NCERT Solutions for Class 12 Accountancy Chapter 2: Reconstitution of a Partnership Firm – Admission of a Partner (NCERT 2026–27)

Q: What is Chapter 2 of Class 12 Accountancy about?

Chapter 2, Reconstitution of a Partnership Firm - Admission of a Partner, explains what happens when a new partner joins a firm: calculating the new profit sharing ratio and sacrificing ratio, valuing and adjusting goodwill, revaluing assets and reassessing liabilities, distributing accumulated profits and reserves, and adjusting partners' capitals.

These Class 12 Accountancy Chapter 2 solutions cover Reconstitution of a Partnership Firm – Admission of a Partner from the NCERT textbook Accountancy – Partnership Accounts (Part I), updated for the 2026–27 session. The chapter explains what happens to a firm’s books when a new partner joins: how to compute the new profit sharing ratio and the sacrificing ratio, how to value and adjust goodwill, how to revalue assets and reassess liabilities through the Revaluation Account, how to distribute accumulated profits and reserves, and how to adjust partners’ capitals. Below you get every end-of-chapter Short Answer, Long Answer and Numerical question reproduced verbatim and solved step by step, with full working shown in clear tables and verified figures, plus extra practice, MCQs, Assertion–Reason and FAQs.

Class: 12 Subject: Accountancy Book: Partnership Accounts (Part I) Chapter: 2 Topic: Admission of a Partner Session: 2026–27

On this page

Chapter overview
Key concepts, terms & formulas
Short Answer Questions — solutions
Long Answer Questions — solutions
Numerical Questions — full working
Extra practice questions
MCQs & Assertion–Reason
Exam tips & common mistakes
FAQs

Class 12 Accountancy Chapter 2 – Overview

A partnership is reconstituted whenever the existing agreement among partners changes — on the admission of a new partner, a change in the profit sharing ratio, or the retirement or death of a partner. In each case the old agreement ends and a new one begins, but the firm continues. This chapter deals mainly with the admission of a new partner, who is admitted (with the consent of all existing partners, under the Indian Partnership Act, 1932) to bring in additional capital or managerial help. On admission, six matters need attention: (1) the new profit sharing ratio, (2) the sacrificing ratio, (3) valuation and adjustment of goodwill, (4) revaluation of assets and reassessment of liabilities, (5) distribution of accumulated profits and reserves, and (6) adjustment of partners’ capitals. The chapter also covers methods of valuing goodwill (average profits, super profits and capitalisation), the treatment of goodwill when the new partner does or does not bring premium in cash, hidden goodwill, and the change of profit sharing ratio among existing partners.

Key Concepts, Terms & Formulas

Reconstitution of a firm: any change in the existing agreement among partners — admission, change in profit sharing ratio, retirement, or death of a partner — that ends the old agreement and starts a new one while the firm continues.

New profit sharing ratio: the ratio in which all partners (old and new) will share future profits after admission. It is found by deducting each old partner’s sacrifice from his old share.

Sacrificing ratio: the ratio in which the old partners give up part of their share of profit in favour of the incoming partner. It is the ratio used to credit the incoming partner’s premium for goodwill.

Goodwill: the value of a firm’s reputation that lets it earn profits above the normal rate of return. It is an intangible asset and exists only when a firm earns super profits.

Hidden goodwill: goodwill not stated directly but inferred from the capital the new partner brings for his share, by comparing the implied total capital of the firm with the actual combined capital.

Revaluation Account: a nominal account opened to record the increase or decrease in the value of assets and liabilities on admission; its net profit or loss is transferred to the old partners in their old profit sharing ratio.

Accumulated profits and losses: reserves, general reserve and Profit & Loss balances existing before admission are distributed to the old partners in their old ratio, because the new partner has no right over them.

Sacrificing Share = Old Share − New Share

New Partner’s Share = sum of shares sacrificed by old partners

Average Profit = Total Profits ÷ Number of years; Goodwill (Average Profits Method) = Average Profit × Number of years’ purchase

Normal Profit = Firm’s Capital × Normal Rate of Return ÷ 100; Super Profit = Average Profit − Normal Profit

Goodwill (Super Profits Method) = Super Profit × Number of years’ purchase

Goodwill (Capitalisation of Average Profits) = (Average Profit × 100 ÷ Normal Rate) − Net Assets (Capital Employed)

Goodwill (Capitalisation of Super Profits) = Super Profit × 100 ÷ Normal Rate of Return

Short Answer Questions – Solutions

All questions below are reproduced verbatim from the NCERT textbook’s end-of-chapter exercise. Answers are original, written in exam-ready style.

1. Identify various matters that need adjustments at the time of admission of a new partner.

ANSWER At the time of admission of a new partner the following matters need adjustment in the books of the firm: (i) determining the new profit sharing ratio; (ii) calculating the sacrificing ratio; (iii) valuation and accounting treatment of goodwill; (iv) revaluation of assets and reassessment of liabilities; (v) distribution of accumulated profits, reserves and losses among the old partners; and (vi) adjustment of partners’ capitals according to the new profit sharing ratio, if agreed.

2. Why it is necessary to ascertain new profit sharing ratio even for old partners when a new partner is admitted?

ANSWER When a new partner is admitted, he acquires his share of profit out of the shares of the old partners. As a result the old partners’ shares fall below their earlier levels. Since the future profits will now be divided among more partners, the share of each old partner changes and must be recalculated. Determining the new ratio for the old partners is therefore necessary so that future profits (and losses) can be distributed correctly and the sacrifice made by each old partner can be measured.

3. What is sacrificing ratio? Why is it calculated?

ANSWER Sacrificing ratio is the ratio in which the old partners agree to give up (sacrifice) their share of future profit in favour of the incoming partner. For each partner, Sacrifice = Old Share − New Share. It is calculated because the incoming partner compensates the old partners for the loss of their share in the firm’s super profits by bringing in a premium for goodwill. This premium is distributed among the old partners in their sacrificing ratio, so the ratio must be known to credit each partner correctly.

4. On what occasions sacrificing ratio is used?

ANSWER The sacrificing ratio is used: (i) to distribute the premium for goodwill brought in by the new partner among the old partners; and (ii) to adjust goodwill among partners when there is a change in the profit sharing ratio among existing partners (the gaining partners compensate the sacrificing partners in this ratio). In short, it is used wherever some partners give up a part of their share in favour of another.

5. If some goodwill already exists in the books and the new partner brings in his share of goodwill in cash, how will you deal with existing amount of goodwill?

ANSWER As per Accounting Standard 26, self-generated goodwill cannot be shown as an asset, so any goodwill already appearing in the books must first be written off. It is written off by debiting the old partners’ capital accounts in their old profit sharing ratio and crediting the Goodwill Account. Thereafter, the premium for goodwill brought in by the new partner in cash is credited to the sacrificing partners’ capital accounts in their sacrificing ratio (after first crediting the Premium for Goodwill Account).

6. Why there is need for the revaluation of assets and liabilities on the admission of a partner?

ANSWER On admission, the assets and liabilities may not be shown in the books at their current (true) values — some may be overstated or understated, and there may be unrecorded assets or liabilities. If they are not revalued, the new partner would unfairly share gains or losses that actually belong to the period before his admission. Revaluation ensures that assets and liabilities are brought to their correct values and that any profit or loss arising from this is transferred to the old partners alone, in their old profit sharing ratio, before the new partner joins.

Long Answer Questions – Solutions

1. Do you advise that assets and liabilities must be revalued at the time of admission of a partner? If so, why? Also describe how is this treated in the book of account?

ANSWER Yes, assets and liabilities should be revalued at the time of admission. The book values may differ from current values, and there may be unrecorded items. If the firm does not revalue, the new partner would wrongly share the profit or loss arising from changes in value that took place before his admission, which is unfair to all partners. Treatment in the books: a Revaluation Account (Profit and Loss Adjustment Account) is opened. An increase in an asset and a decrease in a liability are gains, so the asset is debited / liability debited and Revaluation Account credited. A decrease in an asset and an increase in a liability are losses, so Revaluation Account is debited. Unrecorded assets are credited to Revaluation (asset debited) and unrecorded liabilities debited to Revaluation. The final balance — a credit balance shows net profit and a debit balance shows net loss — is transferred to the capital accounts of the old partners in their old profit sharing ratio. After revaluation, the assets and liabilities appear in the new balance sheet at their revalued figures.

