Kajal, Neerav and Alsha are partners in a firm sharing profits in the ratio of `3:2: 1` They decided to admit Rajan, their landlrd as a partner in the firm. Rajan brought suffcient amount of capital and his share of goodwill premium. The accountant of the firm passed the entry of rent paid for the building to rajan in 'Profit and Loss Appropriation Account' Is he correct in doing so? Give reason is support of your answer.
Answers
Answer:
Accounting treatment of goodwill in case of a admission of a new partner:
If the incoming partner brings any premium over and above his capital contribution at the time of his admission, such premium should be distributed to other existing partners. when a new partner is admitted to a firm, the old partners generally sacrifice in favour of the new partner in terms of lower profit sharing ratio in the future. Therefore, the premium for goodwill brought in by the new partner shall be given to the existing partners.
There can be two ways for the treatment of goodwill:
1. Goodwill account is raised in the books of the firm by debiting goodwill account or crediting partners capital A/c in old ratio and written off in new profit sharing ratio.
2. Premium for goodwill should be adjusted through partners capital account by debiting new partners share of goodwill to his account and crediting old partners capital account in sacrificing ratio.
Explanation:
tq
Answer:
No, accountant of the is not correct in doing so.
Reason: Because rent paid is a charge against the profit so it should be debited to profit and Loss Account.