Goodwill Premium Retained vs Withdrawn: Admission Entries

A new partner pays Rs 48,000 as premium for goodwill. The old partners receive credit for it. Yet the money stays in the firm’s bank account.

Has the firm forgotten to pay them?

No. Giving a partner credit and giving a partner cash are two separate events. That small distinction explains almost every question about goodwill premium being retained or withdrawn on admission.

Think of the firm as an orchard the original partners have spent years nurturing. A newcomer pays for a share in its future harvest. The compensation can remain available to the orchard, or the original growers can take it home. Their entitlement and the location of the money are different questions.

Let’s follow one set of figures all the way through, including the bank balance, the capital accounts, and a balance sheet check. All examples below are original classroom illustrations, with amounts in rupees.

The rule before the numbers

When premium enters the firm’s bank account, debit Bank and credit Premium for Goodwill. Allocate the premium to the sacrificing partners, then record a withdrawal only if instructed. Allocation uses the sacrificing ratio. A private payment outside the firm requires no goodwill entry in its books. These treatments are covered in NCERT’s Admission of a Partner chapter, Section 2.5.5.

For the examples that follow, capital accounts fluctuate unless stated otherwise. We use Bank because all receipts and payments go through the bank.

Start with three separate amounts

Meet Asha and Bilal, who run a design stationery business. Charu joins them.

Their admission agreement says:

• Asha and Bilal previously shared profits in the ratio 3:2.
• The new ratio for Asha, Bilal, and Charu is 5:3:2.
• The firm’s goodwill is valued at Rs 2,40,000.
• Charu contributes Rs 1,20,000 as capital and brings her full goodwill premium separately.
• There is no existing Goodwill Account and no other admission adjustment in this first example.

1. Work out Charu’s premium

Charu’s share is 2/10, or 1/5.

Premium = Rs 2,40,000 x 1/5 = Rs 48,000.

Rs 2,40,000 values the whole firm’s goodwill. Rs 48,000 is the agreed compensation for Charu’s share. Rs 1,20,000 is her separate capital contribution.

Those three numbers do different jobs. If you underline them separately before writing the journal, you are much less likely to credit the wrong amount to Charu.

2. Calculate who sacrificed

Asha’s sacrifice:

3/5 - 5/10 = 6/10 - 5/10 = 1/10.

Bilal’s sacrifice:

2/5 - 3/10 = 4/10 - 3/10 = 1/10.

The sacrificing ratio is 1:1, although the old ratio was 3:2.

Each receives a goodwill credit of Rs 24,000. Together, the two sacrifices add to 2/10, exactly Charu’s new share.

For a fuller explanation of how to calculate each ratio, see our profit-sharing, sacrificing, and gaining ratio guide.

Case 1: The full premium stays in the business

Charu deposits Rs 1,68,000: capital of Rs 1,20,000 plus premium of Rs 48,000.

Entry 1: Record the receipt

Particulars	Debit (Rs)	Credit (Rs)
Bank A/c Dr.	1,68,000
To Charu’s Capital A/c		1,20,000
To Premium for Goodwill A/c		48,000

Being capital and goodwill premium received from Charu.

Entry 2: Allocate the premium

Particulars	Debit (Rs)	Credit (Rs)
Premium for Goodwill A/c Dr.	48,000
To Asha’s Capital A/c		24,000
To Bilal’s Capital A/c		24,000

Being premium allocated equally to Asha and Bilal according to their sacrifice.

Now stop. There is no third entry for retention.

Look at what the two entries have accomplished:

• Bank increased by Rs 1,68,000.
• Charu’s capital increased by Rs 1,20,000.
• Asha’s and Bilal’s capitals increased by Rs 24,000 each.
• Premium for Goodwill received an equal credit and debit, leaving no balance.

The accounting equation works: assets increased by Rs 1,68,000, and partners’ funds increased by the same amount.

Notice that the Rs 48,000 has not vanished when the Premium for Goodwill Account closes. It remains within Bank. Its corresponding credit now sits in the old partners’ capital accounts.

