Q.M and N are partners sharing profits in the ratio of 3:2. They admit O for a 1/5th share in profits. The goodwill of the firm is valued at ₹50,000. O is unable to bring in his share of goodwill in cash, though he brings in his agreed capital separately. Pass the necessary journal entry to record the goodwill adjustment.

Since O cannot bring cash for goodwill, the adjustment must be made entirely through the partners' capital accounts, without any cash changing hands.

Step 1 — Determine the new ratio and sacrificing ratio

O is admitted for 1/5th share; remaining 4/5th is shared by M and N in their old ratio of 3:2 (nothing else is stated).

M's new share = 3/5 × 4/5 = 12/25

N's new share = 2/5 × 4/5 = 8/25

O's share = 1/5 = 5/25

New Ratio M : N : O = 12 : 8 : 5

M's sacrifice = 3/5 − 12/25 = 15/25 − 12/25 = 3/25

N's sacrifice = 2/5 − 8/25 = 10/25 − 8/25 = 2/25

Sacrificing Ratio M : N = 3 : 2

Step 2 — Compute O's share of goodwill

Goodwill of the firm = ₹50,000

O's share of goodwill = 1/5 × ₹50,000 = ₹10,000

Since O does not bring this in cash, it must be adjusted purely through the capital accounts: O's Capital Account is debited with ₹10,000, and M's and N's Capital Accounts are credited with their shares of this amount in the sacrificing ratio of 3:2.

M's share = 3/5 × ₹10,000 = ₹6,000

N's share = 2/5 × ₹10,000 = ₹4,000

Step 3 — Journal Entry

A common error is opening a Premium for Goodwill Account even though no cash is being brought in for goodwill — when goodwill is NOT brought in cash, the adjustment is a direct capital-account-to-capital-account …