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CA Foundation · Accounting · Partnership and LLP Accounts

P and Q share profits in the ratio 2:1. Goodwill of the firm is valued at ₹90,000. R is admitted for a 1/3rd share, bringing his share of goodwill in cash, which is paid to the existing partners privately and not through the firm. R takes his share from P and Q equally. What is the effect on the firm's books?

No entry is made in the firm's books. The goodwill amount is paid privately by R directly to P and Q, so the firm does not receive or record any cash or goodwill transaction.

  1. ANo goodwill entry is made in the firm's books for this paymentCorrect
  2. BCash is debited by ₹30,000 and goodwill credited
  3. CP's capital account is credited by ₹20,000 and Q's by ₹10,000
  4. DGoodwill is debited by ₹90,000 and old partners are credited

Explanation

When the incoming partner pays his goodwill share directly to the old partners outside the firm, the firm receives nothing. Hence no entry is passed in the firm's books. Crediting capital accounts or debiting cash would be correct only if the amount was paid into the firm.

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