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Admission and retirement of a partner, and goodwill

Edexcel IAL Accounting · WAC11 The Accounting System and Costing

When a partner joins or leaves, the old partnership ends and a new one begins. Assets are revalued, goodwill is valued and shared, and capital accounts are adjusted so each partner gets a fair share of value built up so far (spec 1.3.13).

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Goodwill

Goodwill is the amount by which the value of a business as a whole exceeds the fair value of its separate net assets. It comes from reputation, loyal customers, location, skilled staff and brand names.

On buying a business: goodwill = price paid - fair value of net assets acquired. A buyer pays more than net assets because the business already earns profits from its customer base; the 2024 examiners' report found this reason was often poorly explained.
Valuation methods in partnership questions include a multiple of average profits (e.g. 2 x average of last 3 years) or a value agreed by the partners.

The old partners built the goodwill, so they are credited with it in the old profit-sharing ratio.

Admission: goodwill not kept in the books

1. Debit Goodwill, credit old partners' capitals in the old ratio.

2. Debit all partners' capitals (including the new one) in the new ratio, credit Goodwill.

The net effect is that the new partner pays the old partners for their share of goodwill through the capital accounts.

Capital accounts	Abe £	Bea £	Dee (new) £
Goodwill created (old ratio 1 : 1)	15,000	15,000	0
Goodwill written off (new ratio 2 : 2 : 1)	(12,000)	(12,000)	(6,000)
Net effect	3,000	3,000	(6,000)

Revaluation and retirement

Revaluation account: debit decreases in asset values, credit increases; the balance (profit or loss on revaluation) is shared in the old ratio to the old partners' capital accounts. Assets introduced by a new partner are debited to the asset and credited to that partner's capital at an agreed value.

Retirement: the retiring partner's capital account is credited with their share of goodwill and revaluation profit and their current account balance is transferred in. The total due is paid in cash or transferred to a loan account (a liability) to be repaid over time.

Worked example

Abe and Bea share profits equally. Dee is admitted and the new ratio is Abe 2 : Bea 2 : Dee 1. Goodwill is valued at £30,000 and is not to remain in the books. Show the effect on each capital account.

Create goodwill in the old ratio: Abe +15,000, Bea +15,000.
Write it off in the new ratio: Abe -12,000, Bea -12,000, Dee -6,000.

Answer: Abe +3,000, Bea +3,000, Dee (6,000): Dee has effectively paid £6,000 for her share of goodwill.

Key idea: Goodwill and revaluation gains belong to the old partners in the old ratio. If goodwill is not kept, write it off in the new ratio. A retiring partner's balance is paid or becomes a loan.

Check yourself

Goodwill is valued at twice the average profit of the last three years. Profits were £36,000, £42,000 and £45,000. Calculate goodwill.
Show answer
£82000. Average = 123,000 / 3 = 41,000; goodwill = 2 x 41,000 = 82,000.
A sole trader buys a business for £150,000. The fair value of its assets is £132,000 and its liabilities are £18,000. Calculate the goodwill purchased.
Show answer
£36000. Net assets = 114,000; goodwill = 150,000 - 114,000 = 36,000.
On admission of a partner, premises are revalued up by £20,000 and inventory down by £2,000. The old partners X and Y share profits 3 : 1. How much is credited to X's capital account?
Show answer
£13500. Revaluation profit = 18,000; X's share = 3/4 = 13,500.
Goodwill of £40,000 is not to remain in the books. A new partner takes a one-quarter share of profits. By how much is the new partner's capital account debited for goodwill?
Show answer
£10000. Written off in the new ratio: 40,000 x 1/4 = 10,000.
In which ratio is goodwill credited to the partners' capital accounts on the admission of a new partner?
- The new profit-sharing ratio
- The ratio of capitals
- Equally among all partners
- The old profit-sharing ratio
Show answer
The old profit-sharing ratio. The old partners built the goodwill, so they share it as they shared profits.
A retiring partner is owed £56,000 but the firm cannot pay immediately. How is the amount recorded?
- Left as a debit balance on the capital account
- Transferred to a loan account, a liability of the firm
- Written off as goodwill
- Treated as drawings
Show answer
Transferred to a loan account, a liability of the firm. The firm owes the former partner the money, so it becomes a loan.

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Sources

Pearson Edexcel International Advanced Subsidiary/Advanced Level in Accounting specification (issue 2), Unit 1 and Appendices 6 to 8

Last updated 8 November 2026. Spotted a mistake? Tell us.