A new partner-who can only admitted with the consent of all existing partner-is normally changed a premium for goodwill. This is because new partner will start to share in the profit of the business immediately and will benefit form the goodwill established by the existing partners. If the business was to be sold shortly after the admission of a new partners.a price will again be a agreed for goodwill and this will be shared amongst all the partners (including the new partner)
To make allowance for this benefit it is necessary to make double-entry adjustments in the partners capital accounts. The most common way of doing this is to use a goodwill account which is opened by the old partners with the agreed valuation of goodwill and immediately after the admission of the new partner is closed by transfer to the partners capital accounts including that of the new partner.