2. What is goodwill? What factors affect goodwill?

ANSWER Goodwill is the monetary value of the advantage a well-established business enjoys through its good name, reputation and wide business connections, which enables it to earn more than the normal rate of profit. It is an intangible asset and exists only when a firm earns super profits; a firm earning only normal profits or making losses has no goodwill. Factors affecting goodwill: (i) Nature of business — firms with high-value or stable-demand products earn more and have higher goodwill; (ii) Location — a central or high-traffic location raises goodwill; (iii) Efficiency of management — well-managed firms earn higher profits, so higher goodwill; (iv) Market situation — monopoly or limited competition allows higher profits and goodwill; (v) Special advantages — import licences, assured and cheap supplies, long-term contracts, patents, trademarks and well-known collaborators all raise goodwill.

3. Explain various methods of valuation of goodwill.

ANSWER There are three important methods of valuing goodwill: 1. Average Profits Method: goodwill is valued at an agreed number of years’ purchase of the average profit of past years. Goodwill = Average Profit × Number of years’ purchase. A weighted average (using weights such as 1, 2, 3, 4) is used only when specified, giving more importance to recent years. 2. Super Profits Method: the buyer’s real benefit lies only in profits above the normal return on capital. Super Profit = Average Profit − Normal Profit, where Normal Profit = Capital Employed × Normal Rate of Return ÷ 100. Goodwill = Super Profit × Number of years’ purchase. 3. Capitalisation Method: (a) Capitalisation of Average Profits — Goodwill = (Average Profit × 100 ÷ Normal Rate) − Net Assets (Capital Employed); (b) Capitalisation of Super Profits — Goodwill = Super Profit × 100 ÷ Normal Rate. Both forms of the capitalisation method give the same amount of goodwill.

4. If it is agreed that the capital of all the partners should be proportionate to the new profit sharing ratio, how will you work out the new capital of each partner? Give examples and state how necessary adjustments will be made.

ANSWER When capitals are to be in the new profit sharing ratio, the new partner’s capital is usually taken as the base. The implied total capital of the firm is found by dividing the new partner’s capital by his share. Each partner’s required capital is then this total multiplied by his share in profits. Example: A and B share 2:1 and admit C for 1/4 share; C brings ₹20,000. Total capital = ₹20,000 × 4/1 = ₹80,000. New ratio is 2:1:1, so required capitals are A ₹40,000, B ₹20,000, C ₹20,000. Adjustment: the required capital is compared with each old partner’s capital after all adjustments for goodwill, reserves and revaluation. A partner whose actual capital falls short brings in the deficiency (Cash A/c Dr., To Partner’s Capital A/c); a partner with surplus withdraws the excess (Partner’s Capital A/c Dr., To Cash A/c). Alternatively, the surplus or deficiency may be transferred to the partners’ current accounts instead of being paid in cash.

5. Explain how will you deal with goodwill when new partner is not in a position to bring his share of goodwill in cash.

ANSWER When the new partner cannot bring his share of goodwill (premium) in cash, his share of goodwill is adjusted through his current account. If no goodwill exists in the books: the entry is — New Partner’s Current A/c Dr. (with his share of goodwill); To Sacrificing Partners’ Capital A/cs (individually, in sacrificing ratio). If goodwill already exists in the books: first write it off — Old Partners’ Capital A/cs Dr. (in old ratio); To Goodwill A/c. Then pass the above adjustment for the new value of goodwill through the new partner’s current account. If the partner brings only part of the premium in cash, the cash brought is credited through Premium for Goodwill A/c and only the balance is debited to his current account.

6. Explain various methods for the treatment of goodwill on the admission of a new partner?

ANSWER (a) When the new partner brings goodwill (premium) in cash: Bank A/c Dr., To Premium for Goodwill A/c; then Premium for Goodwill A/c Dr., To Sacrificing Partners’ Capital A/cs (in sacrificing ratio). If the old partners withdraw the premium, an additional entry debits their capital accounts and credits Bank. (b) When the new partner does not bring goodwill in cash (fully or partly): New Partner’s Current A/c Dr. (with the amount not brought), To Sacrificing Partners’ Capital A/cs in sacrificing ratio. (c) Hidden goodwill: when goodwill is not given, it is inferred from the capital the new partner brings, and the new partner’s current account is debited / capital adjusted accordingly. In every case, if goodwill already appears in the books it is first written off in the old ratio (as required by AS 26 on intangible assets).

7. How will you deal with the accumulated profits and losses and reserves on the admission of a new partner?

ANSWER Accumulated profits, reserves and losses existing on the date of admission belong only to the old partners, because they were earned (or incurred) before the new partner joined. They are therefore distributed among the old partners in their old profit sharing ratio. For accumulated profits/reserves: General Reserve / Reserve / Profit and Loss A/c (credit balance) Dr.; To Old Partners’ Capital A/cs (in old ratio). For accumulated losses: Old Partners’ Capital A/cs Dr. (in old ratio); To Profit and Loss A/c (debit balance) / deferred revenue expenditure. This ensures the new partner neither gains from past profits nor bears past losses.

8. At what figures the value of assets and liabilities appear in the books of the firm after revaluation has been due. Show with the help of an imaginary balance sheet.

ANSWER After revaluation, assets and liabilities appear in the new balance sheet at their revalued (current) figures — assets are shown at the increased or reduced amounts agreed, provisions are deducted, unrecorded assets and liabilities are brought in, and the partners’ capitals are shown after transferring the revaluation profit/loss, goodwill and reserves. Imaginary Balance Sheet (after admission of C): Suppose Plant rises from ₹30,000 to ₹33,000, Stock falls from ₹15,000 to ₹13,500, and a provision for doubtful debts of ₹600 is created on debtors of ₹12,000.

Liabilities	Amount (₹)	Assets	Amount (₹)
Sundry Creditors	20,000	Cash	18,000
Capitals: A, B and C	58,900	Debtors 12,000 − Prov. 600	11,400
		Stock (revalued)	13,500
		Plant (revalued)	33,000
		Furniture	3,000
Total	78,900	Total	78,900

Thus, every asset and liability is carried at its revalued amount, and the resulting gain or loss has already been adjusted in the old partners’ capital accounts.

Numerical Questions – Full Working

Each numerical question below is reproduced verbatim from NCERT. All ratios, goodwill values, revaluation profits and capital adjustments are computed step by step and verified against the NCERT answers where given.

1. A and B were partners in a firm sharing profits and losses in the ratio of 3:2. They admit C into the partnership with 1/6 share in the profits. Calculate the new profit sharing ratio?

SOLUTION C’s share = 1/6, so remaining share = 1 − 1/6 = 5/6 (assumed taken from A and B in old ratio 3:2). A = 3/5 × 5/6 = 15/30 = 3/6; B = 2/5 × 5/6 = 10/30 = 2/6; C = 1/6. New ratio = 3 : 2 : 1. (Matches NCERT answer.)

2. A, B, C were partners in a firm sharing profits in 3:2:1 ratio. They admitted D for 10% profits. Calculate the new profit sharing ratio?

SOLUTION D’s share = 10% = 1/10; remaining = 9/10, shared by A, B, C in 3:2:1 (total 6). A = 3/6 × 9/10 = 27/60; B = 2/6 × 9/10 = 18/60; C = 1/6 × 9/10 = 9/60; D = 1/10 = 6/60. New ratio = 27 : 18 : 9 : 6 = 9 : 6 : 3 : 2.

3. X and Y are partners sharing profits in 5:3 ratio admitted Z for 1/10 share which he acquired equally for X and Y. Calculate new profit sharing ratio?

SOLUTION Z gets 1/10 equally, so 1/20 from each of X and Y. X = 5/8 − 1/20 = 25/40 − 2/40 = 23/40; Y = 3/8 − 1/20 = 15/40 − 2/40 = 13/40; Z = 1/10 = 4/40. New ratio = 23 : 13 : 4.

4. A, B and C are partners sharing profits in 2:2:1 ratio admitted D for 1/8 share which he acquired entirely from A. Calculate new profit sharing ratio?

SOLUTION Only A sacrifices 1/8. A = 2/5 − 1/8 = 16/40 − 5/40 = 11/40; B = 2/5 = 16/40; C = 1/5 = 8/40; D = 1/8 = 5/40. New ratio = 11 : 16 : 8 : 5.

5. P and Q are partners sharing profits in 2:1 ratio. They admitted R into partnership giving him 1/5 share which he acquired from P and Q in 1:2 ratio. Calculate new profit sharing ratio?

