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1. Changes or adjustment to the Profit Sharing
Ratio (PSR) of existing partners
2. Admission of a New Partner
3. Death or Retirement of an existing partner.
 GENERAL IDEA
› Upon changes, old partnership (OPSR)
dissolved. New partnership being formed
(NPSR).
 PERIOD
› Beginning, ending or during accounting
period
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1. Retirement or death of a partner
› Remaining balance in current a/c &
capital a/c will be paid to him.
› Amount may be paid in cash, installments
or by taking over assets. If installments,
balance unpaid will be recorded as loan to
business (may include interest on loan).
› Once amount owe is paid, there will be no
Bal c/d in either current or capital
account.
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2. Admission of partner
 Existing partners will want to ensure receive full
entitlement up to date of admission.
 As for new partner, he does not bear any losses
which may arise before admission.
 Usually brought in capital and premium goodwill.
 custom for the new partner to pay (subject to
agreement) into the firm a certain sum of money as
contribution towards the capital of the business.
 Additional amount in respect of g/will – regard as
premium (considered as form of compensation for
the old partners).

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3. Changes in profit sharing ratio, maybe due
to changes of roles in management.
Example:
 Kay and Lee sharing profit and loss in the
ratio of 3:2. They have decided to admit Mir
as a new partner. Mir is to receive 1/11 of
the profit. Calculate the new profit sharing
ratio for Kay and Lee.

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 When changes occur, most appropriate to calculate current
value of net assets. Allow partners to determine current worth of
their share of net assets by revaluing the net assets
 Carrying VALUES (in SoFP) are reassessed to reflect their
market values.
 Revalued amount may be higher or lower than BV result in either
profit or loss to the business.
 Hence old partners are affected by the changes and this profit or
loss must be shared.
 Profit or loss on revaluation will be transferred to partner’s capital
a/c (OPSR). If required by partnership agreement may be
transferred to current a/c.
 The assessment of the assets may be performed by employees
of the company or hiring professional valuer. Any cost incurred
during this process (revaluation) is known as Revaluation
expenses.
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Accounting Treatment for Revaluation of Assets
 Total increase of assets > total decrease of assets = Profit on
Revaluation
 Total increase of assets < total decrease of assets = Loss on
Revaluation
REVALUATION ACCOUNT
Debit Credit
•Decrease in the value of assets – •Increase in value of assets
either fixed or current except cash except cash and bank.
and bank (credited) •Share of revaluation losses (Dr.
•Expenses incurred on revaluation capital account) – used OPSR
(credit cash or bank if already paid
or credit accrued expense if not yet
paid)
•Share of revaluation profits (Cr.
Capital account) – used OPSR

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Illustration 1:
Cici and Didi are partners sharing P/L equally.
They decided to change their PSR to 2:1. On the
date of the change they revalue the following
assets:
Old value New value
Building 10,000 30,000
Motor Vehicles 5,000 2,000
Stocks 4,000 1,500

Show the revaluation entries

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 Excess amount of value of business as a whole & total value of
tangible net assets. (to compensate & reward)
 It is intangible assets and calculated when the business is sold
or when changes occurred.
 Arise from a combination of various factors:
1. Personal characteristics of the owner (e.g. charm, the ability to
make customers feel that they are very special people.
2. Quality of the goods sold
3. The situation of the premises at which the business is carried on
(e.g. a good position on a busy high street)
4. Possession of near-monopoly rights (e.g. a firm may have been
appointed as the main agent in the area for a firm of car
manufactures)
5. Personal reputation of partners
6. Possession of efficient employees
7. Possession of trade marks, patents and a well-known business
name.
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1. Average Annual Method
 Calculation of g/will based on past years average profit.
G/will is calculated as follows:
 Find Average Annual Profits : profits for an agreed no. of
years preceding the valuation – average
 Value of goodwill = Average Profits X no. of years purchase
 Illustration 2 (Average Annual Profit)
 A, B and C are in p/ship business. On 1/1/2011, they
decided to admit D as a partner. Goodwill was to be
calculated by taking 3 years’ purchase of the average net
profit over the last 4 years. Calculate the amount of share of
g/will to be shared by the partners
 2011 – 12,300 2010 -15,000 2009 –
14,325
2008 – 15,675 EmyWahid 2013
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2. Super profit Method
 Super profit is a profit after deducting any salary to the
partners and interest that would have been earned if the
company invested elsewhere.

