Treatment of goodwill on admission

The new partner compensates the old partners for the share of profits they give up, through goodwill. Under AS 26, a firm must not show its own self-generated goodwill as an asset, so goodwill is adjusted through the partners' accounts. The rule: credit the partners who sacrificed, and debit the new partner with his share.

Premium brought in cash:

• Bank A/c Dr. To Premium for Goodwill A/c (the amount brought in);
• Premium for Goodwill A/c Dr. To the sacrificing partners' capital accounts, in the sacrificing ratio.

The old partners may then withdraw the premium.

Premium paid privately to the old partners, outside the business: no entry is made in the firm's books.

Premium not brought in (the new partner cannot pay it): debit the new partner's current account with his share of goodwill only, and credit the sacrificing partners.

Goodwill already in the books (from the past) is written off among the old partners in their old ratio before the new partner's premium is dealt with.

Hidden goodwill. Sometimes goodwill is not stated, but can be worked out from the capitals. If the new partner brings 60,000 for a 1/5 share, the firm's total capital must be 60,000 ÷ 1/5 = 3,00,000. If the actual capitals (the old partners' 1,30,000 plus his 60,000) total 1,90,000, the difference, 1,10,000, is the hidden goodwill: (new partner's capital ÷ his share) − total actual capital.