(a) Sanjay and Vijay were partners in a firm sharing profits and losses in the ratio of 4 : 3. On 1st April, 2025 they admitted Babul as a new partner for 2/5th share in the profits of the firm. On Babul's admission, the following was agreed upon :
(i) The new profit sharing ratio of Sanjay, Vijay and Babul will be 3 : 3 : 4.
(ii) The goodwill of the firm will be valued at four years purchase of the average profits of the last three years. The profits of the previous three years were :
Year Profit (Rs.) 2022-23 16,500 2023-24 17,500 2024-25 18,500
(iii) Babul will bring his share of goodwill premium in cash, half of which will be withdrawn by Sanjay and Vijay.
(iv) On Babul's admission, revaluation of assets and reassessment of liabilities resulted in a loss of Rs. 70,000.
(v) At the time of Babul's admission, the firm had a General Reserve of Rs. 28,000.
(vi) After making necessary adjustments relating to goodwill, loss on revaluation and general reserve, the capital accounts of Sanjay and Vijay showed balances of Rs. 3,50,000 and Rs. 2,50,000 respectively. Babul brought proportionate capital for his 2/5th share in the profits of the firm.
Showing your workings clearly pass necessary journal entries for the above transactions in the books of the firm on Babul's admission.
OR
(b) Anuj, Divij and Shilpa were partners in a firm sharing profits and losses in the ratio of 2 : 1 : 2. Their Balance Sheet as at 31st March, 2023 was as follows :
Balance Sheet of Anuj, Divij and Shilpa as at 31st March, 2023
Liabilities Amount (Rs.) Assets Amount (Rs.) Capitals : Land & Building 8,00,000 Anuj 3,00,000 Furniture 2,40,000 Divij 4,00,000 Stock 1,20,000 Shilpa 5,00,000 12,00,000 Debtors 1,70,000 Bills Payable 60,000 Cash 50,000 Creditors 1,20,000 13,80,000 13,80,000
Anuj retired on the above date on the following terms :
(i) Anuj's share of goodwill was valued at Rs. 90,000 and the same was to be treated without opening goodwill account.
(ii) Revaluation of assets and reassessment of liabilities resulted in a gain of Rs. 25,000.
(iii) Amount due to Anuj was transferred to his loan account, to be paid in two equal yearly instalments plus interest @ 12% p.a. on the unpaid balance starting from 31st March, 2024.
Prepare Partners' Capital Accounts and Anuj's Loan Account till it is fully discharged.
(a) Sanjay and Vijay were partners in a firm sharing profits and losses in the ratio of 4 : 3. On 1st April, 2025 they admitted Babul as a new partner for 2/5th share in the profits of the firm. On Babul's admission, the following was agreed upon :
(i) The new profit sharing ratio of Sanjay, Vijay and Babul will be 3 : 3 : 4.
(ii) The goodwill of the firm will be valued at four years purchase of the average profits of the last three years. The profits of the previous three years were :
| Year | Profit (Rs.) |
|---|---|
| 2022-23 | 16,500 |
| 2023-24 | 17,500 |
| 2024-25 | 18,500 |
(iii) Babul will bring his share of goodwill premium in cash, half of which will be withdrawn by Sanjay and Vijay.
(iv) On Babul's admission, revaluation of assets and reassessment of liabilities resulted in a loss of Rs. 70,000.
(v) At the time of Babul's admission, the firm had a General Reserve of Rs. 28,000.
(vi) After making necessary adjustments relating to goodwill, loss on revaluation and general reserve, the capital accounts of Sanjay and Vijay showed balances of Rs. 3,50,000 and Rs. 2,50,000 respectively. Babul brought proportionate capital for his 2/5th share in the profits of the firm.
Showing your workings clearly pass necessary journal entries for the above transactions in the books of the firm on Babul's admission.
