AccountancyCBSE Class 12 · Reconstitution of a Partnership Firm – Admission of a Partner

Treatment of Goodwill on Admission of a Partner: Class 12 Entries under AS 26

Updated 15 October 2026 · Fact-checked

On admission, the new partner compensates the old partners for the share of future profit they give up. Under AS 26, goodwill is not raised in the books: premium brought in cash is credited to old partners in their sacrificing ratio, and any premium not brought is debited to the new partner's current or capital account.

Premium paid in cash flows via Premium for Goodwill to old partners in sacrificing ratio; unpaid premium is debited to the new partner, and no Goodwill A/c is r

Illustration drawn for QuestionBuddy.

Understand Treatment of Goodwill on Admission

Why goodwill on admission? The old partners built the firm's reputation. When a new partner joins, they give up (sacrifice) part of their future profits to him. He compensates them through premium for goodwill, equal to firm's goodwill × new partner's share.

AS 26 and the premium method. AS 26 allows only purchased goodwill to be recorded. So the CBSE syllabus uses the premium method: no Goodwill Account is raised on admission; the new partner's share of goodwill is adjusted through capital/current accounts.

Sacrificing ratio. Sacrificing share = old share − new share. The premium is shared among old partners in this ratio.

If only the new partner's share is given, old partners continue in their old ratio: sacrificing ratio = old ratio.
If the new ratio is given, compute each partner's sacrifice; a partner with zero sacrifice gets nothing.
If the new partner takes stated portions from each, those portions give the ratio directly.

Case 1: premium brought in cash.

Bank A/c Dr; To Premium for Goodwill A/c
Premium for Goodwill A/c Dr; To Old Partners' Capital A/cs (sacrificing ratio)

(If the premium is later withdrawn, debit the old partners' capitals and credit Bank.)

Case 2: premium paid privately to old partners: no entry in the firm's books.

Case 3: premium not brought (fully or partly). The unpaid part is debited to the new partner:

New Partner's Current A/c (or Capital A/c) Dr; To Old Partners' Capital A/cs (sacrificing ratio).

Case 4: goodwill already in the books. It is written off among old partners in the old ratio: Old Partners' Capital A/cs Dr; To Goodwill A/c. The premium entries then follow as usual.

Case 5: hidden goodwill. If the new partner brings capital for his share but no premium is stated, infer goodwill: Implied capital of the whole firm = new partner's capital × reciprocal of his share; Hidden goodwill = Implied capital − (old partners' adjusted capitals + new partner's capital). Then treat his share as premium not brought.

Treatment of Goodwill on Admission: key facts

New partner's premium: Firm's goodwill × new partner's share
Sacrificing share: Old share − new share; Sacrificing ratio = ratio of these shares.
Firm's goodwill from premium: Premium ÷ new partner's share; For example, ₹30,000 for 1/5 share means goodwill ₹1,50,000.
Hidden goodwill: New partner's capital × (1 ÷ his share) − (old partners' capitals + new partner's capital); Use old capitals after all adjustments.
Existing goodwill: Written off to old partners in the old ratio; Before recording the premium.

How to answer Treatment of Goodwill on Admission questions

Admission questions tie goodwill to the sacrificing ratio, so get the ratio right first.

1Write old shares and new shares as fractions with a common denominator.
2Sacrifice = old − new for each old partner; this ratio decides who gets the premium.
3Premium = firm's goodwill × new partner's share (or as given).
4Write off any goodwill already in the books in the old ratio.
5Record the cash brought (Bank Dr, Premium for Goodwill Cr) and distribute it in the sacrificing ratio.
6Debit any premium not brought to the new partner's current account (capital account if capitals fluctuate).
7For hidden goodwill, compute it from capitals first, then treat the new partner's share as not brought.

Treatment of Goodwill on Admission in real life

The idea, met in an everyday situation. Answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

Only the sacrificing partner is compensated

Suppose Dev and Esha run a popular café and share profits equally. Farah joins and the three agree that, from now on, Dev keeps half the profit, and Esha and Farah get a quarter each. Farah brings ₹60,000 as her premium for goodwill.

Who should receive Farah's ₹60,000, and why?

Try it first, then show the solutionSolution

Dev: old share 1/2, new share 1/2, sacrifice nil.
Esha: old share 1/2, new share 1/4, sacrifice 1/4.
Only Esha has given up future profit to Farah.

Answer: Esha alone receives the ₹60,000: Premium for Goodwill A/c Dr 60,000 To Esha's Capital A/c 60,000. Dev's share of profit is unchanged, so he has sacrificed nothing and is owed nothing.

Memory hook: Premium goes to whoever gave up profit, not to whoever was there first.

