A2S01 — Advanced Partnership Changes, Goodwill, Revaluation & Dissolution
Advanced Partnership Accounting
Master the accounting treatment of partnership changes — including
goodwill, revaluation, admission, retirement, changes in profit-sharing ratios, part-year changes and dissolution.
Learn to move confidently from the information given in a question to the correct
revaluation account, realisation account, capital accounts, current accounts and final settlement.
Track every change. Apply the correct ratio. Complete every account.
Learning Objectives
By the end of this supplementary topic, students should be able to:
- distinguish between inherent goodwill and purchased goodwill
- calculate goodwill adjustments when profit-sharing ratios change
- calculate sacrificing ratios and gaining ratios
- account for the admission of a new partner
- account for the retirement of an existing partner
- prepare and interpret a revaluation account
- prepare partners’ capital accounts and current accounts
- account for partnership changes occurring part-way through an accounting year
- prepare a realisation account
- account for assets and liabilities during dissolution
- calculate and distribute profit or loss on realisation
- complete final settlement between partners
- apply the correct accounting treatment to integrated partnership questions
Concept Framework
PARTNERSHIP CHANGES
Partnership accounting becomes more demanding when the relationship between partners changes.
Typical changes include:
A. Change in profit-sharing ratio
Existing partners continue, but their agreed shares change.
B. Admission of a new partner
A new partner joins the partnership and receives an agreed share of future profits.
C. Retirement of a partner
An existing partner leaves the partnership and must be settled appropriately.
D. Dissolution
The partnership business comes to an end.
These changes may require adjustments for:
- goodwill
- revaluation of assets and liabilities
- partners’ capital accounts
- partners’ current accounts
- profit or loss
- realisation of assets
- settlement of liabilities
- final settlement between partners.
GOODWILL IN PARTNERSHIP ACCOUNTING
What is goodwill?
Goodwill represents the value of advantages associated with an established business that may enable it to earn profits beyond those expected from its identifiable net assets.
Examples may include:
- established reputation
- loyal customers
- favourable location
- experienced workforce
- strong business relationships.
Purchased goodwill
Purchased goodwill arises when a business is acquired for an amount greater than the fair value of its identifiable net assets.
It represents goodwill that has been acquired through a transaction.
Inherent goodwill
Inherent goodwill is the value of goodwill that has developed within the existing business.
It may arise from the business’s reputation, customer relationships and other internally generated advantages.
Examination point
Do not automatically treat inherent goodwill and purchased goodwill as identical.
The question may specifically require you to distinguish between them.
GOODWILL AND CHANGES IN PROFIT-SHARING RATIO
When existing partners change their profit-sharing ratio, determine who sacrifices and who gains.
Sacrificing ratio
A partner sacrifices when their new share is smaller than their old share.
Sacrifice = Old share − New share
Gaining ratio
A partner gains when their new share is greater than their old share.
Gain = New share − Old share
Worked Example 1 — Change in Ratio
A and B share profits equally.
They change their ratio from:
Old ratio = 1 : 1
to:
New ratio = 3 : 2
Goodwill is valued at £50,000.
Step 1 — Calculate the change
A:
Old share = 1/2
New share = 3/5
A gains:
3/5 − 1/2
= 6/10 − 5/10
= 1/10
B:
Old share = 1/2
New share = 2/5
B sacrifices:
1/2 − 2/5
= 5/10 − 4/10
= 1/10
Step 2 — Calculate goodwill adjustment
B sacrifices 1/10 of the goodwill:
£50,000 × 1/10 = £5,000
Therefore, B is compensated by A with £5,000, subject to the goodwill treatment specified in the question.
Key rule
Always calculate the ratio change first.
Do not divide goodwill between partners simply because their old ratio is known.
REVALUATION OF ASSETS AND LIABILITIES
When a partnership changes, assets and liabilities may need to be reassessed.
Examples:
- property increases in value
- inventory decreases in value
- an asset becomes impaired
- a liability is reassessed.
The difference between the old carrying amount and revised amount creates a revaluation gain or loss.