OR
(b) Anuj, Divij and Shilpa were partners in a firm sharing profits and losses in the ratio of 2 : 1 : 2. Their Balance Sheet as at 31st March, 2023 was as follows :
Balance Sheet of Anuj, Divij and Shilpa as at 31st March, 2023
| Liabilities | Amount (Rs.) | Assets | Amount (Rs.) |
|---|---|---|---|
| Capitals : | Land & Building | 8,00,000 | |
| Anuj 3,00,000 | Furniture | 2,40,000 | |
| Divij 4,00,000 | Stock | 1,20,000 | |
| Shilpa 5,00,000 | 12,00,000 | Debtors | 1,70,000 |
| Bills Payable | 60,000 | Cash | 50,000 |
| Creditors | 1,20,000 | ||
| 13,80,000 | 13,80,000 |
Anuj retired on the above date on the following terms :
(i) Anuj's share of goodwill was valued at Rs. 90,000 and the same was to be treated without opening goodwill account.
(ii) Revaluation of assets and reassessment of liabilities resulted in a gain of Rs. 25,000.
(iii) Amount due to Anuj was transferred to his loan account, to be paid in two equal yearly instalments plus interest @ 12% p.a. on the unpaid balance starting from 31st March, 2024.
Prepare Partners' Capital Accounts and Anuj's Loan Account till it is fully discharged.
This is an OR question — attempt only ONE part, (a) or (b).
(a) Journal Entries in the books of the firm on Babul's admission
Workings
- Sacrificing ratio = Old share − New share: Sanjay = ; Vijay = → Sacrificing ratio 19 : 9.
- Average profit = (16,500 + 17,500 + 18,500) / 3 = Rs. 17,500; Goodwill = 4 × 17,500 = Rs. 70,000.
- Babul's share of goodwill (2/5) = Rs. 28,000, credited to Sanjay and Vijay in 19 : 9 → Sanjay Rs. 19,000; Vijay Rs. 9,000.
- Half of premium withdrawn: Sanjay Rs. 9,500; Vijay Rs. 4,500.
- Revaluation loss Rs. 70,000 borne by Sanjay and Vijay in old ratio 4 : 3 → Sanjay Rs. 40,000; Vijay Rs. 30,000.
- General Reserve Rs. 28,000 distributed in old ratio 4 : 3 → Sanjay Rs. 16,000; Vijay Rs. 12,000.
- Combined adjusted capital of Sanjay and Vijay (Rs. 3,50,000 + Rs. 2,50,000 = Rs. 6,00,000) represents their combined new share of 6/10; total capital of new firm = 6,00,000 × 10/6 = Rs. 10,00,000; Babul's capital for 2/5 share = Rs. 4,00,000.
| Date | Particulars | Dr. (Rs.) | Cr. (Rs.) |
|---|---|---|---|
| 2025 | Bank A/c ...Dr. | 4,28,000 | |
| To Babul's Capital A/c | 4,00,000 | ||
| To Premium for Goodwill A/c | 28,000 | ||
| (Being capital and share of goodwill premium brought in cash by Babul) | |||
| Premium for Goodwill A/c ...Dr. | 28,000 | ||
| To Sanjay's Capital A/c | 19,000 | ||
| To Vijay's Capital A/c | 9,000 | ||
| (Being premium for goodwill credited to sacrificing partners in 19 : 9) | |||
| Sanjay's Capital A/c ...Dr. | 9,500 | ||
| Vijay's Capital A/c ...Dr. | 4,500 | ||
| To Bank A/c | 14,000 | ||
| (Being half of goodwill premium withdrawn by Sanjay and Vijay) | |||
| Sanjay's Capital A/c ...Dr. | 40,000 | ||
| Vijay's Capital A/c ...Dr. | 30,000 | ||
| To Revaluation A/c | 70,000 | ||
| (Being loss on revaluation transferred to old partners in old ratio 4 : 3) | |||
| General Reserve A/c ...Dr. | 28,000 | ||
| To Sanjay's Capital A/c | 16,000 | ||
| To Vijay's Capital A/c | 12,000 | ||
| (Being general reserve distributed among old partners in old ratio 4 : 3) |
(b) Partners' Capital Accounts and Anuj's Loan Account
Workings
- Anuj's goodwill Rs. 90,000 is written off (no goodwill account opened), so it is borne by the gaining partners Divij and Shilpa. As no new ratio is specified, Divij and Shilpa continue sharing in their existing ratio 1 : 2, so gaining ratio = 1 : 2 → Divij Rs. 30,000; Shilpa Rs. 60,000, both credited to Anuj.
