what are the provision of as-26 for the treatment of goodwill at the time of admission of a new partner ?
As per Accounting Standard 26, goodwill is recorded in the books only when some consideration in money or money’s worth has been paid for it. This practice is mandatory to follow. In the case of admission, retirement, death or change in profit sharing ratio among existing partners, Goodwill Account cannot be raised as no consideration is paid for it. This implies that the goodwill of a partnership firm is a self-generated goodwill, that is, the firm itself evaluates the value of the goodwill. The AS-26 standard specifies that goodwill should be immediately written off after it has been raised. That is, as per this AS, goodwill has to be adjusted through Partners' Capital Account. The following Journal entry records the treatment of the goodwill in case of admission of a new partner.
Cash or Bank A/c
To Premium for Goodwill A/c
Premium for Goodwill A/c
To Sacrificing Partners' Capital A/c
At the time of admission of a partner...
The new partner brings premium in order 2 compensate the sacrificing or old partners in their old profit sharing ratio.
the entry will be
Cash A/C .......Dr.
To premium for goodwill A/c
Premium 4 goodwillA/c......Dr
To sacrificing partnersA/c