Revaluation increase
If an asset increases in value:
Debit: Asset account
Credit: Revaluation account
Revaluation decrease
If an asset decreases in value:
Debit: Revaluation account
Credit: Asset account
Liability increase
An increase in a liability creates a loss:
Debit: Revaluation account
Credit: Liability account
Liability decrease
A decrease in a liability creates a gain:
Debit: Liability account
Credit: Revaluation account
REVALUATION ACCOUNT
The revaluation account is used to calculate the profit or loss arising from changes in the values of assets and liabilities.
General structure
| Revaluation Account | £ | £ | |
|---|---|---|---|
| Debit | Credit | ||
| Decrease in assets | X | Increase in assets | X |
| Increase in liabilities | X | Decrease in liabilities | X |
| Revaluation profit transferred to partners | X | ||
| Total | X | Total | X |
If the debit side is greater, there is a revaluation loss.
If the credit side is greater, there is a revaluation profit.
Worked Example 2 — Revaluation
An asset increases from £80,000 to £100,000.
The partners share profits in the ratio:
3 : 2 : 1
Revaluation gain
£100,000 − £80,000 = £20,000
The gain is shared:
| Partner | Ratio | Share |
|---|---|---|
| A | 3/6 | £10,000 |
| B | 2/6 | £6,666.67 |
| C | 1/6 | £3,333.33 |
| Total | 6/6 | £20,000 |
GOODWILL VS REVALUATION
The revaluation account is used to calculate the profit or loss arising from changes in the values of assets and liabilities.
General structure
| Revaluation Account | £ | £ | |
|---|---|---|---|
| Debit | Credit | ||
| Decrease in assets | X | Increase in assets | X |
| Increase in liabilities | X | Decrease in liabilities | X |
| Revaluation profit transferred to partners | X | ||
| Total | X | Total | X |
If the debit side is greater, there is a revaluation loss.
If the credit side is greater, there is a revaluation profit.
Worked Example 2 — Revaluation
An asset increases from £80,000 to £100,000.
The partners share profits in the ratio:
3 : 2 : 1
Revaluation gain
£100,000 − £80,000 = £20,000
The gain is shared:
| Partner | Ratio | Share |
|---|---|---|
| A | 3/6 | £10,000 |
| B | 2/6 | £6,666.67 |
| C | 1/6 | £3,333.33 |
| Total | 6/6 | £20,000 |
ADMISSION OF A NEW PARTNER
When a new partner joins:
- determine the old ratio
- determine the new ratio
- identify the new partner’s share
- calculate sacrificing partners
- calculate goodwill adjustment
- account for revaluation
- adjust capital/current accounts
- prepare the revised partnership position.
Worked Example 3 — Admission
A and B share profits equally.
C is admitted.
The new ratio is:
3 : 2 : 1
Goodwill is valued at £60,000.
Step 1 — Old shares
A = 1/2
B = 1/2
Step 2 — New shares
A = 3/6 = 1/2
B = 2/6 = 1/3
C = 1/6
Step 3 — Sacrifice
A:
1/2 − 1/2 = nil
B:
1/2 − 1/3
= 3/6 − 2/6
= 1/6
C receives 1/6.
Therefore B sacrifices 1/6.
Step 4 — Goodwill
£60,000 × 1/6 = £10,000
B is compensated for the sacrifice of 1/6.
GOODWILL REMAINING IN THE BOOKS OR BEING REMOVED
The question may specify how goodwill is to be treated.
If goodwill remains in the books
The goodwill asset continues to appear in the statement of financial position.
If goodwill is written off
The goodwill balance is removed from the books and the appropriate partners’ accounts are adjusted.
Important
Do not assume the treatment.
Read the wording carefully.
The accounting entries depend on the treatment required by the question.
RETIREMENT OF A PARTNER
When a partner retires:
- determine the retiring partner’s existing share
- determine the revised ratio of continuing partners
- calculate the gaining ratio
- adjust goodwill
- account for revaluation
- adjust capital/current accounts
- determine the amount due to the retiring partner
- settle the retiring partner according to the information provided.
Worked Example 4 — Retirement
A, B and C share profits in the ratio:
3 : 2 : 1
C retires.
Goodwill is valued at £60,000.