SOLUTION R’s 1/5 is taken from P and Q in 1:2: from P = 1/3 × 1/5 = 1/15; from Q = 2/3 × 1/5 = 2/15. P = 2/3 − 1/15 = 10/15 − 1/15 = 9/15; Q = 1/3 − 2/15 = 5/15 − 2/15 = 3/15; R = 1/5 = 3/15. New ratio = 9 : 3 : 3 = 3 : 1 : 1.

6. A, B and C are partners sharing profits in 3:2:2 ratio. They admitted D as a new partner for 1/5 share which he acquired from A, B and C in 2:2:1 ratio respectively. Calculate new profit sharing ratio?

SOLUTION D’s 1/5 taken in 2:2:1 (total 5): from A = 2/5 × 1/5 = 2/25; from B = 2/5 × 1/5 = 2/25; from C = 1/5 × 1/5 = 1/25. Old shares in /175: A = 3/7 = 75/175, B = 2/7 = 50/175, C = 2/7 = 50/175. Sacrifices in /175: A = 2/25 = 14/175, B = 14/175, C = 1/25 = 7/175. A = 75 − 14 = 61/175; B = 50 − 14 = 36/175; C = 50 − 7 = 43/175; D = 1/5 = 35/175. New ratio = 61 : 36 : 43 : 35.

7. A and B were partners in a firm sharing profits in 3:2 ratio. They admitted C for 3/7 share which he took 2/7 from A and 1/7 from B. Calculate new profit sharing ratio?

SOLUTION A = 3/5 − 2/7 = 21/35 − 10/35 = 11/35; B = 2/5 − 1/7 = 14/35 − 5/35 = 9/35; C = 3/7 = 15/35. New ratio = 11 : 9 : 15.

8. A, B and C were partners in a firm sharing profits in 3:3:2 ratio. They admitted D as a new partner for 4/7 profit. D acquired his share 2/7 from A. 1/7 from B and 1/7 from C. Calculate new profit sharing ratio?

SOLUTION Old shares (/56): A = 3/8 = 21/56, B = 3/8 = 21/56, C = 2/8 = 14/56. Sacrifices (/56): A = 2/7 = 16/56, B = 1/7 = 8/56, C = 1/7 = 8/56. A = 21 − 16 = 5/56; B = 21 − 8 = 13/56; C = 14 − 8 = 6/56; D = 4/7 = 32/56. New ratio = 5 : 13 : 6 : 32.

9. Radha and Rukmani are partners in a firm sharing profits in 3:2 ratio. They admitted Gopi as a new partner. Radha surrendered 1/3 of her share in favour of Gopi and Rukmani surrendered 1/4 of her share in favour of Gopi. Calculate new profit sharing ratio?

SOLUTION Radha surrenders 1/3 of 3/5 = 1/5; Rukmani surrenders 1/4 of 2/5 = 1/10. Radha = 3/5 − 1/5 = 2/5 = 4/10; Rukmani = 2/5 − 1/10 = 4/10 − 1/10 = 3/10; Gopi = 1/5 + 1/10 = 3/10. New ratio = 4 : 3 : 3.

10. Singh, Gupta and Khan are partners in a firm sharing profits in 3:2:3 ratio. They admitted Jain as a new partner. Singh surrendered 1/3 of his share in favour of Jain; Gupta surrendered 1/4 of his share in favour of Jain and Khan surrendered 1/5 in favour of Jain. Calculate new profit sharing ratio?

SOLUTION Total = 8. Singh surrenders 1/3 of 3/8 = 1/8; Gupta 1/4 of 2/8 = 1/16; Khan 1/5 of 3/8 = 3/40. Using /80: Singh = 3/8 − 1/8 = 2/8 = 20/80; Gupta = 2/8 − 1/16 = 4/16 − 1/16 = 3/16 = 15/80; Khan = 3/8 − 3/40 = 15/40 − 3/40 = 12/40 = 24/80. Jain = 1/8 + 1/16 + 3/40 = 10/80 + 5/80 + 6/80 = 21/80. New ratio = 20 : 15 : 24 : 21.

11. Sandeep and Navdeep are partners in a firm sharing profits in 5:3 ratio. They admit C into the firm and the new profit sharing ratio was agreed at 4:2:1. Calculate the sacrificing ratio?

SOLUTION New ratio 4:2:1 (total 7). Sandeep = 5/8 − 4/7 = 35/56 − 32/56 = 3/56; Navdeep = 3/8 − 2/7 = 21/56 − 16/56 = 5/56. Sacrificing ratio = 3 : 5.

12. Rao and Swami are partners in a firm sharing profits and losses in 3:2 ratio. They admit Ravi as a new partner for 1/8 share in the profits. The new profit sharing ratio between Rao and Swami is 4:3. Calculate new profit sharing ratio and sacrificing ratio?

SOLUTION Ravi’s share = 1/8, so remaining 7/8 shared by Rao and Swami in 4:3. Rao = 4/7 × 7/8 = 4/8; Swami = 3/7 × 7/8 = 3/8; Ravi = 1/8. New ratio = 4 : 3 : 1. Sacrifice: Rao = 3/5 − 4/8 = 24/40 − 20/40 = 4/40; Swami = 2/5 − 3/8 = 16/40 − 15/40 = 1/40. Sacrificing ratio = 4 : 1.

13. Compute the value of goodwill on the basis of four years’ purchase of the average profits based on the last five years? The profits for the last five years were as follows: 2015 Rs. 40,000; 2016 Rs. 50,000; 2017 Rs. 60,000; 2018 Rs. 50,000; 2019 Rs. 60,000.

SOLUTION Total profits = 40,000 + 50,000 + 60,000 + 50,000 + 60,000 = ₹2,60,000. Average profit = 2,60,000 ÷ 5 = ₹52,000. Goodwill = 52,000 × 4 = ₹2,08,000. (Matches NCERT answer.)

14. Firm’s Capital in a business is Rs. 2,00,000. The normal rate of return on firm’s capital is 15%. During the year 2015 the firm earned a profit of Rs. 48,000. Calculate goodwill on the basis of 3 years purchase of super profit?

SOLUTION Normal profit = 2,00,000 × 15/100 = ₹30,000. Super profit = 48,000 − 30,000 = ₹18,000. Goodwill = 18,000 × 3 = ₹54,000. (Matches NCERT answer.)

15. The books of Ram and Bharat showed that the firm’s capital on 31.12.2016 was Rs. 5,00,000 and the profits for the last 5 years: 2015 Rs. 40,000; 2014 Rs. 50,000; 2013 Rs. 55,000; 2012 Rs. 70,000 and 2011 Rs. 85,000. Calculate the value of goodwill on the basis of 3 years purchase of the average super profits of the last 5 years assuming that the normal rate of return is 10%?

SOLUTION Total profits = 40,000 + 50,000 + 55,000 + 70,000 + 85,000 = ₹3,00,000; Average profit = 3,00,000 ÷ 5 = ₹60,000. Normal profit = 5,00,000 × 10/100 = ₹50,000; Super profit = 60,000 − 50,000 = ₹10,000. Goodwill = 10,000 × 3 = ₹30,000. (Matches NCERT answer.)

16. Rajan and Rajani are partners in a firm. Their capitals were Rajan Rs. 3,00,000; Rajani Rs. 2,00,000. During the year 2015 the firm earned a profit of Rs. 1,50,000. Calculate the value of goodwill of the firm by capitalisation method assuming that the normal rate of return is 20%?

SOLUTION Capital employed = 3,00,000 + 2,00,000 = ₹5,00,000. Capitalised value of profit = Profit × 100 ÷ Normal rate = 1,50,000 × 100/20 = ₹7,50,000. Goodwill = Capitalised value − Capital employed = 7,50,000 − 5,00,000 = ₹2,50,000. (Matches NCERT answer.)

17. A business has earned average profits of Rs. 1,00,000 during the last few years. Find out the value of goodwill by capitalisation method, given that the assets of the business are Rs. 10,00,000 and its external liabilities are Rs. 1,80,000. The normal rate of return is 10%?

SOLUTION Capitalised value of average profit = 1,00,000 × 100/10 = ₹10,00,000. Net assets (capital employed) = Assets − External liabilities = 10,00,000 − 1,80,000 = ₹8,20,000. Goodwill = 10,00,000 − 8,20,000 = ₹1,80,000. (Matches NCERT answer.)

18. Verma and Sharma are partners in a firm sharing profits and losses in the ratio of 5:3. They admitted Ghosh as a new partner for 1/5 share of profits. Ghosh is to bring in Rs. 20,000 as capital and Rs. 4,000 as his share of goodwill premium. Give the necessary journal entries: a) When the amount of goodwill is retained in the business. b) When the amount of goodwill is fully withdrawn. c) When 50% of the amount of goodwill is withdrawn. d) When goodwill is paid privately.

