Accountancy Part AAdmission of a Partner

Valuation of goodwill is not done in which of the following case?

Valuation of goodwill is not done in which of the following case?

Answer & explanation

Correct answer: option 4

The correct answer is Option (4) → Purchasing of raw material

Goodwill is valued when the partners’ rights in the future profits of the firm change, so that the partner who gives up a share is paid for it. Buying raw material is a routine trading transaction: no partner’s share changes, so no valuation of goodwill is needed.

Option (1) Change in profit sharing ratio — A case for valuing goodwill. The partner whose share falls is paid by the partner whose share rises.
Option (2) Admission of a new partner — A case for valuing goodwill. The newcomer pays the old partners for the share of profits they give up.
Option (3) Retirement of a partner — A case for valuing goodwill. The retiring partner is paid for his share, which the continuing partners take over.

NCERT (2026-27 edition):
Need for Valuation of Goodwill – “Normally, the need for valuation of goodwill arises at the time of sale of a business. But, in the context of a partnership firm it may also arise in the following circumstances: 1. Change in the profit sharing ratio amongst the existing partners; 2. Admission of new partner; 3. Retirement of a partner; 4. Death of a partner; and 5. Dissolution of a firm involving sale of business as a going concern. 6. Amalgamation of partnership firms.”

Valuation of goodwill is not done in which of the following case?

Answer & explanation

Correct answer: option 4

The correct answer is Option (4) → Purchasing of raw material

Option (1) Change in profit sharing ratio — A case for valuing goodwill. The partner whose share falls is paid by the partner whose share rises.
Option (2) Admission of a new partner — A case for valuing goodwill. The newcomer pays the old partners for the share of profits they give up.
Option (3) Retirement of a partner — A case for valuing goodwill. The retiring partner is paid for his share, which the continuing partners take over.