Revaluation Account · Goodwill · Changes in Partnership · Admission and Retirement of Partners | Cambridge A Level Accounting 9706
At O Level, partnerships operate with fixed partners and a stable structure. At A Level, we focus on what happens when that structure changes — a new partner joins, an existing partner retires or dies, or partners agree to change their profit-sharing ratio. Each of these events requires careful adjustment to ensure all partners are treated fairly.
Assets are revalued to fair value. Gains and losses are shared among existing partners in their old ratio before the change.
Goodwill is valued, introduced into the accounts at the time of change, then immediately written off — all using the old and new ratios.
A new partner joins or an existing partner leaves. Capital accounts are adjusted to reflect both revaluation and goodwill treatment.
When partnership assets are revalued, the gains or losses are recorded in the Revaluation Account and then shared among the partners in their existing (old) profit-sharing ratio. This ensures partners receive their fair share of any appreciation or bear their fair share of any fall in value that occurred during their time as partners.
Ali and Bilal are partners sharing profits 3:2. On 1 January 2026, Sara is admitted as a new partner. Before her admission, the assets are revalued:
| Asset | Book Value ($) | Revalued Amount ($) | Gain / (Loss) ($) |
|---|---|---|---|
| Premises | 80,000 | 110,000 | +30,000 |
| Equipment | 20,000 | 16,000 | (4,000) |
| Inventory | 15,000 | 13,500 | (1,500) |
| Trade Receivables | 18,000 | 17,000 | (1,000) |
Net Revaluation Gain = 30,000 − 4,000 − 1,500 − 1,000 = $23,500
Shared: Ali (3/5 × 23,500 = $14,100) | Bilal (2/5 × 23,500 = $9,400)
| Details | $ |
|---|---|
| Equipment (reduction) | 4,000 |
| Inventory (reduction) | 1,500 |
| Trade Receivables (reduction) | 1,000 |
| Capital — Ali (3/5 × 23,500) | 14,100 |
| Capital — Bilal (2/5 × 23,500) | 9,400 |
| Total | 30,000 |
| Details | $ |
|---|---|
| Premises (increase) | 30,000 |
| Total | 30,000 |
Goodwill is the value of a business's reputation, customer relationships and earning power over and above the net value of its tangible assets. In a partnership change, goodwill must be recognised and shared fairly so that departing or diluted partners receive compensation for the goodwill they helped build.
Cambridge A Level uses a specific two-step method for goodwill when partnership structure changes:
Continuing Example 1. After the revaluation, Sara is admitted with a profit-sharing ratio of Ali : Bilal : Sara = 2:2:1 (new ratio). Goodwill is agreed at $25,000.
Old ratio (before Sara): Ali 3:2 Bilal → Ali 3/5, Bilal 2/5
New ratio (after Sara): Ali 2:2:1 Bilal : Sara → Ali 2/5, Bilal 2/5, Sara 1/5
| Step | Action | Ali ($) | Bilal ($) | Sara ($) |
|---|---|---|---|---|
| Step 1 | Introduce goodwill (old ratio 3:2) | +15,000 | +10,000 | — |
| Step 2 | Write off goodwill (new ratio 2:2:1) | (10,000) | (10,000) | (5,000) |
| Net effect on Capital Accounts | +5,000 | nil | (5,000) | |
| Details | $ |
|---|---|
| Capital — Ali (3/5 × 25,000) | 15,000 |
| Capital — Bilal (2/5 × 25,000) | 10,000 |
| Total | 25,000 |
| Details | $ |
|---|---|
| Capital — Ali (2/5 × 25,000) | 10,000 |
| Capital — Bilal (2/5 × 25,000) | 10,000 |
| Capital — Sara (1/5 × 25,000) | 5,000 |
| Total | 25,000 |
After revaluation and goodwill treatment, the Capital Accounts are updated to show each partner's revised capital. The new partner then introduces their agreed capital contribution in cash.
