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When a partner joins the firm, he gets the following two rights along with others:

(i) Right to share future profit of the firm and

(ii) Right to share the assets of the firm.

Gaining Partner’s Capital A/c Dr

To Sacrificing Partner’s Capital   A/c 

(Being compensation given by gaining partner to sacrificing partner) 

Correct option is (D) credit side of old partners’ capital accounts in their sacrificing ratio

In this case the partner with a negative sacrificing ratio, i.e. the gaining partner to the extent of his gain should compensate to the sacrificing partner to the extent of his gain.

When the premium for goodwill is paid by the incoming partner privately, it is not recorded in the books of A/c as it is as a matter outside the business.

According to accounting standard 26 when any amount is paid against goodwill then it can be shown in accounts of the firm.

Following matters are taken into consideration while giving accounting effects of goodwill.

1. At the time of admission of a new partner, goodwill appearing in the books (balance sheet) of the old partners is written off among the old partner in their old profit – loss sharing ratio :

2. When the goodwill permium is paid privately by the new partner to the old partners no entry recorded in the books of accounts of the firm.

3. When premium for goodwill brought in cash by the new partner :

4. When premium for goodwilll brought in by new partner i.e. land, building, moter car brought in firm as a goodwill :

Net worth of the firm should be found out on the basis of capital bring by new partner in the ratio of his profit share :

5. For the distribution of premium for goodwill among the partners in their sacrificing ratio :

6. If out of old partners’ any partner gains in new profit and loss sharing ratio compared to old profit – loss sharing ratio, then goodwill has to be given to old sacrificing partners :

7. When new partner brings his share of goodwill premium in cash and it is withdraws by the old partners :

8. When the new partner is not able to bring his share of premium for goodwill in cash:

9. When only a part of the premium for goodwill is brought by a new partner in cash :

10. When the amount of goodwill is not given at the time of admission of a partner, goodwill of the firm is valued on the basis of net worth of the firm or capital of partners.

Here, Net worth of the firm on the basis of capital bring by new partner =  Capital of New Partner  Profit share of New Partner 

Here, Net worth of the firm excluding goodwill = Capital of old partners + Reserves + Capital of New Partners

• Goodwill of the Firm = Net worth of firm on the basis of new Partners’ capital – Net worth of firm excluding goodwill.
• New partners’ share of goodwill = Firm’s goodwill x Profit share of New partner Note : When capital accounts of partners are kept by fixed capital method then goodwill will be recorded to current accounts of partners otherwise it should be noted to capital accounts of partners.

Correct option is (B) If there is a provision in the partnership deed then abiding by it.

According to accounting standard 26, when the firm has made internally generated goodwill, it should not be shown in accounts of the firm.

On the admission of a new partner, old partners sacrifice some of their profit share in favour of the new partner. To compensate profit share acquired by the new partner he is required to give his share of goodwill to the firm.

Circumstances in which sacrificing Ratio may be applied are:

(i) At the time of admission of a new partner for distributing goodwill brought in by the new partner. 

(ii) For adjustment goodwill in case of change in Profit - sharing ratio of existing partners.

To get the profit sharing right in the firm, new partner brings the capital in the firm.

In case it is desired that capitals of the partners should be in their profit sharing ratio, the capital of Old partners may also be adjusted without changing the total capital of the firm.

Calculation of present capital of Sahil and Prashant

                       Journal

New partner is admitted to the partnership if it provided in the partnership deed or all the existing partners agree to admit the new partner.  Section 31 of the Indian Partnership Act 1932 Provides that a person may be admitted as a new partner into a partnership firm with the consent of all the Partners.

Revaluation Account- Credit Side.

Calculation of present capital of Anup and Swarup

The total Capital of Anup and Swarup together Rs.58,000(31,500+26,500). This is their capital for 4/5 share in profits. Thus total firm’s capital should be 58,000 x 5/4 = Rs.72,500. Therefore Chand should bring Rs.14,500(1/5 of Rs.72,500) as his capital. 

In case it is desired that capitals of the partners should be in their profit sharing ratio, the capital of Anup and Swarup may also be adjusted without changing the total capital of the firm. So according to this capitals of Anup and Swarup should br Rs.29,000 each. This means Swaupshoud bring Rs.25,00 and Anup should be paid Rs.25,00.

To compensate the sacrifice of old partners, money received by old partners from new partner is known as premium.

While admitting new partner, the goodwill of old balance sheet is distributed among old partners in their old profit sharing ratio.

The two main rights are:

(i) Right to share the assets of the firm. 

(ii) Right to share the future profits of the firm.

The amount of profit or loss arising out of change in values of assets and liabilities on admission of an new partners is shown in capital account of old partners in their old profit sharing ratio.

Correct option is (A) 12 : 8 : 5

The goodwill premium is distributed among old partners in their sacrificing ratio.

Correct option is (C) Among old partners in their old ratio

Correct option is (D) Sacrifice Ratio

When a new partner is admitted, old partners sacrifice some part of profit in favour of new partner. The compensation paid in cash by new partner for this sacrifice of old partner is known as goodwill premium.

 Need of valuation of goodwill arises on the following occasions:- 

(i) Change in profit sharing ratio of existing partners. 

(ii) Admission of a partner. 

(iii) Retirement of a partner. 

(iv) Death of a partner.

Sacrificing ratio is the ratio in which old partners have agreed to sacrifice their share of profit in favour of the new partner. This ratio is calculated by deducting the new ratio from the old ratio. 

Sacrificing Ratio = Old Ratio - New Ratio. 

(d) The existing agreement does not come to an end

Correct option is (C) Debt

Correct option is (A) Debit side of Revaluation account

Admission of a partner means reconstitution of the partnership. According to Indian Partnership Act, 1932, Admission of a new partner in existing partnership can be given by following two ways :

1. With the consent of all existing partners.
2. There is a provision regarding admission of a new partner in partnership agreement.

