Q.State the accounting treatment when a new partner brings his share of goodwill in cash, and the treatment when he is unable to do so.

Cash goodwill flows through a Premium for Goodwill Account before reaching the old partners; goodwill not brought in cash is adjusted directly between the new and old partners' own capital accounts.

When the new partner brings his share of goodwill in CASH, the amount is first recorded through a Premium for Goodwill Account (bundled together with his capital contribution in a single Bank entry, then split): Bank A/c Dr (capital + premium); To New Partner's Capital A/c (capital only); To Premium for Goodwill A/c (premium only). The premium is then transferred out entirely to the old partners' Capital Accounts, in their sacrificing ratio: Premium for Goodwill A/c Dr; To Old Partners' Capital A/cs (sacrificing ratio). If the old partners are permitted to withdraw some or all of this amount in cash rather than retaining it as capital, a further entry follows: Old Partners' Capital A/cs Dr (amount withdrawn); To Bank A/c.

When the new partner is UNABLE to bring his share of goodwill in cash, no Bank or Premium for Goodwill entry is possible at all, since no cash has actually moved. Instead, the adjustment is made purely within the capital accounts: the new partner's own Capital Account is debited with his share of the firm's valued goodwill, and the old partners' Capital Accounts are credited with the same amount, again in their sacrificing ratio: New Partner's Capital A/c Dr (his share of goodwill); To Old Partners' Capital A/cs (sacrificing ratio). …

Students sometimes open a separate "Goodwill Account" as a fixed asset for the FULL value of the firm's goodwill under the non-cash method — the correct, currently followed treatment adjusts only the incoming partner's OWN SHARE of goodwill di …