Financial Accounting · Admission of Partner

Goodwill Treatment on Admission of a Partner

Updated 10 October 2026 · Fact-checked

When a partner is admitted, the firm's goodwill is valued because old partners give up part of future profits. The new partner pays his share of goodwill (premium), usually in cash, and it is credited to the old partners in their sacrificing ratio. If he does not pay it, his capital account is debited and the old partners are credited.

Understand Goodwill Treatment on Admission

Goodwill is the extra value a firm earns because of its reputation, location and customers. It lets a firm earn more than normal profit. It is an asset you cannot see, but it has a price.

When a new partner joins, he gets a share of future profits. Those profits partly come from goodwill built by the old partners. The old partners give up part of their share. This is their sacrifice. The new partner must compensate them. The compensation is his share of goodwill, called premium.

There are two ways to deal with it. In the premium method, the new partner brings his share of goodwill, in cash or by adjustment of his capital, and the old partners are credited in the sacrificing ratio. No goodwill account is opened. In the goodwill account method, the full goodwill is raised in the books and credited to old partners in the old ratio. It is then written off, often by all partners in the new ratio. Follow the question's wording on which one to use.

Hidden goodwill is goodwill you must work out. It arises when the new partner's capital is stated along with his share, and the firm's total capital then implies a different value for the firm. Compare the implied total capital with the actual net assets plus his capital. The difference is the total goodwill.

Goodwill already in the books belongs to the old partners. Before admission, write it off to the old partners' capital accounts in the old ratio. Then bring in new goodwill at the agreed value. This is as per the usual practice in Indian partnership problems. Some questions say to leave it as is. Follow the instructions.

Key rules to remember

Goodwill by average profit: Goodwill = Average profit × Number of years' purchase; Use adjusted profits (after removing abnormal items). Use a weighted average if weights are given.
Goodwill by super profit: Super profit = Average profit − Normal profit; Goodwill = Super profit × Years' purchase; Normal profit = Capital employed × Normal rate of return ÷ 100.
Capitalisation method: Goodwill = Capitalised value of average profit − Net assets; Capitalised value = Average profit × 100 ÷ Normal rate; Net assets = Assets (excluding goodwill) − outside liabilities.
New partner's share of goodwill: Premium = Total goodwill × New partner's share; This is the amount he brings or is debited.
Sacrificing ratio: Sacrifice = Old share − New share (for each old partner); Premium is credited to old partners in this ratio.
Hidden goodwill: Total firm capital = New partner's capital ÷ His share; Goodwill = Total firm capital − (Net assets of old firm + New partner's capital); Use net assets after revaluation, and after any goodwill already in the books is excluded.
Goodwill not brought in cash: Dr New partner's Capital A/c; Cr Old partners' Capital A/cs (sacrificing ratio); Use this when he cannot pay his share of goodwill.
Existing goodwill written off: Dr Old partners' Capital A/cs (old ratio); Cr Goodwill A/c; Do this before raising or recording new goodwill.

How to solve Goodwill Treatment on Admission questions

Use the same sequence for every question. It keeps the ratios and the entries separate.

1Write the old ratio, the new ratio and the new partner's share. Find the sacrificing ratio (old share − new share).
2Value the total goodwill from the question: given value, average profit, super profit or capitalisation, or by the hidden-goodwill method.
3If goodwill already appears in the books, write it off to old partners in the old ratio first.
4Compute the new partner's share of goodwill (total goodwill × his share).
5Decide the treatment: premium brought in cash, goodwill not brought, partly brought, or full goodwill account raised.
6Pass the journal entries. Cash received goes Dr Bank. Credit old partners in the sacrificing ratio. If the premium is withdrawn by old partners, debit their capital or current accounts and credit Bank.
7Post to the capital accounts and prepare the Balance Sheet. Check that total capital matches the net assets.

Quickest way: Premium in 4 lines

When to use it: Use when the question asks only for journal entries or capital account balances and gives the goodwill value directly.

Write the new partner's share × total goodwill. This is the premium.
Write each old partner's sacrifice as a fraction.
Split the premium in the sacrificing ratio. This gives each old partner's credit.
Journal: Dr Bank (or New Partner's Capital if unpaid) Cr Old partners' Capital A/cs. Check the debit equals the credits.