- Revaluation gain Rs. 25,000 shared by all three in old ratio 2 : 1 : 2 → Anuj Rs. 10,000; Divij Rs. 5,000; Shilpa Rs. 10,000.
- Anuj's final capital = 3,00,000 + 90,000 + 10,000 = Rs. 4,00,000, transferred to Anuj's Loan A/c.
Partners' Capital Accounts
| Particulars | Anuj (Rs.) | Divij (Rs.) | Shilpa (Rs.) | Particulars | Anuj (Rs.) | Divij (Rs.) | Shilpa (Rs.) |
|---|---|---|---|---|---|---|---|
| To Anuj's Capital A/c (goodwill) | – | 30,000 | 60,000 | By Balance b/d | 3,00,000 | 4,00,000 | 5,00,000 |
| To Anuj's Loan A/c | 4,00,000 | – | – | By Revaluation A/c (gain) | 10,000 | 5,000 | 10,000 |
| To Balance c/d | – | 3,75,000 | 4,50,000 | By Divij's Capital A/c (goodwill) | 30,000 | – | – |
| By Shilpa's Capital A/c (goodwill) | 60,000 | – | – | ||||
| Total | 4,00,000 | 4,05,000 | 5,10,000 | Total | 4,00,000 | 4,05,000 | 5,10,000 |
Anuj's Loan Account
| Date | Particulars | Amount (Rs.) | Date | Particulars | Amount (Rs.) |
|---|---|---|---|---|---|
| 31.3.2024 | To Bank A/c (Instalment + Interest) | 2,48,000 | 1.4.2023 | By Anuj's Capital A/c | 4,00,000 |
| 31.3.2024 | To Balance c/d | 2,00,000 | 31.3.2024 | By Interest A/c (12% on 4,00,000) | 48,000 |
| Total | 4,48,000 | Total | 4,48,000 | ||
| 31.3.2025 | To Bank A/c (Instalment + Interest) | 2,24,000 | 1.4.2024 | By Balance b/d | 2,00,000 |
| 31.3.2025 | By Interest A/c (12% on 2,00,000) | 24,000 | |||
| Total | 2,24,000 | Total | 2,24,000 |
Anuj's Loan Account closes with a Nil balance on 31.3.2025 — fully discharged in two equal instalments of Rs. 2,00,000 each plus reducing interest @ 12% p.a.
Marking Scheme
- 1(a) 1 mark: correct sacrificing ratio (19:9) and goodwill valuation (Rs. 70,000).
- 2(a) 2 marks: journal entries for goodwill premium brought in and credited to sacrificing partners, and half withdrawn.
- 3(a) 2 marks: journal entries for revaluation loss and general reserve distributed in old ratio.
- 4(a) 1 mark: correct calculation of Babul's proportionate capital (Rs. 4,00,000) and its journal entry.
- 5(b) 2 marks: correct treatment of Anuj's goodwill (Rs. 90,000) charged to Divij and Shilpa in gaining ratio 1:2, without opening goodwill account.
- 6(b) 1 mark: revaluation gain of Rs. 25,000 distributed in old ratio 2:1:2 and Partners' Capital Accounts correctly balanced.
- 7(b) 2 marks: Anuj's Loan Account correctly showing two yearly instalments of Rs. 2,00,000 each with interest @ 12% p.a. on reducing balance, closing at Nil.
- 81 mark: neat format (proper account headings, narrations, and totals) — awarded only for the part actually attempted.
