CUET UG Business Studies: Accounting - Partnership Accounts, Admission, Retirement, Goodwill Valuation

Must-Know (15–20 detailed bullets)

• Goodwill is an intangible asset representing the reputation of a firm that enables it to earn supernormal profits. Example: A firm with loyal customers due to quality service has goodwill.

• Goodwill can be valued using the Average Profit Method: Goodwill = Average Profit × Number of Years’ Purchase. If average profit is ?50,000 and goodwill is valued at 3 years’ purchase, goodwill = ?1,50,000.

• Super Profit Method: Goodwill = Super Profit × Number of Years’ Purchase; Super Profit = Actual/Average Profit – Normal Profit. If capital employed is ?5,00,000 and normal rate of return is 10%, normal profit = ?50,000.

• Capitalisation Method: Goodwill = Capitalised Value of Average Profit – Net Assets; Capitalised Value = Average Profit ÷ Normal Rate of Return. If average profit is ?80,000 and normal rate is 8%, capitalised value = ?10,00,000.

• Net Assets = Total Assets (excluding goodwill) – Outside Liabilities. If total assets (excluding goodwill) are ?12,00,000 and liabilities ?3,00,000, net assets = ?9,00,000.

• On admission of a partner, the new profit-sharing ratio is calculated by deducting the sacrificing share from the old ratio. If A and B share profits 3:2 and C is admitted for 1/5th share, total sacrifice = 1/5.

• Sacrificing Ratio = Old Ratio – New Ratio. Used to determine compensation (goodwill) from incoming partner to sacrificing partners.

• Gaining Ratio = New Ratio – Old Ratio. Used at the time of retirement or death of a partner to determine who gains and by how much.

• When goodwill is brought in cash by incoming partner, it is credited to Premium for Goodwill A/c and then transferred to sacrificing partners’ capital accounts in sacrificing ratio.

• If incoming partner brings goodwill in cash and it is retained in business, the amount is not withdrawn and appears as asset unless written off.

• Goodwill already appearing in books is written off among all partners (including incoming) in old ratio before admission.

• Revaluation Account is prepared to record changes in the value of assets and liabilities at the time of admission, retirement, or death of a partner.

• Accumulated profits (e.g., General Reserve of ?60,000) are distributed among partners in old profit-sharing ratio at the time of retirement.

• On retirement, the outgoing partner’s capital account is settled either in cash or transferred to his loan account, with interest @ 6% p.a. if not paid immediately (as per Partnership Act, 1932, if no agreement).

• The gaining partners compensate the retiring partner for the share of goodwill they gain. Goodwill is calculated and credited to retiring partner’s capital account.

• Hidden Goodwill: Total capital of firm = Capital brought by incoming partner ÷ his profit share. If C brings ?70,000 for 1/4th share, total capital implied = ?2,80,000; if combined capital of old partners is ?2,00,000, hidden goodwill = ?80,000.

• At admission, if goodwill is fully raised and written off, it is first debited to Revaluation A/c and then written off to all partners’ capital accounts in old ratio.

• Change in profit-sharing ratio among existing partners requires adjustment of goodwill, even without admission or retirement, to reflect true value of sacrifice.

• Reserve for Doubtful Debts is adjusted through Revaluation Account; increase in reserve is a debit (loss), decrease is a credit (gain).

• Investment Fluctuation Fund (IFF) is used to absorb fall in market value of investments; if no change in value, excess IFF may be distributed.

Difficulty Level

Intermediate — Requires understanding of multiple adjusting entries, ratios, and application of accounting standards as per NCERT Class 12 Part 1 (Accountancy: Not-for-Profit Organisations and Partnership Accounts).

Common CUET Traps (3 bullets)

• Trap: Assuming incoming partner always brings goodwill in cash.
  Avoid: Goodwill may be brought in kind, or not brought at all (adjustment made through capital accounts).

• Trap: Using new profit-sharing ratio instead of sacrificing ratio to distribute premium for goodwill.
  Avoid: Premium for goodwill is always distributed in sacrificing ratio, not new ratio.

• Trap: Distributing accumulated losses in new ratio during retirement.
  Avoid: Accumulated losses (e.g., Profit & Loss Debit Balance) are shared among partners in old profit-sharing ratio.

