At the time of admission of a new partner, goodwill is adjusted because:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Old partners sacrifice their share of profit.
Goodwill is the value of a firm’s reputation, which lets it earn more than a normal firm. It has been built up by the old partners. A new partner takes his share of future profits out of the old partners’ shares, so they give up part of the super profits their goodwill earns. Goodwill is adjusted to compensate the sacrificing partners for that loss, shared in their sacrificing ratio.
Why the other options are incorrect
Option (1) Capital Accounts are closed. — Incorrect. The capital accounts continue after admission; they are only adjusted. Admission does not close them.
Option (3) New partner will participate in future decision making. — Incorrect. Taking part in the business is a right every partner gets, but it takes nothing away from the old partners. The payment for goodwill is for the share of profit they give up, not for his say in decisions.
Option (4) Firm’s liability increases. — Incorrect. Admission does not raise the firm’s liabilities; if anything, the new partner brings in capital.
NCERT (2026-27 edition): |