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Accounting Treatment of Goodwill on the Admission of a New Partner

There may be three situations related to treatment of goodwill (premium) at the time of admission of a new partner :

 

(1) When the amount of goodwill (premium) is paid privately.
 

(2) When the new partner brings his share of goodwill (premium) in Cash.
 

(3)  When the new partner does not bring his share of goodwill (premium) in Cash.
 

These situations are discussed below:

When the amount of goodwill (premium) is paid privately:

When the new partner pays the amount of goodwill in cash to the old partners privately outside the business, no entries are required to be passed.

When the new partner brings his share of goodwill (premium) in cash:
 

According to this method there are two alternatives:

When The Amount Of Goodwill/Premium Brought In By The New Partner Is Retained In The Business

If the new partner brings in his share of goodwill in cash and this amount is retained in the business, the amount is credited to the Capital Accounts of old partners in their sacrificing ratio. The following two entries are passed for this purpose :
 

(a)  Cash/Bank/A/c.

Dr.

 

To Premium A/c.

 
(For the amount of goodwill/premium brought in cash by new partner)

 

(b)   Premium A/c.

Dr.

 

To Old Partners’ Capital A/c’s

(For the amount of goodwill/premium transferred to old partners’ capital accounts in sacrificing ratio)

When Goodwill/Premium Brought In By The New Partner Is Withdrawn By The Old Partners

 

Sometimes, the amount of goodwill brought in by new partner is withdrawn by the old partners.
In this case, in addition to the two Journal entries explained above in (i), one more Journal entry is required to be passed :

 

 

Old Partner’s Capital A/cs

Dr.

 

To Cash/Bank A/c


(For the amount of goodwill/premium withdrawn by the old partners)

It must be noted that sometimes partners withdraw only 1/2 or 1/4  amount of goodwill. In such case, entry should be passed with the withdrawn amount only.

When Goodwill Already Appears In The Books And New Partner

Brings his share of goodwill/premium in Cash
 

If new partner brings his share of goodwill in cash, and if the Goodwill Account already appears in the books of the firm, first of all the existing Goodwill Account will have to be written off. For this purpose old Partners’ Capital Accounts are debited in their old profit sharing ratio and Goodwill Account is credited. Thus, the following entry is passed to write off the existing goodwill :
 

Old Partner’s Capital A/cs

Dr.

 

To Goodwill A/c.


(For goodwill written off in old ratio

 

When the goodwill of the firm is evaluated and the new partner does not bring his share of goodwill in cash, goodwill should be adjusted through partner’s capital accounts. For this purpose new partner’s capital account is debited from his share of goodwill and the old partner’s capital accounts are credited in their sacrificing ratio.


Following journal entry is passed for this purpose :

New Partner’s Capital A/c.              Dr.    (From his share of goodwill)

   
To Old Partner’s Capital A/c.             (In sacrificing ratio)


(For Capital Account of new partner debited from
his share of goodwill on his admission and Capital Accounts of old partner’s Credited in their Sacrificing ratio)

When Goodwill Already Appears In The Books And New Partner

Does Not Bring His Share Of Goodwill/Premium In Cash

If goodwill account already exists in the books of the firm, and if the new partner does not bring in his share of goodwill in cash, even then, as already discussed, the amount of goodwill already existing is written off by debiting the capital accounts of old partners in their old ratio.

 

Let’s Practice.
 

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