What is the hidden goodwill?

Excess of desired total capital of the firm over the actual combined capital of all partners

The correct answer is option 1- Excess of desired total capital of the firm over the actual combined capital of all partners.

Excess of desired total capital of the firm over the actual combined capital of all partners is called hidden goodwill.

Sometimes the value of goodwill is not given at the time of admission of a new partner. In such a situation it has to be inferred from the arrangement of the capital and profit sharing ratio. Suppose, A and B are partners sharing profits equally with capitals of Rs. 45,000 each. They admitted C as a new partner for one-third share in the profit. C brings in Rs. 60,000 as his capital. Based on the amount brought in by C and his share in profit, the total capital of the newly constituted firm works out to be Rs.1,80,000 (Rs. 60,000 × 3). But the actual total capital of A, B and C works out as Rs. 1,50,000 (Rs. 45,000 + Rs. 45,000 + Rs. 60,000). Hence, it can be inferred that the difference is on account of goodwill i.e., Rs. 30,000 (Rs. 1,80,000 – Rs. 1,50,000), Which is to be shared equally (old ratio) by A and B.