Page 44 - ISCDEBK-12

3.2 Double Entry Book Keeping (Section A)—ISC XII

SUMMARY OF THE CHAPTER

• When the existing partners of a firm allow a person to become a partner in the firm, it is called admission of
a partner.
• The matters that require adjustment at the time of admission of a new partner are:
(i) Adjustment for change in Profit-Sharing Ratio. Calculation of New Profit-sharing Ratio and Sacrificing Ratio.
(ii) Adjustment for goodwill.
(iii) Adjustment of Profit/Loss arising from the Revaluation of Assets and Reassessment of Liabilities.
(iv) Adjustment of Accumulated Profits, Reserves and Losses.
(v) Adjustment of Capital.
• Change in Profit-sharing Ratio takes place at the time of admission of a new partner in the firm.
• The ratio in which all partners including the incoming partner share the future profits and losses is known as
New Profit-Sharing Ratio.
Unless agreed otherwise, the New Profit-sharing Ratio of existing, i.e., old partners among them will be same as
their old profit-sharing ratio.
• The ratio in which the old (existing) partners have agreed to sacrifice their share in profit in favour of an
incoming partner is called Sacrificing Ratio.
Sacrificing Share = Old Share – New Share.
Unless agreed otherwise, Sacrificing Ratio of old partners will be the same as their old profit-sharing ratio.
• The partners whose share in profit increase due to change in profit-sharing ratio are called Gaining Partners
and the partners whose share in profit decrease are called Sacrificing Partners.
• Goodwill is the reputation of the organisation which attracts customers and increases the profit earning
capacity of the business.
ACCOUNTING TREATMENT OF GOODWILL ON ADMISSION OF A PARTNER
1. Goodwill (Premium) paid Privately No Entry

2. Goodwill brought in Cash Cash/Bank A/c ...Dr.
To Premium for Goodwill A/c
Distribution of Goodwill Premium for Goodwill A/c ...Dr.
To Sacrificing Partners’ Capital A/cs [In sacrificing ratio]
or
To Sacrificing Partners’ Current A/cs
(When capitals are fixed)
3. Goodwill withdrawn by Sacrificing (Old) Partners Sacrificing Partners’ Capital A/cs ...Dr.
To Cash/Bank A/c
4. Goodwill not brought in Cash New Partner’s Current A/c ...Dr.
To Sacrificing Partners’ Capital A/cs [In sacrificing ratio]
5. Goodwill brought in Kind Assets A/c ...Dr.
To Premium for Goodwill A/c
Note: Write off the goodwill appearing in the Old Balance Sheet by debiting the Old Partners’ Capital Accounts (in
case of fluctuating capitals) or Current Accounts (in case of fixed capitals) in their old profit-sharing ratio and
crediting the Goodwill Account.
• Unless otherwise stated, the Partners’ Capitals should be assumed to be fluctuating. Current Accounts
are to be used in case of Fixed Capitals.
• When the incoming partner cannot bring premium for goodwill in cash, adjustments are to be done
through the Current Account of Incoming Partner.