Verma and Sharma are partners in a firm sharing profits and losses in the ratio of 5:3. They admitted Ghosh as

Numerical Questions · Q18

Q. Verma and Sharma are partners in a firm sharing profits and losses in the ratio of 5:3. They admitted Ghosh as a new partner for 1/5 share of profits. Ghosh is to bring in ₹20,000 as capital and ₹4,000 as his share of goodwill premium. Give the necessary journal entries:

(a) When the amount of goodwill is retained in the business.

(b) When the amount of goodwill is fully withdrawn.

(d) When goodwill is paid privately.

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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Revaluation of Assets and Liabilities – because the balance sheet values may be outdated.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 sacrificing ratio. Verma and Sharma’s old ratio is 5:3. Ghosh gets 1/5 share. The remaining 4/5 is shared by the old partners in their old ratio.

Sacrifice = Old share × New profit share of the firm (4/5).

Verma sacrifices: 5/8 × 4/5 = 20/40 = 1/2

Sharma sacrifices: 3/8 × 4/5 = 12/40 = 3/10

Sacrificing ratio = 1/2 : 3/10 = 5:3 (same as old ratio). Goodwill of ₹4,000 is shared by Verma and Sharma in 5:3.

(a) Goodwill retained in business

Particulars	Debit (₹)	Credit (₹)
Bank A/c Dr.	24,000
To Ghosh’s Capital A/c		20,000
To Premium for Goodwill A/c		4,000
(Being capital and goodwill brought by Ghosh)
Premium for Goodwill A/c Dr.	4,000
To Verma’s Capital A/c		2,500
To Sharma’s Capital A/c		1,500
(Being goodwill credited to old partners in sacrificing ratio 5:3)

(b) Goodwill fully withdrawn

Particulars	Debit (₹)	Credit (₹)
Bank A/c Dr.	24,000
To Ghosh’s Capital A/c		20,000
To Premium for Goodwill A/c		4,000
(Being capital and goodwill brought)
Premium for Goodwill A/c Dr.	4,000
To Verma’s Capital A/c		2,500
To Sharma’s Capital A/c		1,500
(Being goodwill credited to old partners)
Verma’s Capital A/c Dr.	2,500
Sharma’s Capital A/c Dr.	1,500
To Bank A/c		4,000
(Being goodwill withdrawn by old partners)

(c) 50% of goodwill withdrawn

50% of ₹4,000 = ₹2,000 withdrawn. Verma withdraws 5/8 × 2,000 = ₹1,250; Sharma withdraws 3/8 × 2,000 = ₹750.

Particulars	Debit (₹)	Credit (₹)
Bank A/c Dr.	24,000
To Ghosh’s Capital A/c		20,000
To Premium for Goodwill A/c		4,000
(Being capital and goodwill brought)
Premium for Goodwill A/c Dr.	4,000

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Journal entries for Ghosh’s admission: (a) Goodwill retained — Dr. Bank ₹24,000, Cr. Ghosh’s Capital ₹20,000, Cr. Premium for Goodwill ₹4,000; then Dr. Premium for Goodwill ₹4,000, Cr. Verma’s Capital ₹2,500, Cr. Sharma’s Capital ₹1,500. (b) Goodwill fully withdrawn — same entry plus Dr. Verma’s Capital ₹2,500, Dr. Sharma’s Capital ₹1,500, Cr. Bank ₹4,000. (c) 50% withdrawn — same as (b) but for ₹2,000. (d) Private payment — no entry in firm’s books.

Concept and Accounting Treatment

When a new partner is admitted, they bring in their share of goodwill (premium) to compensate the existing partners for the sacrifice of their profit share. The accounting treatment depends on what happens to that amount:

Goodwill retained in business: The premium is credited to the existing partners in their sacrificing ratio (here, the old ratio 5:3, since Ghosh’s share is taken equally from both). The journal entry is: Dr. Bank (or Cash) A/c, Cr. Premium for Goodwill A/c. Then, Dr. Premium for Goodwill A/c, Cr. Old Partners’ Capital A/cs (in sacrificing ratio).
Goodwill fully or partly withdrawn: After the above entry, the partners withdraw the amount (or part of it) from the firm. The entry is: Dr. Old Partners’ Capital A/cs (in sacrificing ratio), Cr. Bank A/c.
Goodwill paid privately: The new partner pays the existing partners directly outside the firm. No entry is passed in the firm’s books because the firm’s cash is not involved.

The sacrificing ratio here is the same as the old ratio (5:3) because Ghosh’s 1/5 share is taken equally from both partners — no new ratio is given, so we assume the sacrifice is in the old ratio.

Solution: Journal Entries

(a) When the amount of goodwill is retained in the business

Particulars	Debit (₹)	Credit (₹)
Bank A/c Dr.	24,000
To Ghosh’s Capital A/c		20,000
To Premium for Goodwill A/c		4,000
(Being capital and goodwill premium brought in by Ghosh)
Premium for Goodwill A/c Dr.	4,000
To Verma’s Capital A/c		2,500
To Sharma’s Capital A/c		1,500
(Being goodwill premium credited to old partners in sacrificing ratio 5:3)

Working Note 1: Sacrificing Ratio

Old ratio of Verma and Sharma = 5:3.
Ghosh’s share = 1/5. This is taken equally from both partners (since no new ratio is given, the sacrifice is in the old ratio).
Verma’s sacrifice = 5/8 of 1/5 = 5/40 = 1/8.
Sharma’s sacrifice = 3/8 of 1/5 = 3/40.
Sacrificing ratio = 5:3 (same as old ratio).
Goodwill premium ₹4,000 shared: Verma = 4,000 × 5/8 = ₹2,500; Sharma = 4,000 × 3/8 = ₹1,500.

(b) When the amount of goodwill is fully withdrawn

Particulars	Debit (₹)	Credit (₹)
Bank A/c Dr.	24,000
To Ghosh’s Capital A/c		20,000
To Premium for Goodwill A/c		4,000
(Being capital and goodwill premium brought in)
Premium for Goodwill A/c Dr.	4,000
To Verma’s Capital A/c		2,500
To Sharma’s Capital A/c		1,500
(Being goodwill credited to old partners)
Verma’s Capital A/c Dr.	2,500
Sharma’s Capital A/c Dr.	1,500
To Bank A/c		4,000
(Being goodwill amount withdrawn by old partners)

(c) When 50% of the amount of goodwill is withdrawn

Particulars	Debit (₹)	Credit (₹)
Bank A/c Dr.	24,000
To Ghosh’s Capital A/c		20,000
To Premium for Goodwill A/c		4,000
(Being capital and goodwill brought in)
Premium for Goodwill A/c Dr.	4,000

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Q.Verma and Sharma are partners in a firm sharing profits and losses in the ratio of 5:3. They admitted Ghosh as a new partner for 1/5 share of profits. Ghosh is to bring in ₹20,000 as capital and ₹4,000 as his share of goodwill premium. Give the necessary journal entries:

Concept and Accounting Treatment

Solution: Journal Entries

(a) When the amount of goodwill is retained in the business

(b) When the amount of goodwill is fully withdrawn

(c) When 50% of the amount of goodwill is withdrawn

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