goodwill A/c Distribute among sacrificing partners |
Cash/Bank A/c (Dr) To Goodwill/Premium for Goodwill A/c (Cr) Goodwill/Premium for Goodwill A/c (Dr) To Sacrificing Partners' Capital A/c (Cr) (In sacrificing ratio) |
| New Partner does not bring Goodwill in Cash (Valuation Method) | Adjust through capital accounts | Gaining Partners' Capital A/c (Dr) To Sacrificing Partners' Capital A/c (Cr) (With gaining/sacrificing share of total valued goodwill) |
Additional Information on Partner Admission Concepts
Partner admission leads to a reconstitution of the partnership firm. Several adjustments are required at this time, including:
- Calculation of New Profit Sharing Ratio.
- Calculation of Sacrificing and Gaining Ratios.
- Accounting treatment of goodwill (both existing and new).
- Revaluation of assets and liabilities.
- Distribution of accumulated reserves and profits/losses.
- Adjustment of partners' capital accounts.
The treatment of goodwill is a crucial step. While existing goodwill is written off, the new partner's contribution towards goodwill (either in cash or adjusted through capital accounts) is distributed among the old partners who sacrifice their share of future profits in favour of the new partner. This distribution happens in the sacrificing ratio.
Important Questions from Reconstitution of a Partnership : Admission of a Partner
Anita and Bindu are partners in a firm sharing profits in the ratio of 3:2. They admitted Meria as a new partner for 1/4th share. The new profit-sharing ratio between Anita and Bindu will be 2:1. What will be their sacrificing ratio?
Where a new partner brings his share of capital and goodwill in cash. Identify the correct treatment from the following options:
A and B share profits in the ratio of 3:4. They admitted C for 1/5th share in future profits with a guarantee that his share of profits shall be at least ₹30,000. In the above case, any deficiency to C will be borne by A and B in the ratio of:
M and N are partners sharing profit in the ratio of 3:1. They admit O as a new partner on 1st April, 2022. O brings ₹40,000 as his share of premium and the new profit-sharing ratio is 2:2:1. Identify the correct option related to treatment of Goodwill.
A and B are partners in a partnership firm, sharing profits in a 3:2 ratio. They agreed to admit a new partner C. A sacrifices 2/5 from his share and B sacrifices 1/5 from his share. Calculate the new profit-sharing ratio between A, B, and C.