C’s existing share:
1/6
Goodwill attributable to C
£60,000 × 1/6
= £10,000
C’s goodwill entitlement is therefore £10,000, subject to the exact goodwill treatment specified in the question.
CAPITAL AND CURRENT ACCOUNTS AFTER A CHANG
CAPITAL AND CURRENT ACCOUNTS AFTER A CHANGE
Partners’ accounts must reflect all relevant adjustments.
Possible items include:
Capital account
- opening capital
- additional capital introduced
- goodwill adjustment
- revaluation profit/loss
- capital transferred or withdrawn.
Current account
Under a fixed capital system, items such as:
- drawings
- interest on capital
- interest on drawings
- salary
- commission
- share of profit/loss
are generally recorded through the current account.
Actual Account-Format Working — Partners’ Current Account
Example structure
| Partner A — Current Account | £ | £ | |
|---|---|---|---|
| Drawings | X | Balance b/d | X |
| Interest on drawings | X | Interest on capital | X |
| Salary/commission | X | ||
| Share of profit | X | ||
| Balance c/d | X | ||
| Total | X | Total | X |
The exact items depend on the partnership agreement and question requirements.
CHANGES PART-WAY THROUGH AN ACCOUNTING YEAR
A partnership may change during the year rather than on the first day of the accounting period.
The question may require profit to be divided between:
- the period before the change
- the period after the change.
The basis must come from the information given.
Possible approaches include:
- time basis
- actual profit for each period
- specified allocation basis
- other information given in the question.
Worked Example 5 — Part-Year Change
Annual profit:
£120,000
A partnership changes halfway through the year.
Assume profit accrues evenly.
First six months
£120,000 × 6/12
= £60,000
Second six months
£120,000 × 6/12
= £60,000
The £60,000 for each period is then divided according to the appropriate profit-sharing ratio for that period.
Examination warning
Do not automatically divide annual profit equally between partners.
First determine:
Which period?
Then determine:
Which ratio applies?
DISSOLUTION
DISSOLUTION
Dissolution means the partnership business is brought to an end.
The accounting process normally involves:
- transferring assets to the realisation account
- transferring external liabilities to the realisation account
- realising assets
- settling liabilities
- recording dissolution expenses
- calculating profit or loss on realisation
- transferring the profit or loss to partners’ capital accounts
- settling the partners’ final balances.
REALISATION ACCOUNT
REALISATION ACCOUNT
The realisation account is used to determine the profit or loss arising from the disposal of assets and settlement of liabilities.
Core rules
Transfer of assets
Assets are transferred to the realisation account at their book values.
Debit Realisation
Credit Asset
Transfer of liabilities
External liabilities transferred to realisation are recorded:
Debit Liability
Credit Realisation
Assets realised for cash
Debit Cash/Bank
Credit Realisation
Liabilities settled for cash
Debit Realisation
Credit Cash/Bank
Dissolution expenses
Debit Realisation
Credit Cash/Bank
Realisation profit
Transferred to partners’ capital accounts.
Realisation loss
Transferred to partners’ capital accounts.
WORKED EXAMPLE — REALISATION
The following information is given:
- Assets transferred to realisation: £150,000
- Assets realised for cash: £132,000
- Liabilities transferred to realisation: £25,000
- Liabilities settled for cash: £23,000
- Dissolution expenses paid: £2,000
Step 1 — Transfer assets
Assets transferred:
£150,000
Realisation is debited.
Step 2 — Transfer liabilities
Liabilities transferred:
£25,000
Realisation is credited.
Step 3 — Record asset proceeds
Assets are realised for:
£132,000
Cash is debited and realisation is credited.
Step 4 — Record settlement of liabilities
Liabilities are settled for:
£23,000
Realisation is debited and cash is credited.
Step 5 — Record dissolution expenses
Expenses:
£2,000
Realisation is debited and cash is credited.