SOLUTION Sacrificing ratio = old ratio = 5:3, so premium ₹4,000 is shared Verma ₹2,500 and Sharma ₹1,500.

Case	Journal Entries	Dr (₹)	Cr (₹)
(a) Goodwill retained	Bank A/c Dr. To Ghosh’s Capital A/c To Premium for Goodwill A/c	24,000	20,000 4,000
	Premium for Goodwill A/c Dr. To Verma’s Capital A/c To Sharma’s Capital A/c	4,000	2,500 1,500
(b) Fully withdrawn	Above two entries, then: Verma’s Capital A/c Dr. Sharma’s Capital A/c Dr. To Bank A/c	2,500 1,500	4,000
(c) 50% withdrawn	Above first two entries, then: Verma’s Capital A/c Dr. Sharma’s Capital A/c Dr. To Bank A/c	1,250 750	2,000
(d) Paid privately	No entry is passed in the books of the firm for the premium, as it is paid by Ghosh directly to Verma and Sharma. Only the capital entry: Bank A/c Dr. ₹20,000, To Ghosh’s Capital A/c ₹20,000.

19. A and B are partners in a firm sharing profits and losses in the ratio of 3:2. They decide to admit C into partnership with 1/4 share in profits. C will bring in Rs. 30,000 for capital and the requisite amount of goodwill premium in cash. The goodwill of the firm is valued at Rs. 20,000. The new profit sharing ratio is 2:1:1. A and B withdraw their share of goodwill. Give necessary journal entries?

SOLUTION C’s share of goodwill = 1/4 of ₹20,000 = ₹5,000. Sacrifice: A = 3/5 − 2/4 = 12/20 − 10/20 = 2/20; B = 2/5 − 1/4 = 8/20 − 5/20 = 3/20. Sacrificing ratio = 2:3. Premium ₹5,000 shared: A = 5,000 × 2/5 = ₹2,000; B = 5,000 × 3/5 = ₹3,000.

Particulars	Dr (₹)	Cr (₹)
Bank A/c Dr. To C’s Capital A/c To Premium for Goodwill A/c	35,000	30,000 5,000
Premium for Goodwill A/c Dr. To A’s Capital A/c To B’s Capital A/c	5,000	2,000 3,000
A’s Capital A/c Dr. B’s Capital A/c Dr. To Bank A/c	2,000 3,000	5,000

20. Arti and Bharti are partners in a firm sharing profits in 3:2 ratio. They admitted Sarthi for 1/4 share in the profits of the firm. Sarthi brings Rs. 50,000 for his capital and Rs. 10,000 for his 1/4 share of goodwill. Goodwill already appears in the books of Arti and Bharti at Rs. 5,000. The new profit sharing ratio between Arti, Bharti and Sarthi will be 2:1:1. Record the necessary journal entries in the books of the new firm?

SOLUTION Existing goodwill ₹5,000 written off in old ratio 3:2 → Arti ₹3,000, Bharti ₹2,000. Sacrifice: Arti = 3/5 − 2/4 = 2/20; Bharti = 2/5 − 1/4 = 3/20 → ratio 2:3. Premium ₹10,000 → Arti ₹4,000, Bharti ₹6,000.

Particulars	Dr (₹)	Cr (₹)
Arti’s Capital A/c Dr. Bharti’s Capital A/c Dr. To Goodwill A/c	3,000 2,000	5,000
Bank A/c Dr. To Sarthi’s Capital A/c To Premium for Goodwill A/c	60,000	50,000 10,000
Premium for Goodwill A/c Dr. To Arti’s Capital A/c To Bharti’s Capital A/c	10,000	4,000 6,000

21. X and Y are partners in a firm sharing profits and losses in 4:3 ratio. They admitted Z for 1/8 share. Z brought Rs. 20,000 for his capital and Rs. 7,000 for his 1/8 share of goodwill. Goodwill already appears in the books at Rs. 40,000. Show necessary journal entries in the books of X, Y and Z?

SOLUTION Existing goodwill ₹40,000 written off in old ratio 4:3 → X ₹22,857 (40,000 × 4/7) and Y ₹17,143 (40,000 × 3/7). Sacrificing ratio = old ratio 4:3, so premium ₹7,000 → X ₹4,000, Y ₹3,000.

Particulars	Dr (₹)	Cr (₹)
X’s Capital A/c Dr. Y’s Capital A/c Dr. To Goodwill A/c	22,857 17,143	40,000
Bank A/c Dr. To Z’s Capital A/c To Premium for Goodwill A/c	27,000	20,000 7,000
Premium for Goodwill A/c Dr. To X’s Capital A/c To Y’s Capital A/c	7,000	4,000 3,000

22. Aditya and Balan are partners sharing profits and losses in 3:2 ratio. They admitted Christopher for 1/4 share in the profits. The new profit sharing ratio agreed was 2:1:1. Christopher brought Rs. 50,000 for his capital. His share of goodwill was agreed to at Rs. 15,000. Christopher could bring only Rs. 10,000 out of his share of goodwill. Record necessary journal entries in the books of the firm?

SOLUTION Sacrifice: Aditya = 3/5 − 2/4 = 2/20; Balan = 2/5 − 1/4 = 3/20 → ratio 2:3. Total share of goodwill ₹15,000: brought in cash ₹10,000; not brought ₹5,000 (debited to Christopher’s Current A/c). Aditya gets 2/5 × 15,000 = ₹6,000; Balan 3/5 × 15,000 = ₹9,000.

Particulars	Dr (₹)	Cr (₹)
Bank A/c Dr. To Christopher’s Capital A/c To Premium for Goodwill A/c	60,000	50,000 10,000
Premium for Goodwill A/c Dr. Christopher’s Current A/c Dr. To Aditya’s Capital A/c To Balan’s Capital A/c	10,000 5,000	6,000 9,000

23. Amar and Samar were partners in a firm sharing profits and losses in 3:1 ratio. They admitted Kanwar for 1/4 share of profits. Kanwar could not bring his share of goodwill premium in cash. The Goodwill of the firm was valued at Rs. 80,000 on Kanwar’s admission. Record necessary journal entry for goodwill on Kanwar’s admission.

SOLUTION Kanwar’s share of goodwill = 1/4 of ₹80,000 = ₹20,000. He brings nothing, so his Current A/c is debited; sacrificing ratio = old ratio 3:1 → Amar ₹15,000, Samar ₹5,000.

Particulars	Dr (₹)	Cr (₹)
Kanwar’s Current A/c Dr. To Amar’s Capital A/c To Samar’s Capital A/c	20,000	15,000 5,000

24. Mohan Lal and Sohan Lal were partners in a firm sharing profits and losses in 3:2 ratio. They admitted Ram Lal for 1/4 share on 1.1.2013. It was agreed that goodwill of the firm will be valued at 3 years purchase of the average profits of last 4 years which were Rs. 50,000 for 2013, Rs. 60,000 for 2014, Rs. 90,000 for 2015 and Rs. 70,000 for 2016. Ram Lal did not bring his share of goodwill premium in cash. Record the necessary journal entries in the books of the firm on Ram Lal’s admission when: a) Goodwill already appears in the books at Rs. 2,02,500. b) Goodwill appears in the books at Rs. 2,500. c) Goodwill appears in the books at Rs. 2,05,000.

SOLUTION Average profit = (50,000 + 60,000 + 90,000 + 70,000)/4 = 2,70,000/4 = ₹67,500. Goodwill = 67,500 × 3 = ₹2,02,500. Ram Lal’s share = 1/4 × 2,02,500 = ₹50,625, debited to his Current A/c; sacrificing ratio = 3:2 → Mohan Lal ₹30,375, Sohan Lal ₹20,250. Goodwill adjustment entry (common to all cases): Ram Lal’s Current A/c Dr. ₹50,625; To Mohan Lal’s Capital A/c ₹30,375; To Sohan Lal’s Capital A/c ₹20,250. Existing goodwill is first written off in old ratio 3:2:

Case	Write-off entry	Mohan Lal Dr (₹)	Sohan Lal Dr (₹)	Goodwill A/c Cr (₹)
(a) ₹2,02,500	Old Partners’ Capital A/cs Dr. To Goodwill A/c	1,21,500	81,000	2,02,500
(b) ₹2,500	Old Partners’ Capital A/cs Dr. To Goodwill A/c	1,500	1,000	2,500
(c) ₹2,05,000	Old Partners’ Capital A/cs Dr. To Goodwill A/c	1,23,000	82,000	2,05,000

In each case, after writing off the existing goodwill in old ratio, the common goodwill adjustment entry above is passed for Ram Lal’s share (₹50,625).

