Accountancy Part AAdmission of a Partner

At the time of admission, if goodwill was raised but not written off…

At the time of admission, if goodwill was raised but not written off then its impact will be:

Answer & explanation

Correct answer: option 1

The correct answer is Option (1) → Overstatement of Assets

When goodwill is raised on admission, Goodwill Account is debited and the old partners’ capital accounts are credited. The debit puts goodwill on the asset side. Goodwill a firm has built up itself is not a purchased asset, so it has to be written off straight away among the partners.

If it is raised but never written off, the asset side carries an amount that is not a real asset. The firm then shows more assets than it has, which is an overstatement of assets.

Why the other options are incorrect

Option (2) Overstatement of Liabilities — Incorrect. The credit goes to the partners’ capital accounts, which are the owners’ claim. No outside liability is created or increased.
Option (3) Understatement of Assets — Incorrect. Leaving the goodwill in the books adds to the assets; it does not reduce them.
Option (4) Overstatement of both Assets and Liabilities — Incorrect. Only the asset side is inflated. The other side of the entry is the partners’ capital, not a liability.

NCERT (2026-27 edition):
Goodwill – “… Self - generated goodwill is not accounted for in the books and shown as an asset. Thus if self generated goodwill be debited to goodwill account it should be written - off in the same financial year and should not be shown as an asset in the balance sheet.”