At the time of admission, new partner brings his share of goodwill which is distributed among old partners. This treatment is conceptually used to:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Ensure that gaining partner compensates the sacrificing partner(s).
When a new partner is admitted, the old partners give up part of their share of future profits to him. The firm's goodwill (its power to earn super profits) was built by the old partners, so the new partner, who gains a share of those profits, compensates the sacrificing partners by bringing in his share of goodwill. That is why the amount is shared among the old partners in their sacrificing ratio.
Why the other options are incorrect
Option (1) Raise the total capital of the firm. — Incorrect. The goodwill premium is credited to the old partners' capital accounts, not added as the new partner's capital. Capital is raised by the separate amount he brings as capital.
Option (3) Distribute the undistributed profits before admission among the old partners. — Incorrect. Accumulated profits and reserves are distributed in the old ratio by a separate entry; the goodwill premium is a payment for future profits, not past ones.
Option (4) Ensure that a new partner gets the benefit at the time of admission. — Incorrect. The new partner pays for goodwill; the benefit goes to the old partners who give up their share.
NCERT (2026-27 edition): |