25. Rajesh and Mukesh are equal partners in a firm. They admit Hari into partnership and the new profit sharing ratio between Rajesh, Mukesh and Hari is 4:3:2. On Hari’s admission goodwill of the firm is valued at Rs. 36,000. Hari is unable to bring his share of goodwill premium in cash. Rajesh, Mukesh and Hari decided not to show goodwill in their balance sheet. Record necessary journal entries for the treatment of goodwill on Hari’s admission.

SOLUTION Old ratio 1:1; new ratio 4:3:2 (total 9). Hari’s share of goodwill = 2/9 × 36,000 = ₹8,000. Sacrifice: Rajesh = 1/2 − 4/9 = 9/18 − 8/18 = 1/18; Mukesh = 1/2 − 3/9 = 9/18 − 6/18 = 3/18. Sacrificing ratio = 1:3. So Rajesh = 8,000 × 1/4 = ₹2,000; Mukesh = 8,000 × 3/4 = ₹6,000.

Particulars	Dr (₹)	Cr (₹)
Hari’s Current A/c Dr. To Rajesh’s Capital A/c To Mukesh’s Capital A/c	8,000	2,000 6,000

26. Amar and Akbar are equal partners in a firm. They admitted Anthony as a new partner and the new profit sharing ratio is 4:3:2. Anthony could not bring this share of goodwill Rs. 45,000 in cash. It is decided to do adjustment for goodwill without opening goodwill account. Pass the necessary journal entry for the treatment of goodwill?

SOLUTION Old ratio 1:1; new ratio 4:3:2. Sacrifice: Amar = 1/2 − 4/9 = 1/18; Akbar = 1/2 − 3/9 = 3/18 → ratio 1:3. Anthony’s share of goodwill = ₹45,000, debited to his Current A/c; Amar = 45,000 × 1/4 = ₹11,250; Akbar = 45,000 × 3/4 = ₹33,750.

Particulars	Dr (₹)	Cr (₹)
Anthony’s Current A/c Dr. To Amar’s Capital A/c To Akbar’s Capital A/c	45,000	11,250 33,750

27. Given below is the Balance Sheet of A and B, who are carrying on partnership business on 31.12.2016. A and B share profits and losses in the ratio of 2:1. (Bills Payable Rs. 10,000; Creditors Rs. 58,000; Outstanding Expenses Rs. 2,000; Capitals A Rs. 1,80,000 and B Rs. 1,50,000; Cash in Hand Rs. 10,000; Cash at Bank Rs. 40,000; Sundry Debtors Rs. 60,000; Stock Rs. 40,000; Plant Rs. 1,00,000; Buildings Rs. 1,50,000.) C is admitted as a partner on the date of the balance sheet on the following terms: (i) C will bring in Rs. 1,00,000 as his capital and Rs. 60,000 as his share of goodwill for 1/4 share in the profits. (ii) Plant is to be appreciated to Rs. 1,20,000 and the value of buildings is to be appreciated by 10%. (iii) Stock is found over valued by Rs. 4,000. (iv) A provision for bad and doubtful debts is to be created at 5% of debtors. (v) Creditors were unrecorded to the extent of Rs. 1,000. Pass the necessary journal entries, prepare the revaluation account and partners’ capital accounts, and show the Balance Sheet after the admission of C.

SOLUTION Revaluation Account — Gains: Plant +₹20,000, Buildings +₹15,000 (10% of 1,50,000) = ₹35,000. Losses: Stock −₹4,000, Provision for doubtful debts ₹3,000 (5% of 60,000), Unrecorded creditors ₹1,000 = ₹8,000. Profit on revaluation = 35,000 − 8,000 = ₹27,000, shared A:B = 2:1 → A ₹18,000, B ₹9,000.

Revaluation A/c – Dr.	₹	Cr.	₹
Stock	4,000	Plant	20,000
Provision for doubtful debts	3,000	Buildings	15,000
Creditors (unrecorded)	1,000
Profit: A 18,000 / B 9,000	27,000
Total	35,000	Total	35,000

Goodwill: sacrificing ratio = old ratio 2:1 (nothing stated) → A ₹40,000, B ₹20,000.

Partners’ Capital A/cs	A (₹)	B (₹)	C (₹)
Balance b/d	1,80,000	1,50,000	–
Bank (Capital)	–	–	1,00,000
Premium for Goodwill	40,000	20,000	–
Revaluation Profit	18,000	9,000	–
Balance c/d	2,38,000	1,79,000	1,00,000

Balance Sheet of A, B and C (after admission):

Liabilities	₹	Assets	₹
Bills Payable	10,000	Cash in Hand	10,000
Creditors (58,000 + 1,000)	59,000	Cash at Bank (40,000 + 1,00,000 + 60,000)	2,00,000
Outstanding Expenses	2,000	Debtors 60,000 − Prov. 3,000	57,000
Capitals: A 2,38,000		Stock	36,000
B 1,79,000; C 1,00,000	5,17,000	Plant	1,20,000
		Buildings	1,65,000
Total	5,88,000	Total	5,88,000

Gain on revaluation ₹27,000; Balance Sheet total ₹5,88,000. (Matches NCERT answer.)

28. Leela and Meeta were partners in a firm sharing profits and losses in the ratio of 5:3. In April 2017 they admitted Om as a new partner. On the date of Om’s admission the balance sheet of Leela and Meeta showed a balance of Rs. 16,000 in general reserve and Rs. 24,000 (Cr) in Profit and Loss Account. Record necessary journal entries for the treatment of these items on Om’s admission. The new profit sharing ratio between Leela, Meeta and Om was 5:3:2.

SOLUTION Accumulated profits are distributed to old partners in old ratio 5:3. General Reserve ₹16,000 → Leela ₹10,000, Meeta ₹6,000. P&L (Cr) ₹24,000 → Leela ₹15,000, Meeta ₹9,000.

Particulars	Dr (₹)	Cr (₹)
General Reserve A/c Dr. To Leela’s Capital A/c To Meeta’s Capital A/c	16,000	10,000 6,000
Profit and Loss A/c Dr. To Leela’s Capital A/c To Meeta’s Capital A/c	24,000	15,000 9,000

29. Amit and Viney are partners in a firm sharing profits and losses in 3:1 ratio. On 1.1.2017 they admitted Ranjan as a partner. On Ranjan’s admission the profit and loss account of Amit and Viney showed a debit balance of Rs. 40,000. Record necessary journal entry for the treatment of the same.

SOLUTION A debit balance in P&L A/c is an accumulated loss, borne by old partners in old ratio 3:1 → Amit ₹30,000, Viney ₹10,000.

Particulars	Dr (₹)	Cr (₹)
Amit’s Capital A/c Dr. Viney’s Capital A/c Dr. To Profit and Loss A/c	30,000 10,000	40,000

30. A and B share profits in the proportions of 3/4 and 1/4. Their Balance Sheet on March 31, 2016 was as follows: (Sundry creditors Rs. 41,500; Reserve fund Rs. 4,000; Capital A Rs. 30,000 and B Rs. 16,000; Cash at Bank Rs. 26,500; Bills Receivable Rs. 3,000; Debtors Rs. 16,000; Stock Rs. 20,000; Fixtures Rs. 1,000; Land & Building Rs. 25,000.) On April 1, 2017, C was admitted into partnership on the following terms: (a) That C pays Rs. 10,000 as his capital. (b) That C pays Rs. 5,000 for goodwill. Half of this sum is to be withdrawn by A and B. (c) That stock and fixtures be reduced by 10% and a 5% provision for doubtful debts be created on Sundry Debtors and Bills Receivable. (d) That the value of land and buildings be appreciated by 20%. (e) There being a claim against the firm for damages, a liability to the extent of Rs. 1,000 should be created. (f) An item of Rs. 650 included in sundry creditors is not likely to be claimed and hence should be written back. Record the above transactions (journal entries) in the books of the firm assuming that the profit sharing ratio between A and B has not changed. Prepare the new Balance Sheet on the admission of C.

