Admission, Goodwill and Proportionate Capital
Anita and Bhavna were partners sharing profits 3:2. Their capitals were ₹4,00,000 and ₹2,40,000. On 1 April 2025 they admitted Chetan for 1/5 share. The new profit-sharing ratio was fixed at Anita 3/5, Bhavna 1/5 and Chetan 1/5. Goodwill was valued at ₹1,00,000 and Chetan brought his share in cash. Before admission, the following were discovered: stock was overvalued by ₹20,000; machinery was undervalued by ₹60,000; a provision for doubtful debts of ₹8,000 was required; and an unrecorded creditor of ₹15,000 had to be recognised. Chetan brought ₹2,00,000 as capital. The partners agreed that the old partners' capitals would be adjusted to make them proportionate to Chetan's capital and the new profit-sharing ratio; any excess or shortfall would be settled in cash.
1. Find the sacrificing ratio and show the accounting treatment of goodwill. Why is the old ratio not used?
Read the worked answer
Sacrificing ratio = old share − new share Anita: 3/5 − 3/5 = 0 Bhavna: 2/5 − 1/5 = 1/5
Only Bhavna sacrifices. Chetan's share is 1/5, which exactly equals Bhavna's sacrifice.
Goodwill brought by Chetan: Chetan's share = ₹1,00,000 × 1/5 = ₹20,000 Entry: Bank A/c Dr 20,000 To Bhavna's Capital A/c 20,000
Why not the old ratio? Goodwill is compensation to the partners who give up a share of future profits. Anita gives up nothing (3/5 before and after), so crediting her under the old 3:2 ratio would compensate her for a sacrifice she did not make. It would also under-credit Bhavna, who bears the entire sacrifice. The old ratio is relevant only for sharing pre-admission reserves and revaluation profits, not for distributing incoming goodwill.
2. Prepare the Revaluation Account and compute the cash each old partner must bring in or withdraw if capitals are to be proportionate to Chetan's ₹2,00,000.
Read the worked answer
Revaluation Account Debits: stock overvalued ₹20,000; provision for doubtful debts ₹8,000; unrecorded creditor ₹15,000 = ₹43,000 Credit: machinery undervalued ₹60,000 Profit on revaluation = ₹60,000 − ₹43,000 = ₹17,000 Shared Anita 3/5 = ₹10,200; Bhavna 2/5 = ₹6,800.
Adjusted capitals before goodwill: Anita: ₹4,00,000 + ₹10,200 = ₹4,10,200 Bhavna: ₹2,40,000 + ₹6,800 = ₹2,46,800 Add Bhavna's goodwill credit ₹20,000: Bhavna = ₹2,66,800
Total capital based on Chetan: Chetan's ₹2,00,000 = 1/5, so total = ₹2,00,000 × 5 = ₹10,00,000 Anita's target 3/5 = ₹6,00,000; Bhavna's target 1/5 = ₹2,00,000; Chetan = ₹2,00,000.
Cash to be brought in / withdrawn: Anita: ₹6,00,000 − ₹4,10,200 = brings ₹1,89,800 Bhavna: ₹2,66,800 − ₹2,00,000 = withdraws ₹66,800 Chetan has already brought ₹2,00,000.
3. Explain the treatment of the unrecorded creditor and the overvalued stock, and whether Chetan shares the revaluation profit.
Read the worked answer
Unrecorded creditor: It is a liability that existed before admission but was omitted. It must be brought into the books at admission so that the incoming partner does not inherit a hidden liability. In the Revaluation Account, an increase in a liability is a debit, so ₹15,000 is debited, reducing the revaluation profit.
Overvalued stock: The stock's book value is above its realisable value. The reduction of ₹20,000 is also a debit in the Revaluation Account because an asset has decreased. This prevents Chetan from paying for an inflated asset.
Why Chetan does not share the revaluation profit: Revaluation adjusts the old partners' capital for changes in the value of the business before Chetan joins. The profit of ₹17,000 belongs to the pre-admission period and is credited only to Anita and Bhavna in 3:2. Chetan's entry is at the revalued figure. If Chetan were credited with a share of this profit, he would receive value for which he did not pay and which arose before he became a partner.