PARTNERSHIP ACCOUNTS: CHANGES

IN PARTNERSHIPS
• Partnership Accounts: Changes in Partnerships
• 3.1 Accounting Treatment of Goodwill
• 3.2 Journal and Ledger Entries for The Admission of a Partner
And/or An Outgoing Partner Including Those Relating to
Goodwill
• 3.3 The Effects of a Revaluation of Assets
Treatment of Goodwill
The incoming partner who acquires his share in
the profits of the firm from the existing partners brings
in some additional amount to compensate them for loss
of their share in super profits. It is termed as his share of
goodwill (also called premium). Thus, when a new
partner is admitted, goodwill can be treated in two
ways:
(1) By Premium Method, and
(2) By Revaluation Method.
1.Premium Method
This method is followed when the new partner
pays his share of goodwill in cash. The amount of
premium brought in by the new partner is shared by the
existing partners in their ratio of sacrifice. If this
amount is paid to the old partners directly (privately) by
the new partner, no entry is made in the books of the
firm. But, when the amount is paid through the firm, the
following journal entries are passed:
 Cash A/c Dr.
To Goodwill A/c
(Amount brought by new partner as premium)
Goodwill A/c Dr.
To Existing Partners Capital A/c
(Individually)
(Goodwill distributed among the existing
partners in their sacrificing ratio)
 Alternatively, it is credited to the new partner’s capital
account and then adjusted in favour of the existing partners in
their sacrificing ratio. In that case the journal entries will be as
follows:
Cash A/c Dr.
To New Partner’s Capital A/c
(Amount brought by new partner for his share of goodwill)
New Partner’s Capital A/c Dr.
To Existing Partner’s Capital A/cs (Individually)
(Goodwill brought by new partners distributed among the
existing partners in their sacrificing ratio)
Existing Partner’s Capital A/c (Individually) Dr.
To Cash A/c
(The amount of goodwill withdrawn by the existing partners)
 Illustration
Anil and Dileep are partners in a firm sharing profits and
losses in the ratio of 5:3. Sajan is admitted in the firm for 1/5
share of profits. He is to bring in Rs. 20,000 as capital and Rs.
4,000 as his share of goodwill. Give the necessary journal
entries :
(a) When the amount of goodwill is retained in the business.
(b) When the amount of goodwill is fully withdrawn.
(c) When 50% of the amount of goodwill is fully withdrawn.
 When The Amount Of Goodwill Credited To Existing Partners
Is Retained In Business
Books of Anil &
Dileep
Journal Entry
Date Particular l/f Debit (Rs) Credit(Rs)
Cash A/c Dr. 24,000
1
To Sajan’s Capital A/c 20,000
To Goodwill A/c 4,000
(The amount brought in by Sajan as Capital and
Goodwill)
2
Goodwill A/c Dr. 4,000
To Anil’s Capital A/c 2,500
To Dileep’s Capital A/c 1,500
(Goodwill transferred to Anil and Dileep in the ratio of
5:3)
Alternatively, if the goodwill account is not be the brought into
the books of accounts the following entries will be recorded:

(i) Cash A/C Dr. 24,000

To Sajan’s Capital A/c
24,000
(ii) Sajan’s Capital A/c Dr 4,000
To Anil’s Capital A/c 2,500
To Dileep’s Capital A/c 1,500

Note: It assumed that the sacrificing ratio is the same as old

profit sharing ratio.
 (b) When the amount of goodwill credited to
existing partners is fully withdrawn.
Journal
Date Particular l/f Debit (Rs) Credit(Rs)

Cash A/c Dr. 24,000

1 To Sajan’s Capital A/c 20,000
To Goodwill A/c 4,000
(The amount brought in by Sajan as Capital and
Goodwill)
2 Goodwill A/c Dr. 4,000
To Anil’s Capital A/c 2,500
To Dileep’s Capital A/c 1,500
(Goodwill transferred to Anil and Dileep in the ratio
3
of 5:3)
Anil’s Capital A/c Dr. 2,500
Dileep’s Capital A/c Dr. 1,500
To Cash A/c 4,000
(Cash withdrawn by Anil and Dileep equal to their
share of goodwill)
 (c) When 50% of the amount of goodwill credited to
existing partners is withdrawn.
Journal
Date Particular l/f Debit (Rs) Credit(Rs)