Case 2: Asha and Bilal withdraw the whole premium

Keep Entries 1 and 2 exactly as above. Then add this payment:

Particulars	Debit (Rs)	Credit (Rs)
Asha’s Capital A/c Dr.	24,000
Bilal’s Capital A/c Dr.	24,000
To Bank A/c		48,000

Being the entire premium entitlement withdrawn by Asha and Bilal.

Asha first received a capital credit of Rs 24,000 and now receives a debit of Rs 24,000. The net change in her capital from these goodwill transactions is zero. Bilal’s result is the same.

That does not mean they received no compensation. Each has received Rs 24,000 in money outside the business.

Bank’s net increase becomes:

Rs 1,68,000 received - Rs 48,000 paid = Rs 1,20,000.

Charu’s capital is still Rs 1,20,000. The withdrawal belongs to Asha and Bilal, so it does not reduce Charu’s capital.

Case 3: Both partners withdraw only 25%

Again, first record the full receipt and full allocation.

Each partner withdraws 25% of Rs 24,000, which is Rs 6,000. The combined payment is Rs 12,000.

Asha's Capital A/c Dr.        6,000
Bilal's Capital A/c Dr.       6,000
  To Bank A/c                        12,000
(One-quarter of each partner's premium withdrawn)

Asha retains a net capital credit of Rs 18,000. Bilal retains Rs 18,000 too. Bank rises by Rs 1,56,000 overall.

Here is the comparison, considering only Charu’s capital and these goodwill transactions:

Result	All retained	All withdrawn	25% withdrawn
Receipt into Bank	1,68,000	1,68,000	1,68,000
Payment from Bank	0	48,000	12,000
Net Bank increase	1,68,000	1,20,000	1,56,000
Asha’s net capital increase	24,000	0	18,000
Bilal’s net capital increase	24,000	0	18,000
Charu’s capital increase	1,20,000	1,20,000	1,20,000

For every column, the combined capital increase equals the Bank increase.

What if the two partners withdraw different percentages?

Use the same Rs 24,000 entitlement for each partner. Now suppose Asha takes 75% of hers while Bilal takes only 25% of his.

Asha withdraws Rs 18,000 and leaves Rs 6,000. Bilal withdraws Rs 6,000 and leaves Rs 18,000.

Asha's Capital A/c Dr.       18,000
Bilal's Capital A/c Dr.       6,000
  To Bank A/c                        24,000
(Withdrawals according to individual instructions)

The premium was allocated 1:1, but this payment is divided 3:1. There is no contradiction: the agreement gives different withdrawal instructions after determining the entitlement.

Underline whose amount the percentage applies to. A surprisingly large number of errors begin with applying a perfectly calculated percentage to the wrong base.

Check the balance sheet, not just the journal

Let’s give the original firm a simple opening position:

• Bank: Rs 40,000.
• Other assets: Rs 3,60,000.
• Outside liabilities: Rs 80,000.
• Asha’s capital: Rs 2,00,000.
• Bilal’s capital: Rs 1,20,000.

Both sides total Rs 4,00,000. Assume other assets and outside liabilities do not change on admission.

After Charu joins, the three possible closing positions are:

Balance	All retained	All withdrawn	25% withdrawn
Bank	2,08,000	1,60,000	1,96,000
Other assets	3,60,000	3,60,000	3,60,000
Total assets	5,68,000	5,20,000	5,56,000
Outside liabilities	80,000	80,000	80,000
Asha’s capital	2,24,000	2,00,000	2,18,000
Bilal’s capital	1,44,000	1,20,000	1,38,000
Charu’s capital	1,20,000	1,20,000	1,20,000
Liabilities plus capitals	5,68,000	5,20,000	5,56,000

There is no new goodwill asset in this illustration. The firm received money, allocated the premium, and possibly paid money out. No entry here debits a Goodwill asset account.

Also, the closing capitals need not follow the new profit ratio of 5:3:2. Profit shares and capital balances are separate matters unless the question explicitly requires proportionate capitals.

If capital adjustment is required, complete the goodwill credits and withdrawals before comparing adjusted balances with required capitals. Our capital adjustment after admission guide explains that next stage.

What changes under fixed capitals?

