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5.2 Double Entry Book Keeping—CBSE XII

• The ratio in which all partners including the incoming partner share future profits and losses is known as
the new profit-sharing ratio.
• The ratio in which the old (existing) partners have agreed to sacrifice their share in profits in favour of an
incoming partner is called the sacrificing ratio.
Sacrificing Ratio = Old Ratio – New Ratio.
Notes: 1. Unless agreed otherwise, the New Profit-sharing Ratio of Old Partners will be the same as their
Old Profit-sharing Ratio.
2. Unless agreed otherwise, Sacrificing Ratio of Old Partners will be the same as their old Profit-
sharing Ratio.
• Accounting Treatment of Goodwill: New Partner has to compensate the sacrificing partners by paying
them an amount, called as Goodwill or Premium for Goodwill.
Note: Write off the existing goodwill (if any) appearing in the Balance Sheet of the firm by debiting the Old
Partners’ Capital Accounts (in case of fluctuating capital) or Partners’ Current Accounts (in case of fixed
capital) in their old profit-sharing ratio and crediting the Goodwill Account. Unless agreed otherwise, it
is presumed that the old partners sacrifice in their old profit-sharing ratio.
ACCOUNTING ENTRIES FOR GOODWILL
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 Goodwill withdrawn by the Sacrificing (Old) Partners Sacrificing Partners’ Capital A/cs ...Dr.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: If incoming partner brings a part of his share of Goodwill in Cash then unpaid share of goodwill
should be debited to his Current Account. Debit Balance of Current Account will appear in the
Assets side of Balance Sheet.
• Revaluation Account or the Profit and Loss Adjustment Account is prepared to revalue the assets and
reassess the liabilities of the firm at the time of reconstitution of the firm.
Dr. REVALUATION ACCOUNT Cr.
Particulars ` Particulars `

To Decrease in Value of Assets ... By Increase in Value of Assets ...
To Increase in amount of Liabilities ... By Decrease in amount of Liabilities ...
To Unrecorded Liabilities A/c ... By Unrecorded Assets A/c ...
To Gain (Profit)* trfd. to the Old Partners’ By Loss* trfd. to the Old Partners’
Capital A/cs (in the old profit-sharing ratio) ... Capital A/cs (in the old profit-sharing ratio) ...
... ...
*Either of the two will appear.