Gaining Ratio is computed in the following circumstances: 

(i) When a partner retires or dies. 

(ii) When there is a change in profit-sharing ratio.

Correct option is (C) Premium

The profit accumulated over the years and have not been credited to partners’ capital A/c are known as accumulated Profit or undistributed profit, e.g. the  General Reserve, Profit and Loss A/c (credit balance).

The losses which have not yet been written off to the debit of Partners’ Capital A/c are known as accumulated Losses, e.g. the Profit and Loss A/c appearing on the assets side of Balance Sheet, etc.

Revaluation account is debited for the decrease in the value of assets or increase in the value of liabilities.

(i) Favorable location

(ii) Time period

(i) it is an intangible asset having a definite value.

(ii)   It helps in earning more profit.

 (i) Capital employed = Assets – Liabilities 

= 540000 – 80000 

= Rs. 460000 

 (ii) Normal Profit = Capital employed X Normal rate of return/100 

= Rs. (460000 X 10/100) 

= 46000 

 (iii) Super Profit = Firm’s Average profit – Normal Profit 

 = 60000 – 46000 

 = 14000 

 (iv) Goodwill = Super profit X 100/ Normal rate of return 

 = (14000 X 100/ 10) 

 = 140000

Correct Answer is  False

Business is such activity which involves earning profit. Any business organisation, whether small or large, production unit or service industry; works for getting maximum profit. Profit plays a very important role in business. The role of profit is explained below: 

(i) Growth and Expansion : Profit acts as an internal source of raising funds. Business can keep aside excess profit and use it for its own expansion or diversification purpose. Expansion results into more profit, which can be used for other purposes.

(ii) Research and Development : When a business gets good profits it can spend money on research and development. Research and development helps to find out the processes that help to reduce the cost of production and provide better quality products. This helps to increase the production ultimately resulting in increase in profit.

(iii) Returns to lnvestors: The owner of business needs returns on the money he has invested in the business. These returns are in the form of profit. If there are good profits, the businessman gets fair returns on his investment.

(iv) Means of Livelihood : A biusiness is mainly carried on for getting the livelihood. A result of business is profit. Thus the main role of profit is to help the businessman earn his living.

(v) Increasing Efficiency : Profit acts as a motivating factor. A businessman who is working hard for the business and gets substantial profits gets a motivation to work hard. Profit thus helps in increasing the efficiency. Similarly an employer can give good remuneration to the employees when there is good profit. This helps to increase the efficiency of the employee also.

(vi) Reward for Risks : Every business is exposed to various types of risks. A businessman has to consider these risks. As a businessman takes risks and performs business activities, buyers get the necessary commodities. The result of these business activities is profit. Profit in this case acts a reward for the risk taken by the businessman.

(vii) Survival: The most important role of profit is to help the business to carry on the activities continuously. Survival of business depends upon the continuous supply of finance. Profit enables business to continue with the uninterrupted supply of funds.

Thus profit plays a vital retie in the business. Profit is an inevitable part in every business. It helps a businessman to earn his livelihood, carry on research and development activities and most importantly survival of the business.

True

Explanation: Goodwill brought in by a new partner is shared by the old partners in their sacrificing ratio. At the time of admission, the new partner acquires the right to share future profits; so, in exchange, he/she should compensate the sacrificing partners. Such compensation is known as premium for goodwill.

The total capital of the firm is Rs. 90,000.  To increase the capital base to Rs. 1,50,000, C is to bring in Rs. 60,000 (Rs. 1,50,000 - 9,00,00) But he bring in Rs.  70,000. Therefore, the excess of Rs. 10,000 represent premium for goodwill.

A :   -  =  4/7-2/7 =2/7

B :  = 3/7-1/7=2/7

C :   =2/7+1/7=3/7

New Profit sharing Ratio is 2:2:3.

(i) When Old P&L A/c and General Reserve balances are not to appear in the new firm’s books.

                            Journal

(ii) When Old P&L A/c and General Reserve balances are to appear in the new firm’s books.

                      Journal

Adjustment of Partners' Capital

Adjustment of Partners’ Capital can be any of the following: 

A. Calculation of New Partner's Capital on the basis of Old Partners’ Capital 

B. Adjustment of Old Partners’ Capital on the basis of New Partner's Capital 

These cases are further explained with the help of illustrations.

Jay, Vijay and Ajay are three partners sharing profits in 3:2:1. They decided to admit Sanjay and give him 1/7th share, new profit sharing ratio of partners will be 3:2:1:1.

Explanation: It is calculated as follows:- Let the total share be 1.

Keshav's Sacrifice \(=\frac{2}{5}-\frac{1}{3}=\frac{1}{15}\)

Madhav's Sacrifice \(=\frac{3}{5}-\frac{1}{3}=\frac{4}{15}\)

Sacrificing Ratio = 1:4

WN 1: Distribution of Profit and Loss A/c (Dr.)

Keshav will get \(=15000\times \frac{2}{5}=Rs.\,6000\)

Madhav's will get \(=15000\times \frac{3}{5}=Rs.\,9000\)

WN 2: Distribution of Uddhav's Share of Goodwill

Keshav will get \(=80000\times \frac{1}{5}=Rs.\,16000\)

Madhav's will get \(=80000\times \frac{4}{5}=Rs.\,64000\)

(i) Cost

(ii) Capital

(iii) Assets

(iv) Financial year/Accounting year

(v) Revenue

Correct option is (b) Goodwill

i. (d) Goodwill

ii. (a) AS-3

iii. (a) Conservatism

iv. (b) Narration

v. (c) Transaction