Book-Keeping and Accountancy · Ch 3 — Reconstitution of Partnership (Admission of Partner)
Accounting Treatment of Goodwill on Admission
Accounting Treatment of Goodwill on Admission
Once goodwill has been valued, it must actually be brought into the books in a way that compensates the old (sacrificing) partners fairly — never the new partner, and never in the old partners' OLD ratio unless that happens to be identical to the sacrificing ratio.
When the new partner brings his share of goodwill in cash
This is the case the MSBSHSE syllabus treats as the standard one. The new partner brings in, over and above his capital, an amount equal to his share of the firm's goodwill — this amount is called the Premium for Goodwill. It is credited to the OLD partners' capital accounts in their SACRIFICING ratio, never in the old profit-sharing ratio.
Premium for Goodwill
The amount a new partner brings in cash, over and above his own capital, representing his share of the firm's goodwill; credited to the old (sacrificing) partners' capital accounts in their sacrificing ratio.
| Transaction | Journal Entry |
|---|---|
| New partner brings capital and goodwill premium in cash | Cash/Bank A/c ...Dr (total amount brought in) To New Partner's Capital A/c (capital portion) To Premium for Goodwill A/c (goodwill portion) |
| Premium for Goodwill distributed to old partners | Premium for Goodwill A/c ...Dr To Old Partner 1's Capital A/c (his share of the sacrifice) To Old Partner 2's Capital A/c (his share of the sacrifice) |
If the old partners choose to withdraw part or all of this premium in cash rather than leave it invested in the business, a further entry debits their capital accounts and credits Cash/Bank for the amount withdrawn.
When the new partner cannot bring his share of goodwill in cash …
The amount a new partner brings in cash, over and above his own capital, representing his share of the firm's goodwill; credited to the old (sacrificing) partners' capital acco …