— Kishore V, SME and ACW at Edumarz
Goodwill can be regarded in one of two ways at the moment of a new partner’s admission:
To begin, it may be considered as if it were a Premium Method.
It can also be handled using the Revaluation Method.
i) Premium Approach: If a new partner delivers his or her portion of goodwill in cash, this method is used. The following are the many scenarios that can be encountered with this procedure.
(a) When the new partner pays the old partners personally his or her portion of goodwill. No record will be made in the books if the amount of goodwill is paid directly by the new partner to the old partners personally.
(b) When the new partner delivers his or her portion of goodwill in cash and the goodwill is valued at ₹100,000 or more.
Particulars | L.F | Debit | Credit |
Cash/Bank A/c Dr To New Partner’s Capital A/c (Amount of goodwill is brought in cash by the new partner) | XXX | XXX |
If goodwill is maintained in the firm, it may be used to pass on the goodwill of new partners to existing partners.
Particulars | L.F | Debit | Credit |
New Partner’s Capital A/c Dr To Sacrificing Partner’s Capital A/c (Goodwill brought in by the new partner distributed among the old partners in their sacrificing ratio.)
| XXX | XXX |
If the prior partner’s portion of goodwill is taken away from the new partner.
Particulars | L.F | Debit | Credit |
Sacrificing Partner’s Capital A/c Dr To Cash A/c (Amount of goodwill withdrawn by the old partners) | XXX | XXX |
If the new partner gives up a percentage of his or her goodwill in return for money, it’s a win-win situation.
Particulars | L.F | Debit | Credit |
Cash A/c Dr To New Partner’s Capital A/c (Amount of goodwill brought in cash by the new partner) | XXX | XXX |
For the aim of expressing gratitude to previous business partners.
Particulars | L.F | Debit | Credit |
New partner’s Capital A/c Dr To Sacrificing Partner’s Capital A/c (The new partner’s goodwill is dispersed among the existing partners according to their sacrificial ratio. | XXX | XXX |
When the new partner is unable to contribute any goodwill in cash, the revaluation method is used. In this situation, the capital account of the new partner will be debited by the amount of his share of goodwill, and the capital accounts of the old partners will be credited by the portion of the new partner’s goodwill in their sacrificing ratio. In this regard, the following Journal item will be present.
Particulars | L.F | Debit | Credit |
New Partner’s Capital A/c Dr To Old Partner’s Capital A/c (Share of goodwill of the new partner distributed among the old partners in their sacrificing ratio) | XXX | XXX |
It’s worth noting that goodwill is only documented in the books after a monetary or monetary-value payment has been paid for it. This procedure must be followed at all times. Because no payment is paid for goodwill, it cannot be raised in the event of admission, retirement, death, or a change in profit sharing ratio among current partners.