Mohan Lal and Sohan Lal were partners in a firm sharing profits and losses in 3:2 ratio. They admitted Ram Lal

Numerical Questions · Q24

Q. Mohan Lal and Sohan Lal were partners in a firm sharing profits and losses in 3:2 ratio. They admitted Ram Lal for 1/4 share on 1.1.2013. It was agreed that goodwill of the firm will be valued at 3 years purchase of the average profits of last 4 years which were ₹50,000 for 2013, ₹60,000 for 2014, ₹90,000 for 2015 and ₹70,000 for 2016. Ram Lal did not bring his share of goodwill premium in cash. Record the necessary journal entries in the books of the firm on Ram Lal's admission when:

(a) Goodwill already appears in the books at ₹2,02,500.

(b) Goodwill appears in the books at ₹2,500.

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Concept understanding — Admission Partner Adjustments

Let’s start with something you already know from daily life. Suppose you and a friend run a small tiffin service together. After a year, a third friend wants to join. You both agree to let her in. But the business has grown — you have a reputation, some regular customers, and maybe a little cash saved. She can’t just walk in and claim equal share of everything you built before she arrived. That wouldn’t be fair to you and your original partner.

So you sit down and decide: what is the business worth today? How much should the new partner bring in as her share of that past effort? And once she comes in, how do we rewrite the partnership deed so everyone’s rights are clear from Day 1?

That’s the heart of Admission of a Partner — and the adjustments that follow.

What does “Admission Partner Adjustments” mean?

When a new partner is admitted into an existing partnership, the old partnership is dissolved in the eyes of accounting, and a new one begins. The new partner brings in capital (cash or assets) and also buys a share of the goodwill — the value of the business’s reputation and past efforts. But that’s not all. Several things need to be revalued or adjusted so that the new partner doesn’t unfairly gain or lose from past decisions.

These adjustments are:

Revaluation of Assets and Liabilities – because the balance sheet values may be outdated.
Treatment of Goodwill – the new partner compensates old partners for their past efforts.
Adjustment of Reserves and Accumulated Profits/Losses – these belong to old partners only.
Adjustment of Capital Accounts – to bring all partners’ capitals in proportion to the new profit-sharing ratio.

Each of these has a clear accounting treatment. Let’s go through them one by one.

1. Revaluation of Assets and Liabilities

Why? The balance sheet shows assets at book value (historical cost minus depreciation). But the new partner should not benefit from an undervalued asset (like land that has appreciated) nor suffer from an overvalued one. Similarly, liabilities may be understated or overstated.

Accounting treatment:

We open a Revaluation Account (also called Profit & Loss Adjustment Account).

Increase in asset value → debit Asset, credit Revaluation A/c
Decrease in asset value → credit Asset, debit Revaluation A/c
Increase in liability → credit Liability, debit Revaluation A/c
Decrease in liability → debit Liability, credit Revaluation A/c

The net profit or loss on revaluation is transferred to the old partners’ capital accounts in their old profit-sharing ratio.

Note

The new partner does not share in revaluation profit/loss — it belongs entirely to the old partners.

Example format (Revaluation Account):

Particulars	₹	Particulars	₹
To Building (decrease)	10,000	By Land (increase)	20,000
To Provision for Doubtful Debts (increase)	5,000	By Creditors (decrease)	8,000
To Profit transferred to:
A’s Capital A/c (3/5)	7,800
B’s Capital A/c (2/5)	5,200
Total	28,000	Total	28,000

2. Treatment of Goodwill

Why? The new partner is buying a share of the business’s earning power built by old partners. She must compensate them for this.

Accounting treatment (as per NCERT):

The new partner brings her share of goodwill in cash. That cash is then withdrawn by the old partners (or left in the business). The journal entry:

When new partner brings goodwill in cash:

Cash/Bank A/c Dr.

To Goodwill A/c (or Premium for Goodwill A/c)
Then, distribute that amount to old partners in their sacrificing ratio:

Goodwill A/c Dr.

To Old Partners’ Capital A/cs (individually)

Watch out

The sacrificing ratio is the ratio in which old partners give up their share in favour of the new partner. It is not the same as the old ratio unless the new partner’s share is taken equally from all.

Sacrificing Ratio = Old Ratio – New Ratio

If the new partner does not bring cash for goodwill, we adjust through capital accounts (debit the new partner, credit the old partners).

3. Adjustment of Reserves and Accumulated Profits/Losses

Why? Any accumulated profits (like General Reserve, Profit & Loss A/c credit balance) belong to the old partners. The new partner should not get a share of past profits.

Accounting treatment:

Transfer the entire reserve/accumulated profit to old partners’ capital accounts in their old profit-sharing ratio.