Correct Realisation Account
| Realisation Account | £ | £ | |
|---|---|---|---|
| Debit | Credit | ||
| Assets transferred | 150,000 | Liabilities transferred | 25,000 |
| Liabilities settled | 23,000 | Assets realised | 132,000 |
| Dissolution expenses | 2,000 | ||
| Loss transferred to partners | 18,000 | ||
| Total | 193,000 | Total | 157,000 + 18,000 = 175,000 |
Correct calculation
Total debit before profit/loss:
£150,000 + £23,000 + £2,000
= £175,000
Total credit before profit/loss:
£25,000 + £132,000
= £157,000
Therefore:
£175,000 − £157,000
= £18,000 loss
The £18,000 realisation loss is transferred to the partners’ capital accounts in their agreed profit-sharing ratio.
Important examination point
The £25,000 liability transferred and the £23,000 liability settlement are different entries.
Do not simply use £23,000 as the liability transferred figure.
Correct. The Realisation Account total was wrong.
The correct totals are:
- Debit: £150,000 + £23,000 + £2,000 + £18,000 = £193,000
- Credit: £25,000 + £132,000 = £157,000
- Therefore, £18,000 loss is added to the debit side to balance the account.
- Both sides = £193,000.
Corrected Realisation Account
| Realisation Account | £ | £ |
|---|---|---|
| Debit | Credit | |
| Assets transferred | 150,000 | Liabilities transferred |
| Liabilities settled | 23,000 | Assets realised |
| Dissolution expenses | 2,000 | |
| Loss transferred to partners | 18,000 | |
| Total | 193,000 | Total |
Correct balance logic
Debit: £150,000 + £23,000 + £2,000 + £18,000 = £193,000
Credit: £25,000 + £132,000 = £157,000
The £18,000 loss makes the account balance:
£157,000 + £18,000 = £175,000 ❌
Wait — that exposes the deeper issue: the original figures themselves need checking, because a T-account cannot balance at £193,000 vs £157,000 merely by adding the £18,000 loss to the debit side. The correct debit before loss is £175,000, so:
£175,000 − £157,000 = £18,000 loss
Therefore the balanced account is:
| Realisation Account | £ | £ |
|---|---|---|
| Debit | Credit | |
| Assets transferred | 150,000 | Liabilities transferred |
| Liabilities settled | 23,000 | Assets realised |
| Dissolution expenses | 2,000 | Loss transferred to partners |
| Total | 175,000 | Total |
This is the correct format. The loss belongs on the credit side, because the debit side is greater.
So the final correction is:
Debit total = £175,000
Credit total = £175,000
Realisation loss = £18,000
And the previous table’s “£157,000 + £18,000 = £175,000” was actually the correct balancing calculation; the error was placing the loss on the wrong side while labelling it as a debit.
ACTUAL ACCOUNT-FORMAT WORKINGS — REALISATION
ACTUAL ACCOUNT-FORMAT WORKINGS — REALISATION
The complete accounting flow can be shown as follows.
Assets transferred
Journal logic:
Realisation A/c Dr £150,000
To Assets A/c £150,000
Liabilities transferred
Liability A/c Dr £25,000
To Realisation A/c £25,000
Assets realised
Cash/Bank A/c Dr £132,000
To Realisation A/c £132,000
Liabilities settled
Realisation A/c Dr £23,000
To Cash/Bank A/c £23,000
Dissolution expenses
Realisation A/c Dr £2,000
To Cash/Bank A/c £2,000
Realisation loss
Realisation loss:
£18,000
If A and B share profits equally:
£18,000 × 1/2 = £9,000 each
The transfer is:
A’s Capital A/c Dr £9,000
B’s Capital A/c Dr £9,000
To Realisation A/c £18,000
PARTNERSHIP DISSOLUTION — FINAL SETTLEMENT
After realisation, the partners’ capital accounts are adjusted for:
- realisation profit/loss
- goodwill adjustments where applicable
- other agreed adjustments
- current account balances
- capital introduced or withdrawn.
The final balance represents the amount due to or from each partner.
Actual Account-Format Working — Capital Account
| Partner A — Capital Account | £ | £ | |
|---|---|---|---|
| Realisation loss | X | Balance b/d | X |
| Drawings/settlement adjustments | X | Goodwill adjustment | X |
| Realisation profit | X | ||
| Cash/Bank — final settlement | X | ||
| Total | X | Total | X |
The exact entries depend on whether the final capital balance is payable to or receivable from the partner.
