Case 1 When goodwill does not appear in the books

A. When the amount of goodwill is paid privately:

Illustration: 

E and F are partners sharing profit and loss in the ratio of 4:3. G is admitted into the firm for 1/4th share. G brings ₹20,500 cash as his share of capital and ₹9,800 as premium for goodwill paid privately to the old partners. Pass necessary journal entry.

Solution:

B. When the new partner brings his share of goodwill in cash:

1. When the amount of goodwill is retained in the business:

(i) For the capital and share of goodwill brought in by the new partner:

Journal Entry:

(ii) For adjusting the goodwill to sacrificing partners in their sacrificing ratio:

Journal Entry:

Illustration: 

Gopal and Krishna are partners sharing profit and loss of the firm in the ratio of 5:4. Mohan is admitted in the firm for 1/4th share in firm. The new profit-sharing ratio is decided to be 4:3:2. Mohan brought in ₹22,000 as his share of capital and ₹8,000 as premium for goodwill which is retained in the business. Pass necessary journal entry.

Solution:

Working Notes:

1. Calculation of Sacrificing Ratio:

2. When the amount of goodwill is withdrawn by the old partners:

(i) For the share of Goodwill brought in by the new partner:

(ii) For adjusting goodwill to sacrificing partners in their sacrificing ratio:

Journal Entry:

(iii) For the premium of goodwill withdrawn by old partner:

Journal Entry:

Illustration: 

M and N are partners in the firm, sharing profit and loss in the ratio of 3:2. P is admitted into the firm as the new partner. They decided to share the future profit and loss of the firm in the ratio of 2:2:1. P brings in ₹ 31,500 as his share of capital and ₹11,600 as premium for goodwill. The premium for goodwill brought in by the new partner is withdrawn by the old partner.

Solution:

Working Notes: 

1. Calculation of Sacrificing Ratio:

C. When the new partner brings his share of goodwill in kind:

(i) For Assets brought in by the incoming partner:

Journal Entry:

(ii) For adjusting goodwill to sacrificing partners in their sacrificing ratio:

Journal Entry:

Illustration: 

Radha and Krishna are partners in the firm, sharing profit and loss in the ratio of 5:3. Mayur is admitted into the firm as the new partner. They decided to share the future profit and loss of the firm in the ratio of 4:2:2. Mayur brings in ₹64,800 as his share of capital and his share of goodwill in the firm in the form of the following assets: Furniture ₹24,600, Stock ₹33,600 and Machinery ₹41,600.

Solution:

Workings:

1. Calculation of Sacrificing Ratio:

D. When the new partner does not bring his share of goodwill in cash:

Journal Entry:

Illustration: 

R and S partners in the firm, sharing profit and loss in the ratio 4:3. They admitted T in the firm as the new partner for 1/7th share in the firm’s profit and loss sharing ratio. T brings in ₹ 49,700 as capital and is unable to bring in his share of goodwill in cash. Goodwill of the firm is valued ₹63,000. Pass necessary journal entry on the admission of T.

Solution:

What is Goodwill?

Goodwill is an intangible asset that is either self-generated or purchased. It is the value of benefits that a business has because of the factors that help in increasing its profitability, say its location, favourable contracts, access to supplies and customer loyalty, etc. Goodwill is the reputation earned by the business through hard work, honesty and quality, and satisfactory services to customers. The efforts and hard work done by the existing partners frame the goodwill of the firm.

At the time of admission, the new partner is required to bring his share of goodwill to the firm. Hence, at the time of admission of a partner, goodwill is valued as per agreement among the partners. New partner compensates the old partner for acquiring his/her share of profit in the firm. 

New Partner’s Share of Goodwill = Value of Goodwill on the date of admission x New partner’s share in the firm

Goodwill is adjusted by taking the following steps:

Step 1: Calculate the Sacrificing ratio of the old partners.

Sacrificing Ratio = Old Ratio – New Ratio

Step 2: Calculate the goodwill of the firm or what is stated in the question.

Step 3: Calculate the share of goodwill of the new partner.