Journal entry:

General Reserve A/c Dr.

To Old Partners’ Capital A/cs

Similarly, accumulated losses (debit balance of P&L A/c) are debited to old partners’ capital accounts.

4. Adjustment of Capital Accounts

Why? After all adjustments, the partners’ capitals may not be in the new profit-sharing ratio. The partnership deed may require capitals to be proportionate to profit shares.

Accounting treatment: …

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We first compute the value of goodwill. Average profit of the last four years:

(50,000 + 60,000 + 90,000 + 70,000)/4 = 2,70,000/4 = 67,500

Goodwill = 3 years’ purchase = $67,500 × 3 = 2,02,500$ .

Ram Lal’s share of goodwill = $1/4 × 2,02,500 = 50,625$ .

Since Ram Lal does not bring the premium in cash, the amount is adjusted through the existing partners’ capital accounts in their sacrificing ratio. Old ratio = 3:2; new ratio after Ram’s admission (1/4 share) is computed as:

Remaining share for old partners = $1 - 1/4 = 3/4$ .

Mohan’s new share = $3/4 × 3/5 = 9/20$ , Sohan’s new share = $3/4 × 2/5 = 6/20$ .

Sacrificing ratio = Old – New:

Mohan = $3/5 - 9/20 = (12-9)/20 = 3/20$ , Sohan = $2/5 - 6/20 = (8-6)/20 = 2/20$ .

Sacrificing ratio = 3:2 (same as old ratio).

Thus, the goodwill premium of ₹50,625 is credited to Mohan and Sohan in 3:2 ratio:

Mohan = $3/5 × 50,625 = 30,375$ , Sohan = $2/5 × 50,625 = 20,250$ .

Now, the treatment depends on whether goodwill already appears in the books and at what value.

(a) Goodwill already appears at ₹2,02,500

Since the existing goodwill exactly equals the computed value, no write-off is needed. Only the adjustment for Ram’s share is recorded.

Journal Entry:

Date	Particulars	Debit (₹)	Credit (₹)
2013 Jan 1	Ram Lal’s Capital A/c Dr.	50,625
	To Mohan Lal’s Capital A/c		30,375
	To Sohan Lal’s Capital A/c		20,250
	(Being Ram Lal’s share of goodwill adjusted through capital accounts, as he did not bring cash)

(b) Goodwill appears at ₹2,500

The existing goodwill of ₹2,500 is less than the computed ₹2,02,500. The old goodwill must be written off first (credited to old partners in old ratio), then the new goodwill adjustment is recorded.

Step 1 – Write off existing goodwill:

Date	Particulars	Debit (₹)	Credit (₹)
2013 Jan 1	Mohan Lal’s Capital A/c Dr. (3/5 of 2,500)	1,500
	Sohan Lal’s Capital A/c Dr. (2/5 of 2,500)	1,000
	To Goodwill A/c		2,500
	(Being existing goodwill written off in old ratio)

Step 2 – Record Ram’s share of goodwill:

Date	Particulars	Debit (₹)	Credit (₹)
2013 Jan 1	Ram Lal’s Capital A/c Dr.	50,625
	To Mohan Lal’s Capital A/c		30,375
	To Sohan Lal’s Capital A/c		20,250
	(Being Ram Lal’s share of goodwill adjusted)

(c) Goodwill appears at ₹2,05,000 …

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Goodwill is valued at ₹2,02,500 (3 years’ purchase of average profit ₹67,500). Ram Lal’s 1/4 share = ₹50,625. Since he does not bring cash, the existing goodwill balance is written off/adjusted against old partners’ capital accounts in their sacrificing ratio (3:2). Three cases are shown: (a) existing goodwill ₹2,02,500 – fully written off;

(b) ₹2,500 – written off, then Ram’s share credited to old partners;

Concept and Accounting Treatment

When a new partner is admitted, the firm’s goodwill must be valued. The new partner compensates the old partners for their sacrificed share of future profits. Here, Ram Lal is admitted for 1/4 share, so the old partners (Mohan Lal and Sohan Lal) sacrifice in their old ratio (3:2). The goodwill is valued at 3 years’ purchase of the average profits of the last 4 years.

Why this treatment?

Goodwill is an intangible asset. If it already appears in the books at an old value, that value is likely outdated. On admission, the existing goodwill account is written off (debited to old partners’ capital accounts in their old profit-sharing ratio) because it represents past super-profits that are now replaced by the new valuation.
The new partner’s share of goodwill (calculated on the new value) is then credited to the old partners’ capital accounts in their sacrificing ratio. Since Ram Lal does not bring cash, the adjustment is done through the capital accounts directly – no cash or bank entry.
If the existing goodwill is less than the new value, the difference is adjusted by crediting the old partners. If it is more, the excess is debited to the old partners (i.e., the book value is reduced to the new value).