INTEGRATED WORKED EXAMPLE — PARTNERSHIP CHANGE
A and B share profits in the ratio:
3 : 2
C is admitted.
The new ratio is:
3 : 2 : 1
Goodwill is valued at:
£30,000
Step 1 — Determine old shares
A = 3/5
B = 2/5
Step 2 — Determine new shares
A = 3/6 = 1/2
B = 2/6 = 1/3
C = 1/6
Step 3 — Calculate sacrifice
A:
3/5 − 1/2
= 6/10 − 5/10
= 1/10
B:
2/5 − 1/3
= 6/15 − 5/15
= 1/15
C receives:
1/6
Check:
1/10 + 1/15
= 3/30 + 2/30
= 5/30
= 1/6
Correct.
Step 4 — Goodwill compensation
A:
£30,000 × 1/10
= £3,000
B:
£30,000 × 1/15
= £2,000
Total:
£3,000 + £2,000
= £5,000
This equals C’s share of goodwill:
£30,000 × 1/6
= £5,000
COMMON EXAMINATION ERRORS
COMMON EXAMINATION ERRORS
Error 1 — Using the old ratio for everything
The old ratio may apply to certain adjustments, while the new ratio applies to future profit sharing.
Always identify which ratio the question requires.
Error 2 — Confusing sacrifice and gain
Remember:
Sacrifice = Old − New
Gain = New − Old
Error 3 — Treating goodwill and revaluation as the same adjustment
They are separate accounting matters.
Error 4 — Forgetting the revaluation account
If the question requires revaluation, the changes must be properly recorded.
Error 5 — Using liability settlement as liability transferred
These are different figures.
For example:
Liability transferred = £25,000
Liability settled = £23,000
Both must be recorded separately.
Error 6 — Forgetting realisation expenses
Dissolution expenses are normally charged to the realisation account.
Error 7 — Calculating realisation profit/loss incorrectly
Use the actual account structure.
Do not rely only on a shortcut formula.
Error 8 — Applying a part-year ratio incorrectly
First establish the period.
Then establish the applicable ratio.
Error 9 — Forgetting the final settlement
Dissolution is not complete merely because the assets have been sold.
Partners’ final balances must also be settled.
Structured Practice
Question 1 — Change in Ratio
Question 1 — Change in Ratio
A and B share profits equally.
They change their ratio to 3 : 2.
Goodwill is valued at £50,000.
Calculate the amount of goodwill adjustment required.
Question 2 — Admission
Question 2 — Admission
A and B share profits equally.
C is admitted for a 1/6 share.
Goodwill is valued at £60,000.
Calculate the amount of goodwill attributable to C and identify the sacrificing partner.
Question 3 — Revaluation
Question 3 — Revaluation
An asset has a carrying value of £80,000 and is revalued to £100,000.
Partners A, B and C share profits in the ratio 3 : 2 : 1.
Calculate the revaluation gain and each partner’s share.
Question 4 — Retirement
Question 4 — Retirement
A, B and C share profits in the ratio 3 : 2 : 1.
C retires.
Goodwill is valued at £60,000.
Calculate C’s share of goodwill.
Question 5 — Part-Year Change
Question 5 — Part-Year Change
Annual partnership profit is £120,000.
A change in the partnership occurs halfway through the accounting year.
Assume profit accrues evenly.
Calculate the profit attributable to each six-month period.
Question 6 — Dissolution
Question 6 — Dissolution
The following information is available:
assets transferred to realisation: £150,000
assets realised: £132,000
liabilities transferred: £25,000
liabilities settled: £23,000
dissolution expenses: £2,000
Prepare the realisation account and calculate the profit or loss on realisation.
Question 7 — Explanation
Question 7 — Explanation
Explain why goodwill and revaluation are treated as separate adjustments when a new partner is admitted.
Question 8 — Integrated Question
Question 8 — Integrated Question
A and B share profits in the ratio 3 : 2.
C is admitted and the new ratio becomes 3 : 2 : 1.
Goodwill is valued at £30,000.
Calculate:
A’s sacrifice
B’s sacrifice
C’s share
A’s goodwill adjustment
B’s goodwill adjustment
C’s goodwill entitlement.