SOLUTION Revaluation Account — Losses: Stock 10% of 20,000 = ₹2,000; Fixtures 10% of 1,000 = ₹100; Provision for doubtful debts 5% of (16,000 + 3,000) = ₹950; Claim for damages ₹1,000; total losses = ₹4,050. Gains: Land & Building 20% of 25,000 = ₹5,000; Creditors written back ₹650; total gains = ₹5,650. Profit = 5,650 − 4,050 = ₹1,600, shared A:B = 3:1 → A ₹1,200, B ₹400.

Revaluation A/c – Dr.	₹	Cr.	₹
Stock	2,000	Land & Building	5,000
Fixtures	100	Creditors (written back)	650
Provision for doubtful debts	950
Claim for damages	1,000
Profit: A 1,200 / B 400	1,600
Total	5,650	Total	5,650

Other adjustments: Reserve fund ₹4,000 → A ₹3,000, B ₹1,000. Goodwill premium ₹5,000 in old ratio 3:1 → A ₹3,750, B ₹1,250; half (₹2,500) withdrawn → A ₹1,875, B ₹625.

Partners’ Capital A/cs	A (₹)	B (₹)	C (₹)
Balance b/d	30,000	16,000	–
Bank (Capital)	–	–	10,000
Premium for Goodwill	3,750	1,250	–
Reserve fund	3,000	1,000	–
Revaluation Profit	1,200	400	–
Less: Goodwill withdrawn	(1,875)	(625)	–
Balance c/d	36,075	18,025	10,000

Balance Sheet of A, B and C (after admission):

Liabilities	₹	Assets	₹
Sundry Creditors (41,500 − 650)	40,850	Cash at Bank (26,500 + 10,000 + 5,000 − 2,500)	39,000
Claim for damages	1,000	Bills Receivable 3,000 − Prov. 150	2,850
Capitals: A 36,075		Debtors 16,000 − Prov. 800	15,200
B 18,025; C 10,000	64,100	Stock (20,000 − 2,000)	18,000
		Fixtures (1,000 − 100)	900
		Land & Building (25,000 + 5,000)	30,000
Total	1,05,950	Total	1,05,950

Gain on revaluation ₹1,600; Balance Sheet total ₹1,05,950. (Matches NCERT answer.)

31. A and B are partners sharing profits and losses in the ratio of 3:1. On 1st April, 2017 they admitted C as a new partner for 1/4 share in the profits of the firm. C brings Rs. 20,000 as for his 1/4 share in the profits of the firm. The capitals of A and B after all adjustments in respect of goodwill, revaluation of assets and liabilities, etc. has been worked out at Rs. 50,000 for A and Rs. 12,000 for B. It is agreed that partner’s capitals will be according to new profit sharing ratio. Calculate the new capitals of A and B and pass the necessary journal entries assuming that A and B brought in or withdrew the necessary cash as the case may be for making their capitals in proportion to their profit sharing ratio?

SOLUTION New ratio: C = 1/4; remaining 3/4 in old ratio 3:1 → A = 3/4 × 3/4 = 9/16; B = 3/4 × 1/4 = 3/16; C = 1/4 = 4/16. New ratio = 9 : 3 : 4. Total capital based on C: C’s capital ₹20,000 = 4/16 of total → Total = 20,000 × 16/4 = ₹80,000. Required: A = 9/16 × 80,000 = ₹45,000; B = 3/16 × 80,000 = ₹15,000. A has ₹50,000 (excess ₹5,000 withdrawn); B has ₹12,000 (deficiency ₹3,000 brought in).

Particulars	Dr (₹)	Cr (₹)
A’s Capital A/c Dr. To Cash/Bank A/c	5,000	5,000
Cash/Bank A/c Dr. To B’s Capital A/c	3,000	3,000

New capitals: A ₹45,000, B ₹15,000, C ₹20,000.

32. Pinky, Qumar and Roopa partners in a firm sharing profits and losses in the ratio of 3:2:1. S is admitted as a new partner for 1/4 share in the profits of the firm, which he gets 1/8 from Pinky, and 1/16 each from Qumar and Roopa. The total capital of the new firm after Seema’s admission will be Rs. 2,40,000. Seema is required to bring in cash equal to 1/4 of the total capital of the new firm. The capitals of the old partners also have to be adjusted in proportion of their profit sharing ratio. The capitals of Pinky, Qumar and Roopa after all adjustments in respect of goodwill and revaluation of assets and liabilities have been made are Pinky Rs. 80,000, Qumar Rs. 30,000 and Roopa Rs. 20,000. Calculate the capitals of all the partners and record the necessary journal entries for doing adjustments in respect of capitals according to the agreement between the partners?

SOLUTION New shares (out of 48): Pinky = 3/6 − 1/8 = 24/48 − 6/48 = 18/48; Qumar = 2/6 − 1/16 = 16/48 − 3/48 = 13/48; Roopa = 1/6 − 1/16 = 8/48 − 3/48 = 5/48; S = 1/4 = 12/48. New ratio = 18 : 13 : 5 : 12. Total capital ₹2,40,000. Required capitals: Pinky = 18/48 × 2,40,000 = ₹90,000; Qumar = 13/48 × 2,40,000 = ₹65,000; Roopa = 5/48 × 2,40,000 = ₹25,000; S = 12/48 × 2,40,000 = ₹60,000.

Partner	Required (₹)	Existing (₹)	Adjustment
Pinky	90,000	80,000	Brings in ₹10,000
Qumar	65,000	30,000	Brings in ₹35,000
Roopa	25,000	20,000	Brings in ₹5,000
S	60,000	–	Brings in ₹60,000

Particulars	Dr (₹)	Cr (₹)
Cash/Bank A/c Dr. To Pinky’s Capital A/c To Qumar’s Capital A/c To Roopa’s Capital A/c To S’s Capital A/c	1,10,000	10,000 35,000 5,000 60,000

33. The following was the Balance Sheet of Arun, Bablu and Chetan sharing profits and losses in the ratio of 6/14 : 5/14 : 3/14 respectively. (Capital Accounts: Arun Rs. 19,000, Bablu Rs. 16,000, Chetan Rs. 8,000; Creditors Rs. 9,000; Bills Payable Rs. 3,000; Land and Buildings Rs. 24,000; Furniture Rs. 3,500; Stock Rs. 14,000; Debtors Rs. 12,600; Cash Rs. 900.) They agreed to take Deepak into partnership and give him a share of 1/8 on the following terms: (a) that Deepak should bring in Rs. 4,200 as goodwill and Rs. 7,000 as his Capital; (b) that furniture be depreciated by 12%; (c) that stock be depreciated by 10% (d) that a Reserve of 5% be created for doubtful debts; (e) that the value of land and buildings having appreciated be brought upto Rs. 31,000; (f) that after making the adjustments the capital accounts of the old partners (who continue to share in the same proportion as before) be adjusted on the basis of the proportion of Deepak’s Capital to his share in the business, i.e., actual cash to be paid off to, or brought in by the old partners as the case may be. Prepare Cash Account, Profit and Loss Adjustment Account (Revaluation Account) and the Opening Balance Sheet of the new firm.

SOLUTION Revaluation (P&L Adjustment) Account — Losses: Furniture 12% of 3,500 = ₹420; Stock 10% of 14,000 = ₹1,400; Provision for doubtful debts 5% of 12,600 = ₹630; total ₹2,450. Gain: Land & Buildings 31,000 − 24,000 = ₹7,000. Profit = 7,000 − 2,450 = ₹4,550, shared 6:5:3 (out of 14) → Arun ₹1,950, Bablu ₹1,625, Chetan ₹975.

Revaluation A/c – Dr.	₹	Cr.	₹
Furniture	420	Land & Buildings	7,000
Stock	1,400
Provision for doubtful debts	630
Profit: Arun 1,950 / Bablu 1,625 / Chetan 975	4,550
Total	7,000	Total	7,000

Goodwill: ₹4,200 brought by Deepak, credited to old partners in old (sacrificing) ratio 6:5:3 → Arun ₹1,800, Bablu ₹1,500, Chetan ₹900. Total capital of new firm based on Deepak: ₹7,000 = 1/8 → Total = 7,000 × 8 = ₹56,000. Old partners share 7/8 = ₹49,000 in 6:5:3 → Arun ₹21,000, Bablu ₹17,500, Chetan ₹10,500.

