Confusion About Partnership's Capital A/c Regarding Goodwill

[Jeremy007]

I found partnership's capital account in dealing with goodwill operates a bit "strangely" ;):
because normally increase in capital of a business owner is to credit the amount to the owner's captical a/c, but this statement (taken from GTG F4.20) "The captical or current accounts of the gaining partners are debited and those of the sacrificing partners are credited" seems to contradict the basic double entry accounting rules. The following is intended to illuminate the above statement:
Example: if the value of total goodwill is $80,000, Vijay's (a new partner who just joined in) share of goodwill is 8,000. Vinci (one of the existing partners) has sacrificed her 1/10th share in favour of Vijay. The following entry is made:
Dr Vijay's capital 8,000
Cr Vinci's capital 8,000


Is that because goodwill is a special kind of capital, so a special treatment is required?

I'll be very grateful if anyone can help me clarify my confusions.
Jeremy

[Acid]

Hi Jeremy,

Think of it this way , You owned a car 50% with your friend owning rest of the 50%. Now John joins your partnership of 20% so you & and your friend will have to give 10% of share of car to John , therefore the accounts will be debited. Same approach have been followed here.

I hope this helps.

[Jeremy007]

Hi Jeremy,

Think of it this way , You owned a car 50% with your friend owning rest of the 50%. Now John joins your partnership of 20% so you & and your friend will have to give 10% of share of car to John , therefore the accounts will be debited. Same approach have been followed here.

I hope this helps.

Acid,
Many thanks for your quick response. But can you just explain in a bit more detail: whose account will be debited? or simply put, do you think in this case, the same double entry principles still apply or not?
Cheers Jeremy

[Sonal]

Hi,

Already Acid has given you a nice illustration. In addition to what Acid has said,

just try to deal with journal entries.
Debit the receiver and credit the giver.

then you will easily learn it.

All the bests

[Jeremy007]

Hi,

Already Acid has given you a nice illustration. In addition to what Acid has said,

just try to deal with journal entries.
Debit the receiver and credit the giver.

then you will easily learn it.

All the bests

Thanks a lot Sonal for your reply. You seemed to answer my question indirectly, which is: capital a/c in the parternship context should be treated as receiveables or assets (?) a/c, even though its name suggests otherwise. Have I understood you correctly? Can you be a bit more specific? Cheers.

[Sonal]

Hi,

The capital or current accounts of the gaining partners are debited and those of the sacrificing partners are credited.

In the given example, Vinci is transferring (sacrificing) $8,000 in favour of Vijay.

Here,
Vinci is the sacrificing partner. His account should be credited.
Vijay is the gaining partner. His account should be debited.

Hope you have now understood.

Now, lets take an illustration. Try to solve it by your own.

Sam and Tom are partners sharing profit and loss equally. They admit Joan as a new partner. Both Sam and Tom have sacrificed their share of 1/2 and 1/2 respectively in favour of Joan. Their new ratio is 2: 2: 1.

Goodwill is valued at $50,000. Joan's share of goodwill is $10,000.

Pass journal entries.

[Jeremy007]

Hi,

The capital or current accounts of the gaining partners are debited and those of the sacrificing partners are credited.

In the given example, Vinci is transferring (sacrificing) $8,000 in favour of Vijay.

Here,
Vinci is the sacrificing partner. His account should be credited.
Vijay is the gaining partner. His account should be debited.

Hope you have now understood.

Now, lets take an illustration. Try to solve it by your own.

Sam and Tom are partners sharing profit and loss equally. They admit Joan as a new partner. Both Sam and Tom have sacrificed their share of 1/2 and 1/2 respectively in favour of Joan. Their new ratio is 2: 2: 1.

Goodwill is valued at $50,000. Joan's share of goodwill is $10,000.

Pass journal entries.

Sonal, thanks so much for taking the troubles to answer my questions. Yes, I can fully understand what you said. Maybe, I haven't made myself clear enough. My orginal purpose was not to say I couldn't work out THIS question. What I really wanted to ask was: "is capital a/c in partnership different from capital a/c in limited companies?" As per textbooks, anything added to the capital account (in limited companies) should be credited and anything deducted from the capital account should be debited. According to what you told me in both your replies, that was not the case in the partnership context. How could you explain that? Are I missing something somewhere?

[Sonal]

Hi

I think you are very much confused. This is correct that anything added to the capital account should be credited and anything deducted should be debited.

The example in which you get confused was focusing on goodwill treatment.

In that example, goodwill account is not created. In such cases, accounting effect is given directly in the partner’s capital account. So that total capital remains unchanged.

I have tried to explain you on the basis of ‘debit-credit’ rules.

[Jeremy007]

Thanks for your patient explanations, Sonal. I have to admit I'm a complete newbie in this field, so have a lot confusions needed to be clarified. That's why I come here seeking for help. I'm not being ungrateful, but if my questions can be answered directly, that will be even more helpful. So far, I don't think my key questions have been answered head-on even after a couple of posts, which is a shame really.
Still thanks a lot.