Average net profit

Less: Salary of partners
Amount of capital invested (% x return of capital
employed)
SUPER PROFIT

G/will = SUPER PROFIT x no. of years purchase

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 Illustration 3 (Super Profit Method)
 The average net profits expected in the future by
H, I and J are RM 10,000 p.a. The average
capital employed in the business is RM 50,000.
The rate of interest expected from capital
invested in this class of business, having regard
to the risk involved is 10%. Fair remuneration to
the partners of the firm in respect of their
services is estimated to be RM 2,500 p.a.
Calculate the g/will if the purchase of the
average super profits is for 3 years.

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3. Using Premium goodwill of new partner
 New partner usually bring in new capital and goodwill for
the existing partnership. With the new profit sharing ratio
and premium goodwill of new comer, amount of goodwill
can be determined.
Illustration 4:
 Yuki and Oda are in partnership business sharing profit
and losses in the ratio 2:3. On 1 April 2012, they decided
to admit Nano as a new partner. The new profit sharing
ratio between Yuki, Oda and Nano was 2:2:1 respectively.
Nano brought in RM 65,000 cash as her capital
contribution and RM 4,500 as premium goodwill. Show the
calculation of total goodwill.
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• When changes in partnership occurred, goodwill maybe generated.
However, this type of goodwill is known as internally generated
goodwill.
• Hence goodwill need to be WRITTEN OFF (eliminates goodwill from
p/ship books)
1. Before the changes, allocate to old partners using the OPSR
(Open G/will book)
2. After the changes, write off to new partners using NPSR (Close
G/will book)
• Why write off? Based on the argument that value of g/will is highly
subjective as it is based on estimates. Hence, amount is not reliable
and should not be recorded as asset.

To record goodwill To write off goodwill

Dr: Goodwill account Dr: Partner’s capital account (NPSR)
Cr: Partner’s capital account (OPSR) Cr: Goodwill account

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 Goodwill account
OPSR: Capital a/c NPSR: Capital a/c

A xx A xxx

B xx B xxx
C xxx
XXX XXX

Illustration 5: Ace and Bill are partners, sharing profit and

losses equally. They agree to admit Cathy as a new partner
ad the new profit sharing ratio is 2:2:1.Cathy paid RM 20,000
as her capital. The value of g/will is agreed at RM 10,000.

Shows the ledger entries and goodwill account

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 When changes takes place during the accounting period, it is
necessary for the partnership to apportion profits/loss before & after
changes.
 Before the change – record in “pre” column and after the change –
record in “post’ column
 Generally, net profit assumed to be accrue evenly throughout
accounting period unless stated otherwise. Hence calculation will be
based on ‘Time basis’.
 Any yearly payment need to be apportioned (based on time
apportionment) unless stated otherwise in the question.
 Interest on capital for post period is calculated based on new capital
balance after making adjustment for goodwill and revaluation.
 A partnership may also be provided with guaranteed minimum profit.
› If his share is less than he expected to receive, other partners will
have to bear the difference in value.
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1. Prepare goodwill & revaluation account
2. Prepare Appropriation Statement pre-period
3. Close current account of retired partner. Transfer any
balance due to his capital account.
4. Settle retired partner’s capital account. Paid for any balance
due, label as bank or cash and/or loan (if he lend his money
to new partnership) and asset (if he take over asset as
payment for his balance).
5. Settle other partners’ capital account. Record contribution
of new admitted partner. Determine their Bal c/d (if IOC for
post period based on closing balance)
6. Prepare Appropriation Statement Post-period. Adjust net
profit for any interest on loan.
7. Determine Bal c/d of remaining partner’s current account.
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 General steps: Retirement &
Admission case
Revaluation & Pre column – Closed current
Goodwill a/c Appropriation a/c - retired

Bal off current Retirement Closed capital

a/c - others & Admission a/c - retired

Post column - Balance of capital

Appropriation a/c - others

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