A partnership firm is able to earn extra profits because of:

Goodwill

The correct answer is option 3- Goodwill.

A partnership firm is able to earn extra profits because of Goodwill.

Over a period of time, a well-established business develops an advantage of good name, reputation and wide business connections. This helps the business to earn more profits as compared to a newly set up business. In accounting, the monetary value of such advantage is known as “goodwill”. A partnership firm is able to earn extra profits due to its goodwill which represents the firm's established reputation, loyal customer base, and other intangible advantages that help it generate more profits than a typical firm.

OTHER OPTIONS

• Admission of new partner – This may bring in new capital or skills but is not the direct reason for extra profits.
• Retirement of old partner – This is a change in the partnership structure and may not necessarily lead to extra profits.
• Dissolution of firm – This means the firm is ending; it cannot earn profits after dissolution.