Proficiency Check
LEARN → UNLEARN → RELEARN
LEARN
Answer briefly.
1.
What is goodwill?
2.
What is a relevant cost in a partnership change?
3.
What is a sacrificing ratio?
4.
What is a gaining ratio?
5.
What is the purpose of a revaluation account?
6.
What is the purpose of a realisation account?
7.
Why are partners’ capital accounts adjusted when a partnership changes?
8.
Why must part-year changes be treated carefully?
PROFICIENCY CHECK — FULL ANSWER KEY — LEARN
1.
Goodwill represents the value of advantages associated with an established business that may contribute to its ability to earn profits.
2.
A relevant cost is a cost that changes as a result of the decision or change being considered.
3.
The sacrificing ratio shows the reduction in partners’ profit shares:
Sacrifice = Old share − New share
4.
The gaining ratio shows the increase in partners’ profit shares:
Gain = New share − Old share
5.
A revaluation account records changes in the values of partnership assets and liabilities and determines the resulting revaluation profit or loss.
6.
A realisation account records the disposal of assets, settlement of liabilities and dissolution expenses and determines the profit or loss arising from dissolution.
7.
Capital accounts must reflect adjustments arising from matters such as goodwill, revaluation, profit/loss and final settlement.
8.
A change occurring part-way through the year means different profit-sharing arrangements may apply to different periods.
PROFICIENCY CHECK — UNLEARN
Decide whether each statement is True or False, then correct the false statements.
A.
Goodwill is always shared using the old profit-sharing ratio.
B.
The partner with the highest new profit share must always be the sacrificing partner.
C.
A revaluation increase in an asset is recorded as a debit to the revaluation account.
D.
Liabilities transferred to the realisation account and liabilities actually settled must always be the same amount.
E.
A realisation loss is ignored when preparing partners’ capital accounts.
UNLEARN — FULL ANSWER KEY
A — False
Goodwill adjustments depend on the change in partners’ shares and the treatment specified in the question.
B — False
The partner whose share falls is the sacrificing partner.
Use:
Old share − New share
C — False
An increase in an asset is a revaluation gain.
The asset is debited and the revaluation account is credited.
D — False
The liability transferred is normally recorded at its book value.
The amount actually paid to settle the liability may be different.
E — False
A realisation loss is transferred to the partners’ capital accounts in the appropriate profit-sharing ratio.
PROFICIENCY CHECK — RELEARN
Explain each point in your own words.
1.
Why is the sacrificing ratio important when a new partner is admitted?
2.
Why is goodwill relevant when an existing partner retires?
3.
Why is revaluation required when partnership assets or liabilities change in value?
4.
Why are liabilities transferred and liabilities settled recorded separately during dissolution?
5.
Why must the realisation profit or loss eventually reach the partners’ capital accounts?
RELEARN — FULL ANSWER KEY
1.
The sacrificing ratio identifies the existing partners whose profit shares have decreased. It determines the basis for compensating them for the share given to the new partner.
2.
A retiring partner is entitled to appropriate adjustments for their interest in the partnership, including goodwill where required by the question.
3.
Revaluation ensures that changes in the carrying values of assets and liabilities are properly recognised before the partnership change is completed.
4.
The amount transferred to realisation represents the liability’s book value, while the amount settled represents the actual cash payment. The two figures can differ.
5.
The realisation profit or loss belongs to the partners and therefore must be transferred to their capital accounts according to the appropriate profit-sharing ratio.
Detailed Activity Solutions
Question 1, 2, 3, 4, 5, 6,7,8
Solution 1
Old ratio:
1 : 1
New ratio:
3 : 2
B sacrifices:
1/2 − 2/5
= 5/10 − 4/10
= 1/10
Goodwill:
£50,000 × 1/10
= £5,000
Solution 2
C’s share:
1/6
Goodwill:
£60,000 × 1/6
= £10,000
Old shares:
A = 1/2
B = 1/2
New shares:
A = 1/2
B = 1/3
C = 1/6
Therefore B sacrifices:
1/2 − 1/3
= 1/6
Solution 3
Revaluation gain:
£100,000 − £80,000
= £20,000
Ratio:
3 : 2 : 1
A:
£20,000 × 3/6
= £10,000
B:
£20,000 × 2/6
= £6,666.67
C:
£20,000 × 1/6
= £3,333.33
Solution 4
C’s share:
1/6
Goodwill:
£60,000 × 1/6
= £10,000
Solution 5
Annual profit:
£120,000
Six-month share:
£120,000 × 6/12
= £60,000
Therefore:
First period = £60,000
Second period = £60,000
The applicable partnership ratio must then be applied separately to each period.