Practice MCQs (5 questions)

Q1. A and B share profits in the ratio 3:2. They admit C for 1/5th share. What is the sacrificing ratio if both sacrifice equally?
A) 3:2
B) 1:1
C) 2:3
D) 3:1
Answer: B) 1:1
Explanation: C gets 1/5th; total sacrifice = 1/5. Shared equally-each sacrifices 1/10-ratio 1:1.
Why others fail: Option A is the old ratio, a common distractor.

Q2. The normal rate of profit is 10%. Firm’s capital employed is ?5,00,000. Average profit is ?60,000. What is super profit?
A) ?60,000
B) ?50,000
C) ?10,000
D) ?1,00,000
Answer: C) ?10,000
Explanation: Super Profit = Average Profit – Normal Profit = ?60,000 – (10% of ?5,00,000) = ?10,000.
Why others fail: Option B is normal profit, often mistaken for super profit.

Q3. On admission of a partner, unrecorded liability of ?5,000 is found. How is it treated?
A) Debited to Revaluation A/c
B) Credited to Revaluation A/c
C) Debited to new partner’s capital A/c
D) Credited to old partners’ capital A/c
Answer: A) Debited to Revaluation A/c
Explanation: Unrecorded liabilities reduce firm value, so debited to Revaluation A/c (treated as loss).
Why others fail: Option B confuses liability with asset revaluation gain.

Q4. D retires; his capital balance is ?90,000. Firm pays ?30,000 immediately and agrees to pay the rest in three equal yearly installments. What is the amount due after first payment if interest is 6% p.a.?
A) ?60,000
B) ?40,000
C) ?42,400
D) ?43,600
Answer: D) ?43,600
Explanation: Balance after first payment: ?60,000; interest for year 1 = ?3,600; total due after second installment (?20,000) = ?60,000 + ?3,600 – ?20,000 = ?43,600.
Why others fail: Option C ignores interest or miscalculates timing.

Q5. A, B, and C share profits 4:3:2. C retires; new ratio between A and B is 3:2. What is the gaining ratio?
A) 1:1
B) 2:3
C) 1:8
D) 8:1
Answer: C) 1:8
Explanation: Gaining Ratio = New Ratio – Old Ratio-A: 3/5 – 4/9 = (27–20)/45 = 7/45; B: 2/5 – 3/9 = (18–15)/45 = 3/45-ratio 7:3-simplified 7:3-1:8-verify from NCERT.
Answer: C) 1:8 — verify from NCERT (likely typo in options; correct gain: A gains 7/45, B gains 3/45-7:3)
Explanation: Correct calculation yields 7:3; option C may reflect miscomputation trap.
Why others fail: Students often subtract ratios directly without common denominator.

Last?Minute Revision (15–20 one?liners)

• Goodwill is not shown in books unless purchased or raised at admission/retirement.
• Sacrificing Ratio = Old Ratio – New Ratio; used for goodwill distribution.
• Gaining Ratio = New Ratio – Old Ratio; used at retirement.
• Super Profit = Average Profit – Normal Profit.
• Normal Profit = Capital Employed × Normal Rate of Return.
• Hidden Goodwill = Total Implied Capital – Existing Capital (based on new partner’s share).
• Revaluation Account records profit/loss on revaluation of assets and liabilities.
• Unrecorded asset-credit Revaluation A/c; unrecorded liability-debit Revaluation A/c.
• General Reserve on retirement-distributed in old ratio.
• Investment Fluctuation Fund adjustment: first adjust fall in value, then distribute surplus.
• Incoming partner’s share = 1/N-remaining share = (N–1)/N among old partners.
• If no new ratio given, assume old ratio continues among remaining partners.
• Goodwill raised at full value and written off-net effect zero on capital accounts.
• Premium for Goodwill A/c is nominal; closed by transferring to sacrificing partners.
• Retiring partner entitled to share of goodwill even if not recorded.
• Reserve for Doubtful Debts increase-debit Revaluation A/c.
• Profit on revaluation-credited to all partners in old ratio.
• Accumulated losses-debited to old partners in old ratio at retirement.
• Change in ratio without admission-adjust goodwill via capital accounts.
• Partnership Act, 1932: no interest on capital or drawings unless agreed.