Key rule: The net effect is that the old partners’ capital accounts are adjusted by the difference between the new goodwill share and the old goodwill written off. The journal entries ensure that the goodwill account shows the new value (or is eliminated if written off completely).

Step 1: Compute Goodwill Value

Average profit of last 4 years:

(50,000 + 60,000 + 90,000 + 70,000)/4 = 2,70,000/4 = 67,500

Goodwill = 3 years’ purchase of average profit:

3 × 67,500 = 2,02,500

Ram Lal’s share (1/4):

1/4 × 2,02,500 = 50,625

Old partners’ sacrificing ratio = old ratio = 3:2 (since no new ratio is given, they sacrifice in their old ratio).

Mohan Lal’s sacrifice: $3/5 × 50,625 = 30,375$

Sohan Lal’s sacrifice: $2/5 × 50,625 = 20,250$

Step 2: Journal Entries for Each Case

(a) Goodwill already appears in books at ₹2,02,500

Since the existing goodwill equals the new value, the old goodwill is written off against old partners’ capital accounts. Then Ram Lal’s share is credited to them. But because the amounts are identical, the net effect is zero – no entry is needed for goodwill adjustment. However, the standard procedure requires writing off the old goodwill first.

Journal Entry 1 – Write off existing goodwill:

Date	Particulars	Debit (₹)	Credit (₹)
2013 Jan 1	Mohan Lal’s Capital A/c Dr.	1,21,500
	Sohan Lal’s Capital A/c Dr.	81,000
	To Goodwill A/c		2,02,500
	(Existing goodwill written off in old ratio 3:2)

Journal Entry 2 – Credit Ram Lal’s share of goodwill to old partners:

Date	Particulars	Debit (₹)	Credit (₹)
2013 Jan 1	Ram Lal’s Capital A/c Dr.	50,625
	To Mohan Lal’s Capital A/c		30,375
	To Sohan Lal’s Capital A/c		20,250
	(Ram Lal’s share of goodwill credited to old partners in sacrificing ratio)

Why this two-entry approach is flawed:

Writing off the full existing goodwill and then crediting Ram Lal’s share produces a combined capital reduction of ₹91,125 (Mohan) + ₹60,750 (Sohan) = ₹1,51,875 — far more than the ₹50,625 that should actually change hands. The problem is that the existing goodwill (₹2,02,500) is exactly equal to the newly-valued goodwill, so writing it off and then re-crediting a share of the same value is redundant and distorts the partners' capital unnecessarily.

Watch out

Common mistake: When existing goodwill equals the new value, you do NOT write it off and then credit the new share. Instead, the new partner’s share is simply credited to old partners, and the existing goodwill remains unchanged. Writing it off would reduce capital unnecessarily. The correct treatment: Only adjust for the difference between the new goodwill and the old. Here, difference = 0, so no entry is needed for goodwill. But Ram’s share must still be credited. So only Entry 2 is required.

Corrected entry for case (a):

Date	Particulars	Debit (₹)	Credit (₹)
2013 Jan 1	Ram Lal’s Capital A/c Dr.	50,625
	To Mohan Lal’s Capital A/c		30,375
	To Sohan Lal’s Capital A/c		20,250
	(Ram Lal’s share of goodwill adjusted without touching existing goodwill)

(b) Goodwill appears in books at ₹2,500

Existing goodwill is much lower than the new value. The old goodwill is written off, and then Ram’s share is credited.

Journal Entry 1 – Write off existing goodwill:

Date	Particulars	Debit (₹)	Credit (₹)
2013 Jan 1	Mohan Lal’s Capital A/c Dr.	1,500
	Sohan Lal’s Capital A/c Dr.	1,000
	To Goodwill A/c		2,500
	(Existing goodwill written off in old ratio 3:2)

Journal Entry 2 – Credit Ram Lal’s share of goodwill:

Date	Particulars	Debit (₹)	Credit (₹)
2013 Jan 1	Ram Lal’s Capital A/c Dr.	50,625
	To Mohan Lal’s Capital A/c		30,375
	To Sohan Lal’s Capital A/c		20,250
	(Ram Lal’s share of goodwill credited to old partners)

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Concept and Accounting Treatment

Step 1: Compute Goodwill Value

Step 2: Journal Entries for Each Case

(a) Goodwill already appears in books at ₹2,02,500

(b) Goodwill appears in books at ₹2,500

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