Common mistakes in Goodwill Treatment on Admission

Crediting the premium to old partners in the old ratio.
Students use the profit sharing ratio by habit.
Fix: The premium compensates for sacrifice, so credit it in the sacrificing ratio unless the question says otherwise.
Taking the whole goodwill as the new partner's premium.
Students forget that he only pays for his share.
Fix: Multiply total goodwill by his share. The rest stays with the firm's old partners.
Miscalculating hidden goodwill by ignoring revaluation or existing goodwill.
Students use book values straight from the balance sheet.
Fix: Use net assets after revaluation and exclude existing goodwill. Then compare with the implied total capital.
Not writing off existing goodwill before bringing in the new value.
Students ignore the old goodwill account.
Fix: Write it off to old partners in the old ratio first, unless the question says to retain it.
Debiting new partner's capital when he has brought the premium in cash.
Students mix up the two cases.
Fix: If cash is brought, debit Bank. Debit his capital only when goodwill is not brought in.
Crediting the premium to the new partner's capital account when it should go to old partners.
Students treat the premium as part of his investment.
Fix: Premium is not part of his capital. It is a payment to old partners for their sacrifice, so credit their capital accounts.

Worked examples

Example 1

A and B share profits 3:2. They admit C for 1/5 share, which he takes 1/10 from A and 1/10 from B. Goodwill of the firm is valued at ₹1,00,000. C brings ₹50,000 as capital and his share of goodwill in cash. Pass the journal entries.

Show the solution

C's share of goodwill = ₹1,00,000 × 1/5 = ₹20,000.
Old shares: A 3/5, B 2/5. New shares: A 3/5 − 1/10 = 5/10 = 1/2, B 2/5 − 1/10 = 3/10, C 1/5 = 2/10. Check: 5/10 + 3/10 + 2/10 = 1.
Sacrifice: A 1/10, B 1/10. Sacrificing ratio = 1:1.
Premium ₹20,000 is split equally: A ₹10,000, B ₹10,000.
Cash brought in = ₹50,000 capital + ₹20,000 premium = ₹70,000.
Pass one entry, with no goodwill account: Bank A/c Dr ₹70,000; To C's Capital A/c ₹50,000; To A's Capital A/c ₹10,000; To B's Capital A/c ₹10,000. Check: debit ₹70,000 = credits ₹50,000 + ₹10,000 + ₹10,000.

Answer: Bank Dr ₹70,000; C's Capital Cr ₹50,000; A's Capital Cr ₹10,000; B's Capital Cr ₹10,000.

Example 2

X and Y share profits 2:1. Z is admitted for 1/4 share, X sacrificing 1/6 and Y sacrificing 1/12. Net assets (excluding goodwill) after revaluation are ₹2,40,000. Z brings ₹1,00,000 capital but no goodwill in cash. Find the hidden goodwill and pass the entry.

Show the solution

Implied total firm capital = ₹1,00,000 ÷ 1/4 = ₹4,00,000.
Actual capital = net assets ₹2,40,000 + Z's capital ₹1,00,000 = ₹3,40,000.
Total goodwill = ₹4,00,000 − ₹3,40,000 = ₹60,000.
Z's share of goodwill = ₹60,000 × 1/4 = ₹15,000.
Sacrifice: X 1/6 = 2/12, Y 1/12. Sacrificing ratio = 2:1. Check: 2/12 + 1/12 = 3/12 = 1/4.
X gets ₹15,000 × 2/3 = ₹10,000. Y gets ₹5,000.
Entry: Z's Capital A/c Dr ₹15,000; To X's Capital A/c ₹10,000; To Y's Capital A/c ₹5,000.

Answer: Hidden goodwill is ₹60,000. Dr Z's Capital ₹15,000; Cr X's Capital ₹10,000; Cr Y's Capital ₹5,000.

Exam tips

Read the question for how goodwill is to be treated: cash, not brought, partly brought, or a goodwill account. The entries change with each.
Always show the sacrificing ratio calculation. It earns step marks even if the final entry slips.
For hidden goodwill, show the implied total capital, the actual capital and the difference as three separate lines.
In MCQs, look for who gets credited. The usual trap is old ratio versus sacrificing ratio.
If goodwill already stands in the books, write it off first and show that entry before the admission entries.

Practice questions from Admission of Partner

Goodwill Treatment on Admission in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CSEETAdmission of a Partner

Goodwill Treatment on Admission: frequently asked questions

Who gets the premium for goodwill on admission?

The old partners get it, in their sacrificing ratio. It compensates them for the profit share they give up. It is not part of the new partner's capital.

What is hidden goodwill?

It is goodwill that the question does not state but that can be worked out. Find the firm's total capital implied by the new partner's capital and share. Subtract the actual net assets plus his capital. The balance is the total goodwill.

What if the new partner cannot bring goodwill in cash?

Debit his capital account (or current account) with his share of goodwill. Credit the old partners' capital accounts in the sacrificing ratio. No cash entry is passed.

What is the difference between the premium method and the goodwill account method?

In the premium method the new partner pays only his share, and no goodwill account is opened. In the goodwill account method the full goodwill is raised in the books, credited to old partners in the old ratio, and then usually written off in the new ratio.