Tricks to remember Treatment of Goodwill on Admission

Short memory aids. Say each one aloud once, then use it on a question the same day.

Old minus New = Sacrifice
O − N = S. If O − N is zero, that partner gets no premium.
Use it when: Distributing the premium.
Old goodwill, old ratio
Goodwill already in the books is written off in the OLD ratio, never the sacrificing ratio.
Use it when: Case 4 entries.
Not brought? Debit the newcomer
Unpaid premium sits on the new partner's current account as a debit.
Use it when: Premium not brought in cash.

Treatment of Goodwill on Admission: solved examples

Ordered from board level to HOTS. Try each one before you open the solution.

Example 1: Premium in the old ratio · 1 mark · MCQBoard level

A and B share profits 3 : 2. C is admitted for a 1/5 share and brings ₹50,000 as premium for goodwill in cash. The premium will be credited to:
(a) A ₹25,000, B ₹25,000
(b) A ₹30,000, B ₹20,000
(c) A ₹20,000, B ₹30,000
(d) A ₹40,000, B ₹10,000

Try it first, then show the solutionSolution

No new ratio is given, so A and B continue 3 : 2 and the sacrificing ratio = old ratio.
50,000 × 3/5 = 30,000; × 2/5 = 20,000.

Answer: (b) A ₹30,000, B ₹20,000

Example 2: New ratio given · 3 marks · Short answerBoard level

A and B share profits 3 : 2. They admit C; the new ratio is 2 : 2 : 1. The firm's goodwill is valued at ₹1,00,000, and C brings his share of goodwill in cash. Pass the journal entries. (3 marks)

Try it first, then show the solutionSolution

Sacrifice: A 3/5 − 2/5 = 1/5; B 2/5 − 2/5 = nil.
C's premium = 1,00,000 × 1/5 = ₹20,000.
Bank A/c Dr 20,000 To Premium for Goodwill A/c 20,000; Premium for Goodwill A/c Dr 20,000 To A's Capital A/c 20,000.

Answer: The whole premium of ₹20,000 goes to A, the only partner who sacrificed.

Example 3: Premium partly brought · 4 marks · Short answerHarder board level

X and Y share profits 5 : 3. Z is admitted for a 1/4 share, which he takes 1/6 from X and 1/12 from Y. The firm's goodwill is valued at ₹1,20,000. Z brings only ₹18,000 of his premium in cash; capitals are fluctuating but Z's unpaid premium is to be shown in his current account. Find the new ratio and pass the entries. (4 marks)

Try it first, then show the solutionSolution

New ratio: X 5/8 − 1/6 = 11/24; Y 3/8 − 1/12 = 7/24; Z 6/24, so 11 : 7 : 6.
Sacrificing ratio = 1/6 : 1/12 = 2 : 1. Z's premium = 1,20,000 × 1/4 = ₹30,000.
Bank A/c Dr 18,000 To Premium for Goodwill A/c 18,000.
Premium for Goodwill A/c Dr 18,000; Z's Current A/c Dr 12,000; To X's Capital A/c 20,000; To Y's Capital A/c 10,000.

Answer: New ratio 11 : 7 : 6. X is credited ₹20,000 and Y ₹10,000 (2 : 1); ₹12,000 of the premium is debited to Z's Current Account.

Example 4: Goodwill already in the books · 4 marks · Short answerHarder board level

A and B share profits equally. Goodwill appears in their balance sheet at ₹40,000. C is admitted for a 1/3 share; the firm's goodwill is valued at ₹90,000 and C brings his share of premium in cash. A and B continue to share equally. Pass the journal entries. (4 marks)

Try it first, then show the solutionSolution

Write off old goodwill in the old ratio: A's Capital A/c Dr 20,000; B's Capital A/c Dr 20,000; To Goodwill A/c 40,000.
C's premium = 90,000 × 1/3 = ₹30,000: Bank A/c Dr 30,000 To Premium for Goodwill A/c 30,000.
Sacrificing ratio = old ratio 1 : 1: Premium for Goodwill A/c Dr 30,000 To A's Capital A/c 15,000; To B's Capital A/c 15,000.

Answer: Three entries: write-off ₹40,000 (20,000 each), cash premium ₹30,000, and its credit to A and B at ₹15,000 each.

Example 5: Hidden goodwill · 4 marks · Short answerHOTS / competency

A and B share profits 3 : 2. After all adjustments, their capitals are ₹1,50,000 and ₹1,30,000. C is admitted for a 1/4 share and brings ₹1,20,000 as capital; no premium is mentioned. Calculate hidden goodwill and pass the entry for C's share of goodwill. (4 marks)

Try it first, then show the solutionSolution

Implied total capital = 1,20,000 × 4 = ₹4,80,000.
Actual total = 1,50,000 + 1,30,000 + 1,20,000 = ₹4,00,000.
Hidden goodwill = ₹80,000; C's share = 80,000 × 1/4 = ₹20,000.
Sacrificing ratio = old ratio 3 : 2: C's Current A/c Dr 20,000 To A's Capital A/c 12,000; To B's Capital A/c 8,000.