Continuing Examples 1 and 2. Opening capitals: Ali $60,000 | Bilal $40,000. Sara introduces $20,000 cash on admission.
| Movement | Ali ($) | Bilal ($) | Sara ($) |
|---|---|---|---|
| Opening Capital | 60,000 | 40,000 | — |
| Revaluation gain (old ratio 3:2) | +14,100 | +9,400 | — |
| Goodwill — introduce (old ratio 3:2) | +15,000 | +10,000 | — |
| Goodwill — write off (new ratio 2:2:1) | (10,000) | (10,000) | (5,000) |
| Cash introduced by Sara | — | — | +20,000 |
| Closing Capital | 79,100 | 49,400 | 15,000 |
When a partner retires, the same principles apply — revaluation and goodwill treatment — but the direction changes. The retiring partner receives compensation for their share of the goodwill and revaluation gains they helped create.
Prepare Revaluation Account. Share gain/loss among all partners (including the retiring partner) in the old ratio.
Introduce goodwill at agreed value — share in old ratio (including retiring partner). Write off in new ratio (remaining partners only).
Retiring partner's closing capital account balance (after revaluation and goodwill) = amount owed to them.
Amount due is settled by: cash payment, loan account (if immediate payment not possible), or a combination of both.
Using the same partnership (Ali, Bilal, Sara — ratio 2:2:1). Bilal retires on 31 December 2026. Assets are revalued giving a net gain of $10,000. Goodwill is agreed at $30,000. After retirement, Ali and Sara share profits 3:2.
Bilal's capital before adjustments: $49,400
| Movement | Ali ($) | Bilal ($) | Sara ($) |
|---|---|---|---|
| Opening Capital | 79,100 | 49,400 | 15,000 |
| Revaluation gain (old ratio 2:2:1) | +4,000 | +4,000 | +2,000 |
| Goodwill — introduce (old ratio 2:2:1) | +12,000 | +12,000 | +6,000 |
| Goodwill — write off (new ratio Ali:Sara 3:2) | (18,000) | — | (12,000) |
| Closing Capital | 77,100 | 65,400 | 11,000 |
Existing partners may agree to change their profit-sharing ratio without any partner joining or leaving. This still requires revaluation and goodwill treatment because one partner effectively transfers part of their profit entitlement to another.
Hamza and Nadia share profits 3:1. They agree to change to 1:1 from 1 January 2026. Goodwill is agreed at $20,000. No revaluation is needed.
| Step | Hamza ($) | Nadia ($) |
|---|---|---|
| Introduce goodwill (old ratio 3:1) | +15,000 | +5,000 |
| Write off goodwill (new ratio 1:1) | (10,000) | (10,000) |
| Net effect | +5,000 | (5,000) |
1. Revalue → use old ratio → credits/debits capital accounts
2. Introduce Goodwill → use old ratio → credits capital accounts
3. Write Off Goodwill → use new ratio → debits capital accounts
4. Cash / Loan Settlement → new partner pays in / retiring partner paid out
Net effect = Old ratio share − New ratio share (both as fractions of goodwill value)
Positive → capital increases (partner gives up share)
Negative → capital decreases (partner gains share or is new)
Question 1 Knowledge — 2 marks Paper 1
Explain why revaluation gains and losses are shared among partners in the old profit-sharing ratio rather than the new ratio when a new partner is admitted.
The revaluation gain or loss arose during the period when the existing partners were in business together — before the new partner joined. (1 mark)
It would be unfair to share this with the new partner as they played no part in generating it. Using the old ratio ensures each existing partner receives their correct share of gains or bears their correct share of losses for the period they were responsible for. (1 mark)
Question 2 Application — 6 marks Paper 3
Omar and Zara are partners sharing profits 2:1. On 1 April 2026, Hina is admitted as a new partner. The new profit-sharing ratio is Omar:Zara:Hina = 2:2:1. Goodwill is agreed at $15,000. The following assets are revalued:
| Asset | Book Value ($) | Revalued Amount ($) |
|---|---|---|
| Land and Buildings | 50,000 | 65,000 |
| Machinery | 18,000 | 15,000 |
| Inventory | 12,000 | 11,200 |
Prepare the Revaluation Account and show the effect on each partner's Capital Account from both revaluation and goodwill.
