Why does a partnership change feel like a family reunion?
When a new partner walks in, the business dynamics shift – just like a new sibling joining a game.
💡 In Simple Words: Adding a partner means the old partners share part of their profit, assets, and goodwill with the newcomer. The books get updated so everyone’s capital reflects the new arrangement.
What exactly is "admission of a partner"?
A partner’s admission is the moment a person becomes an owner of the firm. The firm’s accounting records must show how the new partner’s share is created and how existing partners give it up.
Key terms you’ll meet
- Capital account: a ledger where each partner’s investment and share of profit or loss are recorded.
- Goodwill: the extra value of a business that isn’t tied to physical assets, like reputation or customer loyalty. Think of it as the "brand magic" that makes a shop popular.
- Bonus method: a way to give the existing partners a reward (bonus) when they let a new partner in, without creating goodwill.
- Purchase method: a method where the new partner pays for a portion of the existing goodwill.
Step‑by‑step accounting treatment
Let’s walk through the most common scenario – a new partner is admitted for cash, and the existing partners share goodwill.
1. Find out the new partner’s share
First, agree on the profit‑sharing ratio. For example, if the firm was A:B = 3:2 and the new partner C will get 1/5 of profit, the new ratio could be A:B:C = 3:2:1.
2. Value goodwill (if the firm has it)
Goodwill can be calculated in three ways, but the most student‑friendly is the super‑profit method. Super‑profit = actual profit – normal profit. Normal profit = average profit of the last three years × capital employed.
- Actual profit = ₹1,20,000
- Average profit = ₹90,000
- Normal profit = ₹90,000 × 1.5 (capital multiplier) = ₹1,35,000
3. Choose the method
Two popular methods:
- Bonus method: Existing partners give a bonus to the new partner from their own capital. No goodwill appears on the books.
- Purchase method: New partner pays cash for a share of goodwill. Goodwill is recorded as an asset.
4. Journal entries – the heart of the treatment
Let’s illustrate both methods with numbers.
| Scenario | Journal Entry |
|---|---|
| Bonus method (new partner C gets 1/5 share, existing A & B give up proportionately) | Dr. A’s Capital A/c ₹12,000 Dr. B’s Capital A/c ₹8,000 Cr. C’s Capital A/c ₹20,000 |
| Purchase method (C pays ₹30,000 cash for 1/5 share, goodwill valued at ₹50,000) | Dr. Cash A/c ₹30,000 Dr. Goodwill A/c ₹10,000 Cr. A’s Capital A/c ₹12,000 Cr. B’s Capital A/c ₹8,000 Cr. C’s Capital A/c ₹20,000 |
Notice how the bonus method simply moves money between capital accounts, while the purchase method adds a goodwill asset and brings cash into the firm.
5. Update the capital ledger
After the entry, each partner’s capital balance must reflect the new share. The ledger now shows A, B, and C’s revised amounts.
Quick checklist – what to remember before the exam
- Identify the method (bonus vs purchase) the question asks for.
- Calculate goodwill only if the method requires it.
- Adjust existing partners’ capital proportionately to the share they give up.
- Make sure the total of debit and credit amounts in the journal entry are equal.
- Update each partner’s capital account after posting.
📝 Likely Exam Questions
- Question: A partnership of A and B (profit sharing 3:2) admits C for cash of ₹40,000. Goodwill is valued at ₹50,000 and C gets 1/5 share. Show the journal entry using the purchase method.
- Answer: Dr. Cash A/c ₹40,000
Dr. Goodwill A/c ₹10,000
Cr. A’s Capital A/c ₹24,000
Cr. B’s Capital A/c ₹16,000
Cr. C’s Capital A/c ₹20,000 - Question: Explain why the bonus method does not record goodwill on the balance sheet.
- Answer: The bonus method treats the amount given to the new partner as a transfer from existing partners’ capital. No external asset (goodwill) is created, so nothing appears as goodwill.
- Question: A firm’s average profit for the last three years is ₹80,000. Expected normal profit is 12% on capital of ₹5,00,000. Calculate goodwill using the super‑profit method.
- Answer: Normal profit = 12% × ₹5,00,000 = ₹60,000. Super‑profit = ₹80,000 – ₹60,000 = ₹20,000. If goodwill is expected to earn for 5 years, Goodwill = ₹20,000 × 5 = ₹1,00,000.
- Question: List two differences between the bonus and purchase methods of admitting a partner.
- Answer: (i) Bonus method does not create goodwill; purchase method records goodwill as an asset.
(ii) In bonus method, existing partners sacrifice part of their capital; in purchase method, the new partner pays cash for goodwill.