Answer: Hidden goodwill = ₹80,000; C's Current A/c Dr 20,000 To A's Capital 12,000 and B's Capital 8,000.

Example 6: Why the sacrificing ratio? · 1 mark · Assertion-reasonHOTS / competency

Assertion (A): Premium for goodwill brought by a new partner is credited to the old partners in their sacrificing ratio.
Reason (R): The old partners give up part of their future profits in favour of the new partner.
(a) Both A and R are true, and R is the correct explanation of A.
(b) Both A and R are true, but R is not the correct explanation of A.
(c) A is true, but R is false.
(d) A is false, but R is true.

Try it first, then show the solutionSolution

Compensation follows the loss suffered; the loss is the sacrifice. R explains A.

Answer: (a) Both A and R are true, and R is the correct explanation of A.

Where students lose marks in Treatment of Goodwill on Admission

The slips examiners see most often, and what to write instead.

Mistake: Raising a Goodwill Account on admission
Following old methods.
Wrong working
Goodwill A/c Dr 1,00,000 To A's and B's Capital A/cs
Right working
Premium method only: Premium for Goodwill A/c Dr To old partners' capitals.
Do this: AS 26 allows only purchased goodwill in the books.
Usually costs: Full marks of the entry.
Mistake: Distributing the premium in the new ratio
Using whichever ratio is nearest.
Wrong working
Premium 20,000 shared 2 : 2 between A and B.
Right working
Sacrifice is A 1/5, B nil; all 20,000 to A.
Do this: Always compute old − new.
Usually costs: 1-2 marks.
Mistake: Writing off old goodwill in the sacrificing ratio
Mixing the two goodwill steps.
Wrong working
Goodwill written off in the sacrificing ratio.
Right working
Existing goodwill belongs to the old partners in their old ratio.
Do this: Old goodwill, old ratio.
Usually costs: 1 mark.
Mistake: Hidden goodwill computed with capitals before adjustments
Ignoring revaluation profit and reserves already credited.
Wrong working
Using opening capitals from the old balance sheet.
Right working
Use capitals after revaluation, reserves and accumulated profits.
Do this: Prepare the revaluation account and transfer reserves first.
Usually costs: 1-2 marks.

Exam tips

Show the sacrificing ratio working even when it equals the old ratio; write 'old partners continue in the old ratio'.
Write narrations: 'being premium for goodwill brought in by C credited to A and B in their sacrificing ratio'.
If the question says capitals are fixed, unpaid premium goes to the new partner's current account.
Goodwill treatment appears as 1-mark MCQs and inside 4- and 6-mark admission questions.

