(When Premium for Goodwill is paid privately).
X and Y are partners in a firm sharing profits and losses in the ratio 3:2. They admit Z as partner for 1/4th share. Z paid RS 80,000 directly to X and Y as his share of goodwill. Pass the necessary Journal entry in the books of firm.

Explanation

No Journal entry will be passed in the boods as Z has paid his share of goodwill to X and Y directly, i.e., privately outside the firm.(ii) Goodwill (Prrmium for Goodwill ) is brought in Cash by the New or Incoming Partnre and is Retained in Business
When the new of incoming partner brings amount for goodwill for his share, it is transforred to Capital Accounts of the sacrificing partnres in their sacrificing ratio.

Alternatively, Premium for Goodwill is credeted to the New Partner's Capital Account and thereafter, adjusted in favour of old or existing partners in their sacrificing ratio. In this case, the Journal entries passed are:

Note: Unless sated otherwise, the partners' capitals are assumed to be maintained following Fluctating Capital Accounts Method. Goodwill, therefore, is adjusted through Partners' Capital Accounts in their Sacificing Ratio.