Under a fixed capital system, these goodwill allocations and withdrawals normally go through the old partners’ Current Accounts. The incoming partner’s actual capital contribution still goes to Capital Account. The Delhi Directorate of Education’s Accountancy support material sets out this capital/current distinction.

For our example, Entry 1 remains:

Bank A/c Dr.               1,68,000
  To Charu's Capital A/c            1,20,000
  To Premium for Goodwill A/c        48,000

The allocation becomes:

Premium for Goodwill A/c Dr. 48,000
  To Asha's Current A/c              24,000
  To Bilal's Current A/c             24,000

If both withdraw 25%, record:

Asha's Current A/c Dr.       6,000
Bilal's Current A/c Dr.      6,000
  To Bank A/c                        12,000

Assuming no opening current balances or other adjustments, each old partner has a closing current credit of Rs 18,000. Their fixed capital balances stay unchanged. Bank still increases by Rs 1,56,000, exactly as before.

The economic result has not changed. We have changed the accounts used to keep fixed capital separate from other partner adjustments.

Two phrases that sound similar but need different workings

”The old partners withdraw half the premium”

In our main example, Charu brings all Rs 48,000. Asha and Bilal then withdraw Rs 24,000 between them. Bank receives the whole premium before making the payment.

”The new partner brings half the premium”

Here Charu supplies only Rs 24,000 of the required Rs 48,000. The unpaid Rs 24,000 needs a separate adjustment. It is not a withdrawal by the old partners.

For example, if the agreement requires that shortfall to be adjusted through Charu’s Current Account:

Bank A/c Dr.               1,44,000
  To Charu's Capital A/c            1,20,000
  To Premium for Goodwill A/c        24,000

Premium for Goodwill A/c Dr. 24,000
Charu's Current A/c Dr.      24,000
  To Asha's Capital A/c              24,000
  To Bilal's Capital A/c             24,000

This credits the entire compensation while identifying the amount Charu did not bring. There is no Bank credit because we have not been told that anyone withdrew money.

The current-account adjustment for an unpaid premium is also explained in NCERT’s admission chapter. Follow any specified capital or current-account requirements in the question.

Private payment and existing goodwill: keep them separate

Suppose Charu transfers Rs 24,000 directly to Asha’s personal bank account and Rs 24,000 to Bilal’s personal bank account. She then pays Rs 1,20,000 capital into the firm’s bank.

The firm’s receipt is only Rs 1,20,000:

Bank A/c Dr.               1,20,000
  To Charu's Capital A/c            1,20,000

Do not manufacture a Rs 48,000 receipt and withdrawal in the firm’s Bank Account. That cash never passed through it.

Now consider a separate instruction: the old balance sheet contains goodwill of Rs 30,000, which the question says to write off before admission. With Asha and Bilal’s old ratio of 3:2, the entry is:

Asha's Capital A/c Dr.      18,000
Bilal's Capital A/c Dr.     12,000
  To Goodwill A/c                    30,000

That is an adjustment to an existing asset. It is independent of whether Charu pays privately or through the firm. Notice the two ratios in this illustration: the existing goodwill write-off uses 3:2, while the premium allocation uses 1:1.

A quick way to catch an incomplete answer

Read your solution as a short money story:

1. What actually entered the firm’s Bank Account?
2. How much of that was Charu’s capital?
3. Who received the premium credit, and why?
4. Did the question authorise a payment out?
5. Do the final Bank and partner balances tell the same story?

Then check the Premium for Goodwill Account. For the fully paid premium in this example, it has Rs 48,000 on each side. If it still shows a balance after allocation, something has been missed or posted twice.

Avoid debiting Premium for Goodwill again for the withdrawal. It has already closed. The payment reduces the withdrawing partners’ balances.

Finally, read the withdrawal instruction one more time. “Retain 25%” means withdraw 75%; “withdraw 25%” means retain 75%. In our main example, those instructions produce payments of Rs 36,000 and Rs 12,000 respectively.

Try these before looking at the answers

Question 1: Full retention

Dev and Esha sacrifice in the ratio 2:1. Farah brings capital of Rs 90,000 and goodwill premium of Rs 36,000. The full premium stays in the business. Find the Bank increase and each premium credit.

