Question

Why is the entry for hidden goodwill is New Cap a/c Dr.

To Old partner' cap a/c ?

Thats the enrtywhen the new partner doesnt bring his share of goodwill ryight?

Answer 1

Hasim,

Generally, the value of goodwill is specified in the question. However, whenever it is not specified, we ascertain it as the difference between the capital of the new firm and net worth. In this case, it is assumed that the new partner is not bringing his share of goodwill in cash (because the share of incoming partner is inferred from the goodwill of the firm), therefore we need to adjust the same from the amount of capital brought in by the new partner. Accordingly, we debit the incoming partner's capital account and credit the capital accounts of sacrificing partners.