Practice questions on Treatment of Goodwill on Admission

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

Q1 · 1 mark · MCQBoard level
When the premium for goodwill is paid by the new partner privately to the old partners, the entry in the firm's books is:
(a) Bank A/c Dr To Premium for Goodwill A/c
(b) Premium for Goodwill A/c Dr To old partners' capitals
(c) No entry
(d) New partner's Current A/c Dr To old partners' capitals
Hint
Did money come into the firm?
Answer
(c) No entry
Q2 · 1 mark · MCQBoard level
The sacrificing ratio is the ratio of:
(a) new share − old share
(b) old share − new share
(c) old shares
(d) new shares
Hint
What is given up.
Answer
(b) old share − new share
Q3 · 3 marks · Short answerBoard level
P and Q share profits 2 : 1. R is admitted for a 1/4 share and brings ₹24,000 as premium for goodwill in cash. Pass the journal entries. (3 marks)
Hint
Old ratio continues.
Answer
Bank A/c Dr 24,000 To Premium for Goodwill A/c 24,000. Premium for Goodwill A/c Dr 24,000 To P's Capital A/c 16,000; To Q's Capital A/c 8,000.
Q4 · 3 marks · Short answerHarder board level
A and B share profits 3 : 2. C is admitted and the new ratio is 3 : 1 : 1. C brings ₹15,000 as premium. Who gets the premium? Pass the entry for its distribution. (3 marks)
Hint
A's share stays 3/5.
Answer
Sacrifice: A 3/5 − 3/5 = nil; B 2/5 − 1/5 = 1/5. Premium for Goodwill A/c Dr 15,000 To B's Capital A/c 15,000.
Q5 · 4 marks · Short answerHarder board level
X and Y share profits 3 : 2. Z is admitted; X surrenders 1/5 of his share and Y 1/10 of his share in Z's favour. The firm's goodwill is ₹2,50,000 and Z brings his share in cash. Calculate the new ratio and distribute the premium. (4 marks)
Hint
X gives 3/5 × 1/5.
Answer
X sacrifices 3/25, Y 1/25; Z's share 4/25. New ratio: X 12/25, Y 9/25, Z 4/25 = 12 : 9 : 4. Premium = 2,50,000 × 4/25 = ₹40,000, credited 3 : 1: X ₹30,000, Y ₹10,000.
Q6 · 3 marks · Short answerHarder board level
M and N have fluctuating capitals and share profits equally. O is admitted for a 1/4 share; the firm's goodwill is ₹80,000. O cannot bring any premium. Pass the journal entry. (3 marks)
Hint
Fluctuating capitals: use O's capital account.
Answer
O's premium = ₹20,000. O's Capital A/c Dr 20,000 To M's Capital A/c 10,000; To N's Capital A/c 10,000.
Q7 · 4 marks · Short answerHarder board level
M and N share profits 3 : 2 and goodwill appears in their books at ₹50,000. O is admitted for a 1/5 share; the firm's goodwill is valued at ₹1,50,000. O brings only ₹20,000 of his premium. M and N continue 3 : 2. Pass the journal entries. (4 marks)
Hint
Write off old goodwill first; O's premium is ₹30,000.
Answer
(1) M's Capital A/c Dr 30,000; N's Capital A/c Dr 20,000; To Goodwill A/c 50,000. (2) Bank A/c Dr 20,000 To Premium for Goodwill A/c 20,000. (3) Premium for Goodwill A/c Dr 20,000; O's Current A/c Dr 10,000; To M's Capital A/c 18,000; To N's Capital A/c 12,000.
Q8 · 1 mark · Assertion-reasonHarder board level
Assertion (A): Under AS 26, goodwill may be raised in the books when a new partner is admitted.
Reason (R): Only purchased goodwill is recorded in the books.
(a) Both A and R are true, and R is the correct explanation of A.
(b) Both A and R are true, but R is not the correct explanation of A.
(c) A is true, but R is false.
(d) A is false, but R is true.
Hint
Is goodwill on admission purchased?
Answer
(d) A is false, but R is true.
Q9 · 4 marks · Short answerHOTS / competency
A and B share profits equally, with adjusted capitals of ₹2,00,000 and ₹1,00,000. C is admitted for a 1/3 share and brings ₹1,80,000 as capital. Calculate hidden goodwill and pass the entry for C's share. (4 marks)
Hint
Implied total = 1,80,000 × 3.
Answer
Implied capital = ₹5,40,000; actual = 2,00,000 + 1,00,000 + 1,80,000 = ₹4,80,000; hidden goodwill = ₹60,000; C's share = ₹20,000. C's Current A/c Dr 20,000 To A's Capital A/c 10,000; To B's Capital A/c 10,000.
Q10 · 3 marks · Short answerHOTS / competency
A and B share profits 2 : 1. C brings ₹30,000 as premium for a 1/5 share, and the new ratio is 3 : 1 : 1. Find the firm's goodwill and distribute the premium. (3 marks)
Hint
Goodwill = premium ÷ share; then old − new.
Answer
Firm's goodwill = 30,000 × 5 = ₹1,50,000. Sacrifice: A 2/3 − 3/5 = 1/15; B 1/3 − 1/5 = 2/15; ratio 1 : 2. A gets ₹10,000, B gets ₹20,000.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1.Which ratio is used to credit the premium for goodwill?Show answer
The sacrificing ratio.
2.In which ratio is goodwill already in the books written off on admission?Show answer
The old profit sharing ratio.
3.C brings ₹40,000 premium for a 1/4 share. What is the firm's goodwill?Show answer
₹1,60,000.
4.Which account is debited for premium the new partner does not bring?Show answer
His current account (capital account if capitals fluctuate).
5.Which standard stops goodwill from being raised on admission?Show answer
AS 26, which records only purchased goodwill.

Treatment of Goodwill on Admission: frequently asked questions

How is goodwill treated on admission of a partner in Class 12?

By the premium method under AS 26: cash premium is credited to the old partners in the sacrificing ratio; any premium not brought is debited to the new partner's current or capital account; no Goodwill Account is raised.

What if the new ratio is not given?

Assume the old partners continue in their old ratio; then the sacrificing ratio equals the old ratio.

What is hidden goodwill?

Goodwill inferred when the new partner's capital implies a total firm value higher than the combined capitals; the difference is goodwill.

Can a partner who gains on admission be debited for goodwill?

Yes. If an old partner's share rises, he gains and must compensate the sacrificing partners, just like the new partner.