Hint
In (a): sacrificing ratio = old − new, and Babul's capital is derived from the combined adjusted capital of Sanjay and Vijay. In (b): goodwill is written off against gaining partners, and the loan carries interest on the reducing balance each year.
Quick Oral Answer
In admission, sacrificing ratio = old ratio minus new ratio, and goodwill premium is credited to sacrificing partners; the new partner's capital is fixed proportionately using the old partners' adjusted capital. In retirement, the retiring partner's goodwill is charged to the gaining partners' capitals, and any unpaid amount becomes a loan repaid with reducing-balance interest.
Analysis & Explanation
This OR question tests two distinct reconstitution events — admission and retirement/death — both requiring goodwill adjustment without opening a goodwill account, plus capital adjustment.
Concept (a) — Admission: On admission, the sacrificing partners are compensated for the share they give up. Sacrificing ratio = Old ratio − New ratio (never simply the old ratio). The incoming partner's capital is fixed with reference to the combined adjusted capital of the old partners for their new combined share — a very common 'hidden' calculation examiners test.
Concept (b) — Retirement: The retiring partner's goodwill share is written off against the gaining partners' capitals (gaining ratio = New ratio − Old ratio; here, absent a stated new ratio, the continuing partners keep their mutual ratio, so gaining ratio = their old mutual ratio). The retiring partner's dues, if not paid immediately, become a loan — repaid with equal principal instalments plus interest on the reducing balance, exactly like a diminishing-balance loan schedule.
Common exam trap: Students often use the old ratio instead of the sacrificing/gaining ratio for goodwill entries, or forget that interest in the loan account is calculated on the opening (not closing) balance each year.
Real-world relevance: This mirrors how professional partnerships (CA firms, law firms) actually settle an outgoing partner's dues — through a structured loan with interest — protecting the firm's liquidity while fairly compensating the partner.
Common Mistakes
- 1Using the old profit-sharing ratio instead of the sacrificing ratio (19:9) to distribute Babul's goodwill premium.
- 2Forgetting that Babul's capital is calculated from the combined adjusted capital of Sanjay and Vijay for their new combined share, not simply given.
- 3In part (b), crediting Anuj's goodwill share to Divij and Shilpa in the old three-way ratio instead of the gaining ratio between the continuing partners only.
- 4Calculating interest on the original loan balance every year instead of on the reducing (opening) balance.
Interesting Facts
The 'hidden goodwill' / proportionate capital method used in part (a) is one of the most frequently tested numericals in CBSE Class 12 Accountancy, appearing in some form almost every year since the 2019 syllabus revision.
Writing off goodwill through partners' capital accounts (without opening a Goodwill Account) became the mandated NCERT treatment after the 2017 amendment to AS-26 / Ind AS 38, which discourages carrying self-generated goodwill as an asset.
The diminishing-balance loan instalment method used for Anuj's Loan Account is identical in structure to how banks calculate EMI interest — interest is always charged only on the outstanding principal.
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Frequently Asked Questions
Why is Babul's capital not simply given but calculated from Sanjay and Vijay's capitals?
When the question says the new partner brings 'proportionate capital', the total capital of the reconstituted firm must first be derived from the old partners' adjusted (post-goodwill, post-revaluation, post-reserve) capitals for their combined new share, and then the new partner's capital is calculated for their own share of that total.
Why is the gaining ratio in part (b) the same as Divij and Shilpa's old mutual ratio?
Because the question does not state any new profit-sharing ratio between the continuing partners, the default CBSE assumption is that they continue to share profits between themselves in their existing ratio, making their gaining ratio equal to their old mutual ratio (1:2).
How is interest calculated on Anuj's Loan Account each year?
Interest @ 12% p.a. is calculated on the opening (unpaid) balance of the loan for that year — Rs. 4,00,000 in year 1 (interest Rs. 48,000) and Rs. 2,00,000 in year 2 (interest Rs. 24,000) — not on the original Rs. 4,00,000 throughout.