When a new partner is admitted, the old partners give up part of their share. The new partner usually brings capital and a premium for goodwill.
New ratio and sacrificing ratio
- If the sacrifice is not stated, old partners sacrifice in their old ratio.
- Sacrificing ratio = Old ratio − New ratio.
Premium for goodwill (AS-26)
| Situation | Entry |
|---|---|
| Premium brought in cash | Cash/Bank A/c Dr. To Premium for Goodwill A/c; then Premium for Goodwill A/c Dr. To Sacrificing Partners' Capital A/cs |
| Premium not brought in | New Partner's Capital/Current A/c Dr. To Sacrificing Partners' Capital A/cs |
| Existing goodwill in the books | Old Partners' Capital A/cs Dr. To Goodwill A/c (old ratio) |
Hidden goodwill
If the new partner's capital implies a value for the whole firm higher than the combined capitals, the difference is hidden goodwill:
Hidden goodwill = (New partner's capital × reciprocal of his share) − (Total capital of all partners after his capital, before goodwill adjustments).
Revaluation and reserves
- Prepare a Revaluation Account; share profit or loss among old partners in the old ratio.
- General reserve, workmen compensation reserve (excess over claim) and investment fluctuation reserve (excess over fall in value) go to old partners in the old ratio.
Adjustment of capitals
When capitals are to be in the new ratio, find the total capital from the new partner's capital and his share, work out each old partner's required capital, and bring in or withdraw the difference in cash or through current accounts.
Recorded lectures for this chapter
16 lectures (5 h 30 min) by Ronak Dugar in Class 12 Accountancy Book 1: Accounting for Partnership Firms. Enrolled students watch them in the student portal.
- Class 1 - Basics, Cases of New Ratio29 min
- Class 2 - Sacrificing Ratio, Cases of Premium for Goodwill18 min
- Class 3 - Cases for Premium for Goodwill, Practice Questions21 min
- Class 4 - Revaluation A/c, W.C.R. Cases23 min
- Class 5 - I.F.R. Cases10 min
- Class 6 - Treatment of Accumulated Profits, Accumulated Losses. Provision for Doubtful Debt Cases26 min
- Class 7 -Treatment of Purchased Goodwill, Extraordinary points of Revaluation A/c18 min
- Class 8 - Comprehensive Question24 min
- Class 9 - Comprehensive Question26 min
- Class 10 - Hidden Goodwill10 min
- Class 11 - Comprehensive Question of Hidden Goodwill17 min
- Class 12 - Proportionate Capital23 min
- Class 13 - Capital Adjustment24 min
- Class 14 - Additional Extraordinary Questions11 min
- Class 15 - Additional Comprehensive Question23 min
- Class 16 - Capital Adjustment with Current account19 min
Learn this chapter with Ronak Sir
Classroom batches in Sector 9, Faridabad and recorded lectures online. Book a free demo class or call +91 83685 45620.