Partnership Accounts: Admission, Retirement, Dissolution and Goodwill
What the domain tests
Partnership questions test admission, retirement and dissolution, including goodwill, revaluation, sacrifice ratios, loan accounts and the realization account. The exam checks that adjustments go to the right partners in the right ratio.
Core rules
- On admission, revalue assets and liabilities; the revaluation gain or loss belongs to old partners in the old ratio. Goodwill is credited to old partners in the sacrifice ratio. Under the capital-adjustment method, debit the incoming partner's capital with their share and credit the sacrificing partners.
- On retirement, revalue assets, adjust goodwill, calculate the retiring partner's capital, and transfer any unpaid balance to a loan account.
- On dissolution, open a realization account. Debit assets at carrying amount and realization expenses; credit proceeds, liabilities taken over and cash paid. The realization profit or loss is shared in the old profit-sharing ratio.
- Goodwill is not an ongoing asset in the partnership statement of financial position under the capital-adjustment method.
Worked example
A and B share 3:2. C is admitted for 1/5. Goodwill is valued at 50,000. C's share = 10,000. Sacrifice ratio of A:B is 3:2. Debit C capital 10,000; credit A capital 6,000 and B capital 4,000. C's capital account is reduced because C paid nothing for goodwill directly; the old partners are compensated for the share they gave up.
Traps
Do not credit goodwill to old partners in the new ratio. Do not give revaluation gains to the incoming partner. Do not use going-concern values in dissolution. Do not forget the retiring partner's loan account.