Partner	Capital after adj. (₹)	Required (₹)	Cash brought / (paid off)
Arun (19,000 + 1,800 + 1,950)	22,750	21,000	Paid off (1,750)
Bablu (16,000 + 1,500 + 1,625)	19,125	17,500	Paid off (1,625)
Chetan (8,000 + 900 + 975)	9,875	10,500	Brings in 625

Cash Account: Opening ₹900 + Deepak capital ₹7,000 + Deepak goodwill ₹4,200 + Chetan ₹625 = ₹12,725 (Dr.); Less paid to Arun ₹1,750 and Bablu ₹1,625 = ₹3,375; Closing balance c/d = ₹9,350. Opening Balance Sheet of new firm:

Liabilities	₹	Assets	₹
Creditors	9,000	Cash	9,350
Bills Payable	3,000	Debtors 12,600 − Prov. 630	11,970
Capitals: Arun 21,000		Stock (14,000 − 1,400)	12,600
Bablu 17,500; Chetan 10,500		Furniture (3,500 − 420)	3,080
Deepak 7,000	56,000	Land & Buildings	31,000
Total	68,000	Total	68,000

Gain on revaluation ₹4,550; Balance Sheet total ₹68,000. (Matches NCERT answer.)

34. Azad and Babli are partners in a firm sharing profits and losses in the ratio of 2:1. Chintan is admitted into the firm with 1/4 share in profits. Chintan will bring in Rs. 30,000 as his capital and the capitals of Azad and Babli are to be adjusted in the profit sharing ratio. The Balance Sheet of Azad and Babli as on March 31, 2016 (before Chintan’s admission) was as follows: (Creditors Rs. 8,000; Bills payable Rs. 4,000; General reserve Rs. 6,000; Capital Azad Rs. 50,000 and Babli Rs. 32,000; Cash in hand Rs. 2,000; Cash at bank Rs. 10,000; Sundry debtors Rs. 8,000; Stock Rs. 10,000; Furniture Rs. 5,000; Machinery Rs. 25,000; Buildings Rs. 40,000.) It was agreed that: i) Chintan will bring in Rs. 12,000 as his share of goodwill premium. ii) Buildings were valued at Rs. 45,000 and Machinery at Rs. 23,000. iii) A provision for doubtful debts is to be created @ 6% on debtors. iv) The capital accounts of Azad and Babli are to be adjusted by opening current accounts. Record necessary journal entries, show necessary ledger accounts and prepare the Balance Sheet after admission.

SOLUTION Revaluation Account — Gain: Building +₹5,000. Losses: Machinery −₹2,000, Provision for doubtful debts 6% of 8,000 = ₹480; total losses = ₹2,480. Profit = 5,000 − 2,480 = ₹2,520, shared 2:1 → Azad ₹1,680, Babli ₹840.

Revaluation A/c – Dr.	₹	Cr.	₹
Machinery	2,000	Building	5,000
Provision for doubtful debts	480
Profit: Azad 1,680 / Babli 840	2,520
Total	5,000	Total	5,000

Other adjustments: Goodwill ₹12,000 in old ratio 2:1 → Azad ₹8,000, Babli ₹4,000. General Reserve ₹6,000 → Azad ₹4,000, Babli ₹2,000. New ratio: Chintan 1/4; remaining 3/4 in 2:1 → Azad 2/4, Babli 1/4 → 2:1:1. Total capital on Chintan’s base = 30,000 × 4 = ₹1,20,000 → Azad ₹60,000, Babli ₹30,000, Chintan ₹30,000.

Partners’ Capital A/cs	Azad (₹)	Babli (₹)	Chintan (₹)
Balance b/d	50,000	32,000	–
Cash (Capital)	–	–	30,000
Goodwill	8,000	4,000	–
General Reserve	4,000	2,000	–
Revaluation Profit	1,680	840	–
Sub-total	63,680	38,840	30,000
Transfer to Current A/c (excess)	3,680	8,840	–
Balance c/d	60,000	30,000	30,000

Excess transferred to current accounts: Azad ₹3,680, Babli ₹8,840.

Liabilities	₹	Assets	₹
Creditors	8,000	Cash in hand	44,000
Bills Payable	4,000	Cash at bank	10,000
Current A/cs: Azad 3,680 / Babli 8,840	12,520	Debtors 8,000 − Prov. 480	7,520
Capitals: Azad 60,000		Stock	10,000
Babli 30,000; Chintan 30,000	1,20,000	Furniture	5,000
		Machinery	23,000
		Buildings	45,000
Total	1,44,520	Total	1,44,520

(Cash in hand = 2,000 + 30,000 + 12,000 = ₹44,000.) Gain on revaluation ₹2,520; Balance Sheet total ₹1,44,520. (Matches NCERT answer.)

35. Ashish and Dutta were partners in a firm sharing profits in 3:2 ratio. On Jan. 01, 2015 they admitted Vimal for 1/5 share in the profits. The Balance Sheet of Ashish and Dutta as on March 31, 2016 was as follows: (Ashish Capital Rs. 80,000; Dutta’s Capital Rs. 35,000; Creditors Rs. 15,000; Bills Payable Rs. 10,000; Land & Building Rs. 35,000; Plant Rs. 45,000; Debtors Rs. 22,000 less Provision Rs. 2,000 = Rs. 20,000; Stock Rs. 35,000; Cash Rs. 5,000.) It was agreed that: i) The value of Land and Building be increased by Rs. 15,000. ii) The value of plant be increased by 10,000. iii) Goodwill of the firm be valued at Rs. 20,000. iv) Vimal to bring in capital to the extent of 1/5th of the total capital of the new firm. Record the necessary journal entries and prepare the Balance Sheet of the firm after Vimal’s admission.

SOLUTION Revaluation Account — Gains only: Land & Building +₹15,000, Plant +₹10,000. Profit = ₹25,000, shared 3:2 → Ashish ₹15,000, Dutta ₹10,000.

Revaluation A/c – Dr.	₹	Cr.	₹
Profit: Ashish 15,000 / Dutta 10,000	25,000	Land & Building	15,000
		Plant	10,000
Total	25,000	Total	25,000

Goodwill: Vimal’s share = 1/5 of ₹20,000 = ₹4,000, brought in cash and credited to old partners in old ratio 3:2 → Ashish ₹2,400, Dutta ₹1,600. Capitals of old partners after adjustments: Ashish = 80,000 + 15,000 + 2,400 = ₹97,400; Dutta = 35,000 + 10,000 + 1,600 = ₹46,600. Combined = ₹1,44,000 = 4/5 of total capital. Total capital = 1,44,000 × 5/4 = ₹1,80,000. Vimal’s capital = 1/5 × 1,80,000 = ₹36,000.

Particulars	Dr (₹)	Cr (₹)
Land & Building A/c Dr. Plant A/c Dr. To Revaluation A/c	15,000 10,000	25,000
Revaluation A/c Dr. To Ashish’s Capital A/c To Dutta’s Capital A/c	25,000	15,000 10,000
Cash A/c Dr. (36,000 + 4,000) To Vimal’s Capital A/c To Premium for Goodwill A/c	40,000	36,000 4,000
Premium for Goodwill A/c Dr. To Ashish’s Capital A/c To Dutta’s Capital A/c	4,000	2,400 1,600

Balance Sheet of Ashish, Dutta and Vimal (after admission):

Liabilities	₹	Assets	₹
Creditors	15,000	Cash (5,000 + 40,000)	45,000
Bills Payable	10,000	Debtors 22,000 − Prov. 2,000	20,000
Capitals: Ashish 99,800		Stock	35,000
Dutta 48,200; Vimal 36,000	1,84,000	Plant (45,000 + 10,000)	55,000
		Land & Building (35,000 + 15,000)	50,000
Total	2,05,000	Total	2,05,000

(Ashish’s capital = 97,400 + 2,400 = ₹99,800; Dutta = 46,600 + 1,600 = ₹48,200.) Gain on revaluation ₹25,000; Balance Sheet total ₹2,05,000. (Matches NCERT answer.)

Extra Practice Questions

Short Answer Type Questions

Q1. State any two rights acquired by a newly admitted partner.

ANSWERA newly admitted partner acquires (i) the right to share in the assets of the partnership firm, and (ii) the right to share in the future profits of the firm. For these rights he brings in an agreed amount of capital and, usually, a premium for goodwill.

Q2. Why is goodwill of an established firm written off at the time of admission?

ANSWERAs per Accounting Standard 26, self-generated (internally generated) goodwill cannot be recognised as an asset. Therefore any goodwill already appearing in the books is written off at the time of admission by debiting the old partners’ capital accounts in their old profit sharing ratio.

Q3. What is meant by “number of years’ purchase” in goodwill valuation?

ANSWER“Number of years’ purchase” is the agreed multiple by which the average profit (or super profit) is multiplied to value goodwill. It represents the number of future years for which the buyer expects to enjoy the firm’s profits, e.g. goodwill = average profit × 3 years’ purchase.