Net revaluation gain:
Land increase: +15,000 | Machinery reduction: (3,000) | Inventory reduction: (800)
Net gain = 15,000 − 3,000 − 800 = $11,200
Shared in old ratio (Omar 2:1 Zara):
Omar: 2/3 × 11,200 = $7,467 | Zara: 1/3 × 11,200 = $3,733
| Details | $ |
|---|---|
| Machinery (reduction) | 3,000 |
| Inventory (reduction) | 800 |
| Capital — Omar (2/3) | 7,467 |
| Capital — Zara (1/3) | 3,733 |
| Total | 15,000 |
| Details | $ |
|---|---|
| Land and Buildings | 15,000 |
| Total | 15,000 |
Goodwill effect on Capital Accounts ($15,000):
| Step | Omar ($) | Zara ($) | Hina ($) |
|---|---|---|---|
| Introduce (old ratio 2:1) | +10,000 | +5,000 | — |
| Write off (new ratio 2:2:1) | (6,000) | (6,000) | (3,000) |
| Net goodwill effect | +4,000 | (1,000) | (3,000) |
Question 3 Analysis — 4 marks Paper 3
A partner retires and cannot be paid immediately. Explain how the amount due is treated in the partnership accounts and state the accounting entries required.
The amount due to the retiring partner (their closing capital account balance after revaluation and goodwill) is transferred to a Loan Account in the retiring partner's name. (1 mark)
Accounting entries:
DR Capital Account — Retiring Partner
CR Loan Account — Retiring Partner
(1 mark)
The Loan Account appears as a non-current liability in the SFP of the remaining partnership. (1 mark)
Interest is charged on the loan at the agreed rate (or 5% per annum under the Partnership Act 1890 if no rate is agreed), debited to the Income Statement as an expense and credited to the Loan Account. (1 mark)
Question 4 Application — 5 marks Paper 1
Kamran and Asad share profits 3:2. They agree to admit Fatima and change the ratio to Kamran:Asad:Fatima = 3:3:2. Goodwill is valued at $40,000. No revaluation is required.
Calculate the net effect of the goodwill treatment on each partner's Capital Account and explain who gains and who loses.
| Step | Kamran ($) | Asad ($) | Fatima ($) |
|---|---|---|---|
| Introduce goodwill (old ratio 3:2) | +24,000 | +16,000 | — |
| Write off goodwill (new ratio 3:3:2) | (15,000) | (15,000) | (10,000) |
| Net effect | +9,000 | +1,000 | (10,000) |
Kamran gains $9,000 because he held 3/5 of the old
partnership but only receives 3/8 going forward — he gives up a
significant profit share and is compensated.
Asad gains $1,000 — his share changes from 2/5 to
3/8, a small reduction in future entitlement, so he receives modest
compensation.
Fatima loses $10,000 — she is buying into an established
business with goodwill, so she must compensate the existing partners.
Her capital account is reduced by her share of the write-off.
Question 5 Analysis — 3 marks Paper 3
Explain the accounting treatment of goodwill when a partner's profit-sharing ratio changes, and justify why goodwill should be written off immediately rather than retained as an asset.
When a profit-sharing ratio changes, goodwill is first introduced by debiting the Goodwill Account and crediting each partner's Capital Account in the old ratio. It is then immediately written off by debiting each partner's Capital Account in the new ratio and crediting the Goodwill Account. (1 mark)
The net effect adjusts capital accounts fairly — partners who are giving up a higher future profit share receive compensation; those gaining a higher future share effectively pay for it through their capital account. (1 mark)
Goodwill is written off immediately because it is internally generated goodwill — it was not purchased from a third party and therefore cannot be reliably measured or recognised as an asset under accounting standards (IAS 38). Retaining it would overstate total assets and mislead users of the financial statements. (1 mark)