Solution 6 — Full Realisation Working
Realisation Account
| Realisation Account | £ | £ | |
|---|---|---|---|
| Assets transferred | 150,000 | Liabilities transferred | 25,000 |
| Liabilities settled | 23,000 | Assets realised | 132,000 |
| Dissolution expenses | 2,000 | ||
| Loss transferred to partners | 18,000 | ||
| Total | 193,000 | Total | 175,000 |
Calculation
Debit before loss:
£150,000 + £23,000 + £2,000
= £175,000
Credit before loss:
£25,000 + £132,000
= £157,000
Loss:
£175,000 − £157,000
= £18,000
Therefore:
Realisation loss = £18,000
Solution 7
Goodwill relates to the value of the established business and the partners’ interests in that value.
Revaluation relates to changes in the carrying values of assets and liabilities.
Therefore, they must be treated as separate adjustments.
Solution 8
Old ratio:
A = 3/5
B = 2/5
New ratio:
A = 3/6 = 1/2
B = 2/6 = 1/3
C = 1/6
A’s sacrifice:
3/5 − 1/2
= 1/10
B’s sacrifice:
2/5 − 1/3
= 1/15
C’s share:
1/6
Goodwill £30,000:
A:
£30,000 × 1/10
= £3,000
B:
£30,000 × 1/15
= £2,000
C:
£30,000 × 1/6
= £5,000
Check:
£3,000 + £2,000 = £5,000
Correct.
How This Topic Appears in the Examination
Partnership questions may require candidates to:
- calculate goodwill
- distinguish purchased and inherent goodwill
- calculate sacrificing or gaining ratios
- prepare partners’ capital accounts
- prepare partners’ current accounts
- prepare a revaluation account
- account for admission or retirement
- deal with changes part-way through an accounting year
- prepare a realisation account
- calculate profit or loss on dissolution
- complete final settlement between partners
- combine several of these adjustments in one structured question.
Examination Thinking
When you see a partnership-change question, identify:
1. What changed?
2. Which ratio applies?
3. Is goodwill involved?
4. Is revaluation required?
5. Which accounts must be prepared?
6. Is the change part-way through the year?
7. Is the partnership continuing or dissolving?
8. Has the final settlement been completed?
Remember
Do not start calculating immediately.
First map the accounting changes.
Change → Ratio → Adjustment → Account → Transfer → Final balance
🎯 Question Papers + YouTube Explanation
Use examination-style questions to practise partnership changes under timed conditions and review worked explanations where available.
For enrolled students: submit a difficult partnership question or request additional support.
Self-Assessment Checklist
Tick each statement when you can confidently do it.
- ☐ I can explain goodwill.
- ☐ I can distinguish purchased and inherent goodwill.
- ☐ I can calculate a sacrificing ratio.
- ☐ I can calculate a gaining ratio.
- ☐ I can calculate goodwill adjustments.
- ☐ I can prepare a revaluation account.
- ☐ I can account for admission of a partner.
- ☐ I can account for retirement of a partner.
- ☐ I can distinguish capital and current account adjustments.
- ☐ I can deal with part-year partnership changes.
- ☐ I can prepare a realisation account.
- ☐ I can distinguish liabilities transferred from liabilities settled.
- ☐ I can calculate a realisation profit or loss.
- ☐ I can transfer the realisation result to partners’ capital accounts.
- ☐ I can complete final settlement.
- ☐ I can integrate several partnership adjustments in one examination question.
Final Self-Test
If you can complete a partnership-change question without confusing the old ratio, new ratio, sacrificing ratio, gaining ratio, revaluation and realisation, you are ready to move to higher-level examination practice.
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