Accountancy Part AAdmission of a Partner

In which of the following case valuation of goodwill is not required ?

Answer & explanation

Correct answer: option 4

The correct answer is Option (4) → Purchase of tools for the business

Goodwill is valued when the firm’s business changes hands or the partners’ shares in its future profits change, because a partner who gives up a share must be paid for the reputation built up so far. Buying tools is only the purchase of an ordinary asset at its price; no share in profit moves, so no goodwill needs to be valued.

Option (1) Change in profit sharing ratio — A case that needs it. The partner who gains a share must compensate the partner who sacrifices, and the amount is worked out from goodwill.
Option (2) Sale of business — A case that needs it. The buyer pays for the reputation and earning power of the business as well as its assets.
Option (3) Amalgamation of partnership firms. — A case that needs it. Each firm’s partners must get credit for the goodwill their firm brings into the combined firm.

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.”