Giri and Shanta are partners in a firm sharing profits equally. They admit Kachroo into partnership who, in addition to capital, brings Rs. 20,000 as goodwill for 1/5th share of profits in the firm. What shall be journal entries if: (a) no goodwill appears in the books of the firm. (b) goodwill appears in the books of the firm at Rs. 40,000.
Case (a): When no goodwill appears in the books of the firm
Journal Entries
| Date | Particulars | L.F. | Dr. (Rs.) | Cr. (Rs.) |
|---|---|---|---|---|
| Bank A/c Dr. | 20,000 | |||
| To Premium for Goodwill A/c | 20,000 | |||
| (Being goodwill brought in by Kachroo) | ||||
| Premium for Goodwill A/c Dr. | 20,000 | |||
| To Giri's Capital A/c | 10,000 | |||
| To Shanta's Capital A/c | 10,000 | |||
| (Being premium for goodwill distributed among sacrificing partners in sacrificing ratio 1:1) |
Working Note: Since Giri and Shanta share profits equally and Kachroo is admitted for 1/5th share, the sacrificing ratio is equal (1:1). Hence, Rs. 20,000 is divided equally between Giri and Shanta (Rs. 10,000 each).
Case (b): When goodwill appears in the books at Rs. 40,000
Journal Entries
| Date | Particulars | L.F. | Dr. (Rs.) | Cr. (Rs.) |
|---|---|---|---|---|
| Giri's Capital A/c Dr. | 20,000 | |||
| Shanta's Capital A/c Dr. | 20,000 | |||
| To Goodwill A/c | 40,000 | |||
| (Being existing goodwill written off among old partners in old ratio) | ||||
| Bank A/c Dr. | 20,000 | |||
| To Premium for Goodwill A/c | 20,000 | |||
| (Being goodwill brought in by Kachroo) | ||||
| Premium for Goodwill A/c Dr. | 20,000 | |||
| To Giri's Capital A/c | 10,000 | |||
| To Shanta's Capital A/c | 10,000 | |||
| (Being premium for goodwill distributed among sacrificing partners in sacrificing ratio 1:1) |
Working Note: Existing goodwill of Rs. 40,000 is written off in the old profit sharing ratio (1:1) between Giri and Shanta.
Explanation
When a new partner is admitted and brings premium for goodwill in cash, the amount is first credited to Premium for Goodwill Account and then transferred to the sacrificing partners' capital accounts in their sacrificing ratio. In this case, since Giri and Shanta share profits equally and nothing specific is mentioned about how Kachroo acquires his share, the sacrificing ratio is assumed to be equal (1:1). When existing goodwill appears in the books, it must first be written off by debiting the old partners' capital accounts in their old profit sharing ratio before recording the new goodwill brought in by the incoming partner.