Q.A firm's profits for the last three years are ₹5,00,000; ₹4,00,000 and ₹6,00,000. Calculate value of firm's goodwill on the basis of four years' purchase of the average profits for the last three years.

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:

1. Revaluation of Assets and Liabilities – because the balance sheet values may be outdated.
2. Treatment of Goodwill – the new partner compensates old partners for their past efforts.
3. Adjustment of Reserves and Accumulated Profits/Losses – these belong to old partners only.
4. 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.

Example format (Revaluation Account):

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:

1. When new partner brings goodwill in cash:

   Cash/Bank A/c Dr.

   To Goodwill A/c (or Premium for Goodwill A/c)

2. Then, distribute that amount to old partners in their sacrificing ratio:

   Goodwill A/c Dr.

   To Old Partners’ Capital A/cs (individually)

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:

Calculate the total capital of the new firm based on the new partner’s capital contribution. Then determine each partner’s required capital. The difference is adjusted by bringing in or withdrawing cash.

Journal entry for excess capital withdrawn:

Partner’s Capital A/c Dr.

To Cash/Bank A/c

For deficiency (partner brings in more):

Cash/Bank A/c Dr.

To Partner’s Capital A/c

Putting it all together: A proforma Capital Account

Here’s how a Partner’s Capital Account looks after admission adjustments (NCERT format):

Why does this matter for your exam?

NCERT Class 12 Accountancy (Part II, Chapter 3 – Admission of a Partner) treats this as a step-by-step process. You will be asked to:

• Prepare Revaluation Account
• Prepare Partners’ Capital Accounts
• Calculate sacrificing ratio
• Pass journal entries for goodwill

The key is to never skip a step. Always start with revaluation, then goodwill, then reserves, then capital adjustment. Each step feeds into the next.

Final takeaway: Admission of a partner is not just about bringing in cash. It’s about fairly resetting the score so that the new partner starts on equal footing with the old ones, without taking away what the old partners earned before she arrived. Every adjustment — revaluation, goodwill, reserves, capital — serves that single idea.