Q4. Distinguish between sacrificing ratio and old ratio.

ANSWERThe old ratio is the ratio in which the existing partners shared profits before admission. The sacrificing ratio is the ratio of the shares given up (Old Share − New Share) in favour of the new partner. They are equal only when the new partner takes his share from the old partners in their old ratio; otherwise they differ.

Q5. What is hidden goodwill?

ANSWERHidden goodwill is goodwill not directly stated at the time of admission but inferred from the capital brought in by the new partner. It is found by computing the implied total capital of the firm (new partner’s capital ÷ his share) and subtracting the actual combined capital of all partners; the difference is the firm’s goodwill.

Long Answer Type Questions

Q1. Explain, with journal entries, the treatment of goodwill when the new partner brings premium in cash and the old partners withdraw it.

ANSWERWhen the new partner brings premium for goodwill in cash, three entries are passed. (1) Bank A/c Dr. (capital + premium); To New Partner’s Capital A/c; To Premium for Goodwill A/c. (2) Premium for Goodwill A/c Dr.; To Sacrificing Partners’ Capital A/cs (individually, in sacrificing ratio) — this compensates the old partners for the share of super profits they have given up. (3) If the old partners withdraw the premium: Sacrificing Partners’ Capital A/cs Dr.; To Bank A/c. If the premium is retained in the business, no third entry is passed. If goodwill already appears in the books, it is first written off in the old ratio (Old Partners’ Capital A/cs Dr.; To Goodwill A/c).

Q2. Describe the procedure for adjusting partners’ capitals when the total capital of the new firm is fixed.

ANSWERWhen the total capital of the new firm is given, each partner’s required capital is computed by multiplying the total capital by his share in the new profit sharing ratio (including the new partner). This required capital is then compared with each partner’s actual capital after all adjustments for goodwill, reserves and revaluation. A partner whose actual capital is short brings in the deficiency (Cash A/c Dr.; To Partner’s Capital A/c) and a partner with surplus withdraws the excess (Partner’s Capital A/c Dr.; To Cash A/c). Where agreed, the surplus or deficiency is instead transferred to the partners’ current accounts rather than settled in cash. This brings every partner’s capital into proportion with the new profit sharing ratio.

Q3. Explain how a change in the profit sharing ratio among existing partners is accounted for.

ANSWERWhen existing partners change their profit sharing ratio without admission or retirement, some partners gain a share of future profit and others sacrifice it. The gain/sacrifice of each partner is found as New Share − Old Share. The change is, in effect, one partner buying a share of profit from another, so adjustment for goodwill is made: the gaining partners’ capital accounts are debited and the sacrificing partners’ capital accounts are credited in the ratio of gain/sacrifice. In addition, like admission, the change may require revaluation of assets and reassessment of liabilities (profit/loss transferred to old partners in the old ratio) and the distribution of accumulated profits, losses and reserves to all partners in the old ratio. Capitals may also be readjusted to the new ratio if agreed.

MCQs & Assertion–Reason

1. The ratio in which old partners give up a part of their share in favour of the new partner is called:

(a) gaining ratio (b) sacrificing ratio (c) new ratio (d) capital ratio

2. Profit or loss on revaluation of assets and liabilities is transferred to:

(a) all partners in new ratio (b) old partners in old ratio (c) new partner only (d) old partners in new ratio

3. At the time of admission, a general reserve appearing in the old balance sheet is transferred to:

(a) all partners’ capital accounts (b) new partner’s capital account (c) old partners’ capital accounts (d) revaluation account

4. A and B share profits 3:1 and admit C for 1/4 share. If C takes his share from A and B in their old ratio, the sacrificing ratio is:

(a) equal (b) 3:1 (c) 2:1 (d) 1:3

5. Under the super profits method, goodwill equals:

(a) average profit × years’ purchase (b) super profit × years’ purchase (c) normal profit × years’ purchase (d) super profit × 100/normal rate

6. Goodwill already existing in the books is written off among old partners in their:

(a) sacrificing ratio (b) gaining ratio (c) old profit sharing ratio (d) new profit sharing ratio

7. When the new partner brings premium for goodwill in cash, it is credited to:

(a) Goodwill A/c (b) new partner’s capital A/c (c) sacrificing partners’ capital A/cs (d) all partners’ capital A/cs

8. If average profit is ₹60,000, capital employed ₹5,00,000 and normal rate of return 10%, the super profit is:

(a) ₹50,000 (b) ₹10,000 (c) ₹6,000 (d) ₹1,10,000

9. When the new partner does not bring his share of goodwill in cash and no goodwill exists in the books, the amount is debited to the:

(a) new partner’s current account (b) goodwill account (c) revaluation account (d) old partners’ capital accounts

10. On admission of a partner, an increase in the value of an asset is:

(a) debited to Revaluation A/c (b) credited to Revaluation A/c (c) credited to old partners’ capital A/cs (d) credited to P&L A/c

Answer key: 1-(b), 2-(b), 3-(c), 4-(b), 5-(b), 6-(c), 7-(c), 8-(b), 9-(a), 10-(b).

For each Assertion–Reason question, choose: (A) Both true and the Reason correctly explains the Assertion; (B) Both true but the Reason is not the correct explanation; (C) Assertion true, Reason false; (D) Assertion false, Reason true.

A-R 1. Assertion: On admission of a partner, the firm is reconstituted but does not come to an end.

Reason: Admission changes the existing agreement, so a new agreement comes into being while the firm continues.

A-R 2. Assertion: Revaluation profit is shared by all partners including the new partner.

Reason: Revaluation reflects changes in value that occurred before the new partner’s admission.

A-R 3. Assertion: Goodwill exists only when a firm earns super profits.

Reason: Goodwill is the value of a firm’s ability to earn profits above the normal rate of return.

A-R 4. Assertion: The premium for goodwill brought by a new partner is shared by old partners in the sacrificing ratio.

Reason: The premium compensates old partners for the share of future super profits they have given up.

A-R 5. Assertion: Accumulated profits and reserves are distributed to all partners in the new ratio on admission.

Reason: Reserves were built up before admission and belong only to the old partners.

Answer key: 1-(A), 2-(D), 3-(A), 4-(A), 5-(C).

Exam Tips & Common Mistakes

How to score full marks in this chapter

Always begin a numerical by writing the old ratio, sacrifice and new ratio clearly before doing any goodwill or capital work. Take a common denominator (LCM) so fractions add to 1 and you avoid arithmetic slips. Remember the golden rule: revaluation profit/loss and accumulated reserves/losses go to the old partners in the old ratio, while the premium for goodwill goes in the sacrificing ratio. When goodwill already appears in the books, write it off first in the old ratio (AS 26). For capital adjustment, find the firm’s total capital from the new partner’s capital and his share, then allocate by the new ratio. Present every solution with a clear Revaluation Account, Partners’ Capital Accounts and Balance Sheet, and tally the totals — an untallied balance sheet signals an error.

Common mistakes to avoid

Confusing the sacrificing ratio with the old ratio — they are the same only when the new partner takes his share in the old ratio.
Distributing revaluation profit/loss or reserves to the new partner — these belong to old partners only.
Forgetting to write off existing goodwill in the old ratio before recording the new goodwill.
Crediting the premium for goodwill to the Goodwill A/c instead of the sacrificing partners’ capital accounts.
Treating a provision for doubtful debts as a gain — creating or increasing it is a loss to Revaluation A/c.
Using the new partner’s capital wrongly — total firm capital = new partner’s capital ÷ his share.
Adding only old partners’ capitals when finding hidden goodwill — include the new partner’s capital in the actual total.

Frequently Asked Questions

What is Chapter 2 of Class 12 Accountancy about?

Chapter 2, Reconstitution of a Partnership Firm – Admission of a Partner, explains what happens when a new partner joins a firm: calculating the new profit sharing ratio and sacrificing ratio, valuing and adjusting goodwill, revaluing assets and reassessing liabilities, distributing accumulated profits and reserves, and adjusting partners’ capitals.

In which ratio is the premium for goodwill shared on admission of a partner?

The premium for goodwill brought in by the new partner is shared among the old partners in their sacrificing ratio (Old Share − New Share). It is the same as the old ratio only when the new partner takes his share from the old partners in their old ratio.

How is profit or loss on revaluation distributed at the time of admission?

Profit or loss on revaluation of assets and reassessment of liabilities is transferred only to the old partners in their old profit sharing ratio, because the change in values relates to the period before the new partner was admitted.

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