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Treatment of goodwill, when cash not brought for goodwill.

sir, in case if question is silent about whether the new partner at the time of admission brings his propotionate amount of goodwill in cash or not, then what should be done?

asked Dec 26, 2015 in Partnership-Admission by siddhartha gupta (20 points) 436 views

1 Answer

+1 vote
In case question is silent about whether the new partner is bringing or not bringing his share of goodwill, we can safely assume that he is not bringing his share of goodwill.  This is because when the question positively asserts that he is bringing this much amount of capital, the question would have also mentioned the total amount bring brough including goodwill.  Let us understand this with the help of an example:

Question: A & B who share profits equally admit C for 1/3 share in the firm.  For this purpose goodwill is valued at Rs.60000.  C brings Rs.100000 as capital.  Journalise.

Solution:

Bank A/c                                        Dr.  100000

  To C's Capital A/c                                                   100000

C's Capital A/c or Current A/c    Dr.  20000

  To A's Capital A/c or Current A/c                         10000

  To B's Capital A/c or Current A/c                         10000

(C being debited for his share of goodwill and A and B being credited in their sacrificing ratio 1: 1).

Note: 1. If fixed capital A/c method is followed, then debit and credits will be done in current accounts otherwise in capital accounts.

2. As you all know there are no free lunches.   Practically C has to pay for his share of goodwill.  Actually this arrangement means that he is not able to bring money for goodwill now but he will make up for this later on either by bringing cash or withdrawing less.  For example if his share of profits during the year is Rs.30000 and he withdraws only Rs.10000, leaving Rs.20000 in business.  In this way either his capital account will increase by Rs.20000 or debit in his current account will reduce by Rs.20000.
answered Dec 27, 2015 by jbsclasses (3,971 points)
Thank you sir...
But i have a question that if we will debit his current a/c then we have to do all afterwards adjustment related to him in his current a/c and same will be followed for every partner. I mean to ask that other partner's current a/c will be credited or capital a/c?

     If the firm is following the fixed capital method, then the capital brought by C, Rs.100000 will be credited to his capital account and his current account will be debited by Rs.20000 and old partners' capital accounts will be credited by Rs.10000 each.  Since their are following fixed capital method, then all transactions/adjustments except relating to introduction or withdrawal of capital will be done in current accounts. 

     Similarly if they are following fluctuating capital account method then adjustment for goodwill be made in capital accounts of all the partners including the C, the new partner.

Sir but in my textbook new partners current account is debited and old partners capital a/c is credited
Read your text book carefully, I hope you will get it right this time. Otherwise you can click that question and post it here, then we will discuss it further.
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