At the time of admission, the new partner brings in additional amount in the form of goodwill. For what it is used for?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → To compensate the sacrificing partner(s).
An established firm earns super profits because of the goodwill the old partners have built. A new partner who shares future profits also gets a part of that benefit, and the old partners who give up part of their share lose it. The extra amount he brings as goodwill (premium) is paid to them, in their sacrificing ratio, for that loss.
Why the other options are incorrect
Option (1) To raise the total capital of the firm. — Incorrect. The new partner’s capital is brought separately; the premium goes to the old partners, not to the firm’s capital.
Option (3) To distribute the undistributed profits before admission among the old partners. — Incorrect. Past profits and reserves are transferred to the old partners from the books in their old ratio; the premium is not used for that.
Option (4) To compensate all the partners. — Incorrect. Only the partners who gave up part of their share are compensated. A partner whose share does not fall gets nothing, and the new partner never compensates himself.
NCERT (2026-27 edition): |