Adjustment for Goodwill
Since the new partner gets a share in the profits of the rum, he should compensate the old partners for sharing the earning of the firm on account of the reputation or goodwill earned by the partnership firm so fan The problem of goodwill on admission of a new partner can be dealt in two different ways:
1. When the goodwill account already appears in the books.
2. When the goodwill account is not appearing in the books at the time of admission of a partner.
If the goodwill account is already appearing in the books. There can be three situations:
The goodwill account is appearing at a proper value. In such an event no adjustment will be required for goodwill.
A and B are sharing profits in the ratio 3 : 2. They admit a new partner C with 1/5 share in the profits. At the time of admission of C, goodwill is appearing in the firm’s books at Ps 10,000 and it is agreed by all partners (including C) that it is properly valued. Should C pay anything for goodwill?
Since goodwill is already appearing in the books, it shows that the old partners have already got credit to their capital accounts with the value of goodwill. Moreover, it is properly valued and hence C will not be required to pay anything for goodwill nor any further adjustment will be required.
(ii) The goodwill account is to be revalued. In such an event entry will be made only with the difference. The amount of over or under-valued goodwill is debited or credited to the old partners in the old ratio and credited or debited to goodwill account.