Cash A/c Dr. 24,000

1 To Sajan’s Capital A/c 20,000
To Goodwill A/c 4,000
(The amount brought in by Sajan as Capital and
Goodwill)
Goodwill A/c Dr. 4,000
2 To Anil’s Capital A/c 2,500
To Dileep’s Capital A/c 1,500
(Goodwill transferred to Anil and Dileep in the ratio of
5:3)
3 Anil’s Capital A/c Dr. 1250
Dileep’s Capital A/c Dr. 750
To Cash A/c 2,000
(Cash withdrawn for 50% of their share of goodwill)
When Goodwill Already Exists In Books
It is quite possible that when a new partner brings in
his share of goodwill in cash, some amount of goodwill
already exists in books. In that case, after crediting the old
partners by the amount of goodwill brought in by the new
partner, the existing goodwill must be written off by debiting
the old partners in their old profit sharing ratio.
But, if it is decided that the goodwill may continue to
appear in the books at its old value, the amount to be brought
in by new partner will have to be proportionately reduced
i.e., He will be required to bring cash only for this share of
the excess of the agreed value of goodwill over the amount
of goodwill already appearing in books.
2.Revaluation Method
This method is followed when the new partner does not
bring in his share of goodwill in cash. In such a situation, the
goodwill account is raised in the books of account by crediting
the old partners in the old profit sharing ratio. When goodwill
account is to be raised in the books of account there are two
possibilities,
(a) No goodwill appears in books at the time of admission, and
(b) Goodwill already exists in books at the time of admission.
When no goodwill exists in the books
When no goodwill exists in the books at the time of the
admission of a new partner, the goodwill account must be raised
at its full value. This can be done by debiting goodwill account
with its full value and crediting the old partners’ capital accounts
in their profit sharing ratio. The journal entry will be:
Goodwill A/c Dr.
To Old Partners’ Capitals A/c (individually)
(Goodwill raised at full value in the old ratio)
The goodwill thus raised shall appear in the balance sheet of the
firm at its full value.
 When goodwill already exists in the books
If the books already show some balance in the Goodwill
Account, the adjustment for goodwill in the old partner’s capital
accounts shall be made only for the difference between the agreed
value of goodwill and the amount of goodwill appearing in books.
The amount of goodwill appearing in the books may be less than
its agreed value or it may be more than the agreed value. If it is
less than the agreed value, the difference between the agreed value
of goodwill and the amount of goodwill appearing in the books
will be debited to goodwill account and credited to old partner’s
capital accounts in their old profit sharing ratio. If, however, it is
more than the agreed value, the difference will be debited to the
old partners’ capital accounts in their old profits sharing ratio and
credited to the goodwill account.
(a) When the value of goodwill appearing in the books is less
than the agreed value.
Goodwill A/c Dr.
To Old Partners’ Capital A/c (individually)
(Goodwill raised to its agreed value)
(b) When the value of goodwill appearing in the books is
more than the agreed value.
Old Partners’ Capital A/c (individually) Dr.
To Goodwill A/c
(Goodwill brought down to its agreed value)
Illustration
Partners May Decide Not To Show Goodwill Account
Anywhere in Books

New Partner’s Capital A/C Dr

To Old Partner’s Capitals ( Sacrificing Ratio)
Hidden Goodwill
Sometimes the value of goodwill is not
given at the time of admission of a new partner.
In such a situation it has to be inferred from the
arrangement of the capital and profit sharing
ratio.
Illustration
Hemand and Nibu are partners in a firm sharing
profits in the ratio of 3:2. Their capitals were Rs. 50,000
and Rs. 30,000 respectively. They admitted Sameer on
Jan. 1, 2011 as a new partner for 1/5 share in the future
profits. Sameer brought Rs. 40,000 as his capital.
Calculate the value of goodwill of the firm and record
necessary journal entries on Sam’s admission.
Solution

Value of Firm’s Goodwill

Sameer’s capital = Rs. 40,000
Sameer’s share = 1/5
Total capital of new firm = 5 ×Rs.40,000 = Rs. 2,00,000
Hemand’s + Nibu’s + Sameer’s = Rs.50,000 + Rs. 30,000 + Rs.40,000
= Rs.1,20,000
Goodwill of the firm =Rs.80,000(Rs.2,00,000-Rs.1,20,000)
Sameer’s share = 1/5× Rs.80,000 = Rs. 16,000
Date Particular l/f Debit (Rs) Credit(Rs)

1 Cash A/c Dr. 40,000

To Sameer’s Capital A/c 40,000
(The amount brought in by Sameer as Capital)
Goodwill A/c Dr.
2 To Hemand’s Capital A/c 80,000
To Nibu’s Capital A/c 48000
(Goodwill transferred to Hemand and Nibu in the ratio of 32000
3:2)
If goodwill account is not to be raised
3 Sameer’s Capital A/C Dr 16000
To Hemand’s Capital A/c 9600
To Nibu’s Capital A/c 6400
(Amount of goodwill of new partner adjusted )