Gulab and Khushbu were partners in a firm sharing profits in the ratio of 3:2. From 1st April, 2014, Kanta joined as a partner for ⅕ share and they decided to share future profits in the ratio 5:3:2. For this purpose, the goodwill of the firm was valued at ₹2,50,000. Pass necessary journal entry for the treatment of goodwill on change in the profit sharing ratio of Gulab, Khushbu and Kanta.?

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Answer

Journal Entry for the Treatment of Goodwill on Change in Profit Sharing Ratio:

When there is a change in the profit sharing ratio of partners, it is necessary to account for the goodwill of the firm. Goodwill represents the reputation, customer base, and other intangible assets of the firm. In this case, Gulab, Khushbu, and Kanta have decided to change their profit sharing ratio, and therefore, the goodwill needs to be adjusted in the books of accounts. The following journal entry is required for the treatment of goodwill:

Step 1: Valuation of Goodwill:
The goodwill of the firm is valued at ₹2,50,000. This value represents the premium paid by the new partner, Kanta, to acquire a share in the firm's profits. This premium is based on the firm's reputation and the potential for future earnings.

The journal entry for the valuation of goodwill is as follows:

Goodwill A/C Dr. ₹2,50,000
To Gulab's Capital A/C ₹1,50,000
To Khushbu's Capital A/C ₹1,00,000

Explanation: The goodwill account is debited with the valuation amount of ₹2,50,000. To maintain the accounting equation, the capital accounts of Gulab and Khushbu are credited with their respective shares in the goodwill. Gulab's capital account is credited with ₹1,50,000 (₹2,50,000 x 3/5) and Khushbu's capital account is credited with ₹1,00,000 (₹2,50,000 x 2/5).

Step 2: Adjustment of Goodwill:
The next step is to distribute the goodwill among the partners in the new profit sharing ratio. The partners' capital accounts are adjusted based on their new profit sharing ratio.

The journal entry for adjusting the goodwill is as follows:

Gulab's Capital A/C Dr. ₹1,00,000
Khushbu's Capital A/C Dr. ₹1,00,000
Kanta's Capital A/C Dr. ₹50,000
To Goodwill A/C ₹2,50,000

Explanation: Gulab's capital account is debited with ₹1,00,000 (₹2,50,000 x 5/10) and Khushbu's capital account is debited with ₹1,00,000 (₹2,50,000 x 3/10) to adjust their share of the goodwill. Similarly, Kanta's capital account is debited with ₹50,000 (₹2,50,000 x 2/10) to adjust her share of the goodwill. The goodwill account is credited with the total amount of ₹2,50,000.

Conclusion:
By following the above journal entries, the treatment of goodwill on the change in the profit sharing ratio of Gulab, Khushbu, and Kanta is recorded in the books of accounts. This ensures that the goodwill is appropriately valued and distributed among the partners based on their new profit sharing ratio.

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A and B are partners sharing the profit the ratio of 3:2. They take C as the new partner, who brings in Rs. 25,000 against capital and Rs. 10,000 against goodwill. New profit sharing ratio is 1:1:1. In what ratio will this amount will be shared among the old partners A & B.

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