At the time of admission of a new partner, Goodwill raised should be written off in ___________.
The correct option is A New profit sharing ratio
Very often the incoming partner is not in a position to bring anything in cash for goodwill. Under this circumstance it becomes desirable to bring the goodwill at its full value by debiting the goodwill and crediting the old partners’ Capital Account in their old profit sharing ratio.
This allows full credit to all the old partners for their interest in the overall goodwill. Goodwill Account then appears as an asset in the firm’s Balance Sheet. It is not necessary that it should be allowed to stand there for an indefinite period.
After crediting the goodwill to the old partners, their capital accounts increase and thus the firm’s status as regards the earning capacity descends from super earning to the normal earning one At this stage any share in partnership firm that is assigned to the incoming partner refers to the normal profit as against super profit.
Therefore, the newcomer cannot be asked for any extra payment because none gains or sacrifices super profit. When the purpose is fulfilled the goodwill is written back to partners of newly constituted firm in the new profit sharing ratio.
Very often the incoming partner is not in a position to bring anything in cash for goodwill. Under this circumstance it becomes desirable to bring the goodwill at its full value by debiting the goodwill and crediting the old partners’ Capital Account in their old profit sharing ratio.
This allows full credit to all the old partners for their interest in the overall goodwill. Goodwill Account then appears as an asset in the firm’s Balance Sheet. It is not necessary that it should be allowed to stand there for an indefinite period.
After crediting the goodwill to the old partners, their capital accounts increase and thus the firm’s status as regards the earning capacity descends from super earning to the normal earning one At this stage any share in partnership firm that is assigned to the incoming partner refers to the normal profit as against super profit.
Therefore, the newcomer cannot be asked for any extra payment because none gains or sacrifices super profit. When the purpose is fulfilled the goodwill is written back to partners of newly constituted firm in the new profit sharing ratio.
