Goodwill Accounting

The goodwill not brought in cash is debited to the new partner's account. Separate the brought and unbrought portions in the question.

In average profit method goodwill is the product of average profit and years' purchase. Therefore goodwill increases when years' purchase increases.

Normal profit = Capital employed × Normal rate of return = ₹400,000 × 10/100 = ₹40,000. Therefore, option B is correct. ₹20,000 would represent only a 5% return on the given capital, not 10%. Exam tip: To calculate normal profit, multiply the capital employed by the normal rate of return.

A's old share is (3/4) and new share is (2/4) so sacrifice is (1/4). Write old and new shares with common denominator.

B's old share is (1/4) and new share is (1/4) so sacrifice is zero. Calculate each partner's sacrifice separately.

On the admission of a new partner, the goodwill amount compensates the old partners who sacrifice a part of their profit share. If an old partner’s profit share has not decreased, he has made no sacrifice and suffered no corresponding loss; therefore, he is not entitled to goodwill compensation. The amount is adjusted in the sacrificing ratio. Exam tip: goodwill is credited to the sacrificing partners, not automatically to all old partners.

The incoming partner’s goodwill liability is ₹18,000, of which ₹12,000 is brought in cash. Therefore, the remaining amount is ₹18,000 − ₹12,000 = ₹6,000, which is adjusted through the partner’s capital account. Exam tip: subtract the cash contribution from the total goodwill due to find the amount requiring adjustment.

Goodwill is based on normal and sustainable earnings. Abnormal profit is removed to get a correct average.

Abnormal loss is not a regular loss so it is added back to average profit. In exams separate abnormal items from normal profit.

Average profit = (₹40,000 + ₹50,000 + ₹60,000) ÷ 3 = ₹1,50,000 ÷ 3 = ₹50,000. Therefore, ₹50,000 is correct. ₹1,50,000 represents the total profit, not the average profit. In exams, divide the total adjusted profit by the number of years to calculate average profit.

Goodwill is (25000 \times 4 = ₹100000). In super profit method multiply super profit by years' purchase.

In super profit method goodwill is based on super profit. If there is no super profit goodwill will also be zero.

Direct answer: Option A, goodwill is an intangible asset. An asset is something that gives future economic benefit to the business. Goodwill represents the firm’s reputation, customer loyalty, good location, skilled management, and ability to earn more than an ordinary firm. These benefits are valuable, but they cannot normally be touched or seen as a separate physical object. Therefore goodwill is called intangible. Option A is correct because it names this exact category. Option B, tangible asset, is wrong because tangible assets have physical form, such as machinery, furniture, or buildings. Goodwill has no physical shape. Option C, current liability, is wrong because a liability is an amount owed to outsiders, while goodwill is a business value or asset. Option D, cash expense, is wrong because goodwill is not itself a cash expense; a premium may be paid or received in a transaction, but the nature of goodwill remains intangible. Exam cue: reputation and earning power without physical form means intangible asset.

To write off old goodwill the goodwill account is credited. Old partners' capital accounts are debited in old ratio.

When raised goodwill is written off the burden may be placed on all partners in new ratio. Read the instruction carefully in the question.

The sacrificing ratio is (3:2) so B receives (10000 \times 2/5 = ₹4000). Use the goodwill amount brought for distribution.

Total goodwill is (30000 \div 1/3 = ₹90000). Work backward from the new partner's goodwill share.

Goodwill arises from reputation and extra earning capacity of the firm. Therefore ordinary asset value alone is not enough.

Goodwill is compensation for sacrifice so a wrong ratio gives wrong distribution. In exams do not confuse old ratio with sacrificing ratio.

Total parts are (5+3+2=10) and C's part is 2 so the share is (2/10). Add total parts when converting ratio into share.

New partner's goodwill is (120000 \times 2/10 = ₹24000). Multiply total goodwill by the new share.

When cash is received cash or bank account is debited. Then old partners are credited in sacrificing ratio.

When the amount remains in business cash increases and no withdrawal occurs. In exams distinguish retained from withdrawn.

Cash first comes in and then the same amount goes out so the net effect is zero. Both entries should be shown separately.

Goodwill is raised as an asset so goodwill account is debited. Old partners' capital accounts are credited in old ratio.