Answer: Bank increases by Rs 1,26,000. Dev receives Rs 24,000 and Esha Rs 12,000. Farah’s capital credit is Rs 90,000. No withdrawal entry is needed.

Question 2: Different withdrawal instructions

Using Question 1, Dev withdraws half his premium and Esha withdraws all hers. How much leaves Bank?

Answer: Dev takes Rs 12,000 and Esha Rs 12,000, so debit their respective capital accounts and credit Bank Rs 24,000. Net Bank increase is Rs 1,02,000. Dev retains a Rs 12,000 premium credit; Esha retains none.

Question 3: Calculate the sacrifice first

Gita and Hari share profits 7:3. They admit Isha, and the new ratio is 5:3:2. The firm’s goodwill is Rs 1,50,000. Isha brings the full premium, which is then fully withdrawn. Who gets it?

Answer: Gita sacrifices 7/10 - 5/10 = 2/10. Hari sacrifices zero. Isha’s premium is Rs 30,000, all credited to Gita. On withdrawal, debit Gita’s Capital and credit Bank Rs 30,000. Hari receives no goodwill credit here.

Question 4: Work backwards from Bank

A new partner brings Rs 80,000 capital plus Rs 20,000 premium. Bank increases by Rs 85,000 after the only withdrawal. What percentage of the premium was retained?

Answer: Receipt is Rs 1,00,000, so withdrawal is Rs 15,000. Retained premium is Rs 5,000, or 25%. This conclusion assumes there are no other receipts or payments.

Question 5: Fixed capitals

Two partners with fixed capitals receive premium credits of Rs 15,000 each. Both withdraw Rs 10,000. Their Current Accounts had nil opening balances. What remains?

Answer: Each Current Account has a credit balance of Rs 5,000. Bank paid Rs 20,000. Their fixed Capital Accounts are unaffected by these goodwill adjustments.

Frequently asked questions

1. What does premium for goodwill retained in the business mean?

The cash stays available to the firm after the sacrificing partners receive their account credits. In our main example, Asha and Bilal each gain a Rs 24,000 capital credit, while the firm keeps the Rs 48,000 premium within Bank.

2. Is there a separate journal entry for retaining the premium?

No. Record the receipt and allocation. A retention instruction does not itself create a further transaction.

3. What is the entry when old partners withdraw the premium?

Debit the withdrawing partners’ Capital Accounts, or Current Accounts under fixed capitals, and credit Bank or Cash with the actual amount paid.

4. Does withdrawal reverse the sacrificing ratio?

No. Calculate the compensation using the sacrificing ratio first. Then apply the withdrawal instructions to each partner’s entitlement. Different withdrawal percentages can produce a different payment ratio.

5. Does retained premium appear as a goodwill asset?

Not under the premium entries used here. The receipt increases Bank, and the allocation increases the relevant partners’ balances. Retention alone does not create a Goodwill asset account.

6. Does the new partner’s capital include the premium?

In the separate-account method shown here, only the agreed capital contribution is credited to the new partner’s Capital Account. The premium passes through Premium for Goodwill to the sacrificing partners.

7. What if the question gives the premium directly?

Use the stated premium amount. For example, “brings Rs 48,000 as her share of goodwill” already specifies the amount due. Do not multiply that figure by her profit share again.

8. What if an old partner sacrifices nothing?

That partner receives no compensation for sacrifice in the simple admission situation illustrated in Question 3. If an old partner gains, work out the additional goodwill adjustment for that gain rather than allocating the incoming premium blindly among everyone.

9. Are private payment and immediate withdrawal the same?

They can leave similar final cash positions, but the transactions differ. A payment through the firm requires receipt, allocation, and withdrawal entries. A genuinely private payment creates no goodwill cash movement in the firm’s books.

10. What is the fastest numerical check?

For these examples, net Bank increase equals capital received plus premium actually received minus withdrawals. Compare that result with the net change in partners’ capital and current balances, after allowing for any non-cash adjustments. If the two sides disagree, revisit the receipt, allocation, and payment separately.