When the incoming partner cannot bring premium for goodwill, then the necessary adjustment for goodwill is done through which one of the following?
Capital account of the new partners
Understanding Goodwill Adjustment When New Partner Cannot Bring Premium
When a new partner joins a partnership firm, they are usually required to bring in their share of capital. In addition to capital, if the firm has existing goodwill, the incoming partner is also expected to bring in their share of the goodwill premium in cash. This premium is then distributed among the old partners who have sacrificed their share of future profits in favour of the new partner.
Accounting for Goodwill Premium Not Brought in Cash
However, there are situations where the incoming partner is unable to bring their share of the goodwill premium in cash. In such cases, the necessary adjustment for goodwill is made directly through the partners' capital accounts.
The new partner's share of goodwill is calculated, and instead of debiting a Cash or Bank account (as premium is not brought in cash), the new partner's Capital Account or Current Account is debited. This effectively reduces their capital balance or creates a debit balance in their current account, representing their obligation for the goodwill premium.
The corresponding credit is given to the Capital Accounts of the sacrificing partners in their sacrificing ratio. This increases the capital balances of the old partners who have given up their share of profits.
The Journal Entry Involved
The typical journal entry when the new partner cannot bring premium for goodwill in cash is:
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| New Partner's Capital/Current A/c Dr. | [New Partner's Share of Goodwill] | ||
| To Sacrificing Partners' Capital A/cs | [Distributed in Sacrificing Ratio] | ||
| (Being adjustment for goodwill made through partners' capital accounts) |
Analyzing the Options for Goodwill Adjustment
Let's look at the given options in the context of goodwill adjustment when the premium is not brought in cash:
- Goodwill account of the partners: While a Goodwill Account might exist in some accounting methods (though usually not preferred under Accounting Standard 26 unless purchased), adjustments for premium brought in/not brought in cash typically directly involve the partners' capital or current accounts, not a separate "Goodwill account of the partners".
- Capital account of the new partners: This aligns with the accounting treatment described above. The new partner's capital (or current) account is debited to account for their share of goodwill when the premium is not paid in cash. This is the mechanism used for the adjustment. The phrase "new partners" is slightly inaccurate if only one new partner is admitted, but the core idea points to the capital account of the incoming partner(s).
- Balance sheet of the new partnership firm: The Balance Sheet is a statement showing assets, liabilities, and capital. While the capital accounts adjusted for goodwill will appear on the Balance Sheet, the adjustment process itself (the journal entry) does not happen *in* the Balance Sheet.
- Profit & Loss Appropriation accounts: The Profit & Loss Appropriation Account is used for distributing profits among partners. Goodwill adjustments are not typically routed through this account.
Based on the standard accounting practice for goodwill adjustment when premium is not brought in cash, the adjustment is made by debiting the incoming partner's capital or current account and crediting the sacrificing partners' capital accounts. Therefore, the Capital account of the new partners is directly involved in this adjustment.
Revision Table: Key Concepts
| Concept | Explanation | Treatment if Premium NOT brought in cash |
|---|---|---|
| Goodwill Premium | Amount paid by new partner for share of firm's goodwill. | Adjusted through partners' Capital/Current Accounts. |
| Sacrificing Ratio | Ratio in which old partners give up profit share. | Premium (whether brought in or adjusted) is credited to sacrificing partners in this ratio. |
| New Partner's Capital A/c | Account showing new partner's capital contribution and share of profits/losses. | Debited with their share of goodwill if premium is not brought in cash. |
Additional Information: Goodwill Accounting Methods
Beyond the premium method discussed, other methods for accounting for goodwill upon admission of a partner might exist, such as the Revaluation Method (where goodwill is raised and written off) or memorandum methods. However, the premium method, especially with the adjustment through capital accounts when cash is not paid, is a commonly tested scenario.
It is important to distinguish between bringing the premium in cash (where Cash/Bank A/c is debited and Premium for Goodwill A/c is credited, and then Premium A/c is debited and Sacrificing Partners' Capital A/cs are credited) and not bringing the premium in cash (where the New Partner's Capital/Current A/c is directly debited). The question specifically addresses the latter scenario.
Important Questions from Partnership
Kiran, Vimal and Naveen started a business by investing Rs. 1,35,000, Rs. 1,50,000 and Rs. 1,65,000 respectively. Find the share of each (respectively), out of an annual profit of Rs. 60,000.
Which one of the following rights is usually not available to a partner consequent to the dissolution of a firm?
A, B, C invest Rs. 20000, Rs. 30000, Rs. 40000 in a business. After one year, A withdrew his money but B and C continued for one more year. If the net profit after 2 years be Rs. 32000, then A’s share in the profit is:
Manoj received Rs. 6000 as his share out of the total profit of Rs. 9000 which he and Ramesh earned at the end of one year. If Manoj invested Rs. 20000 for 6 months, whereas Ramesh invested his amount for the whole year, what was the amount invested by Ramesh?
Three friends A, B, and C invested Rs. 20,000, Rs. 18,000, and Rs. 14,000, respectively in a business. If at the end of the year they got a profit of Rs. 7,800, then the profit share of B would be:
