Capital & Current accounts for changes of Goodwill and Revaluation

Most partnerships keep fixed capital accounts plus current accounts for each partner:

• The fixed capital account records each partner's permanent capital — the amount they have invested. It changes only on major events: introducing/withdrawing capital, goodwill adjustments and revaluation adjustments on a partnership change.
• The current account records the year-to-year items: each partner's share of profit, salary, interest on capital, less interest on drawings and drawings. Its balance fluctuates each year.

When the partnership changes (admission, retirement, change in ratio), the goodwill and revaluation adjustments go through the capital accounts. The current accounts are usually only affected if the question says drawings/profit are settled or transferred. Keeping the two separate makes the partners' permanent stake clear.

When the partnership changes, assets are often revalued to fair value (covered fully in a later subtopic). The gain or loss on revaluation belongs to the old partners (they owned the assets before the change), so it is shared in the OLD profit-sharing ratio:

• A net revaluation gain (assets worth more) → credit each old partner's capital account in the old ratio.
• A net revaluation loss (assets worth less) → debit each old partner's capital account in the old ratio.

Example. Premises revalued up by $30,000; A and B share 3:2 → credit A $18,000 and B $12,000 to their capital accounts.

This ensures the change in asset values up to the date of the change is credited (or charged) to those who earned it, before the new partner shares in future results.

When a new partner is admitted, their capital account is built up by:

1. Capital introduced — Dr Bank/Cash, Cr the new partner's capital account.
2. Their share of the goodwill write-off (a debit, in the new ratio) — see the goodwill subtopic.
3. (They do not share the revaluation gain/loss — that belongs to the old partners.)

For the existing partners, their capital accounts are updated for:

• the revaluation gain/loss (old ratio),
• the goodwill raise (old ratio) and write-off (new ratio).

The result is a fresh set of capital balances for the new partnership. A common exam task is to draw up the partners' capital accounts in columnar form, showing the opening balances, each adjustment, and the closing balances for the new firm.

When a partner retires (or dies), the amount owed to them (or their estate) is their total balance after all adjustments:

$\text{Amount owed} = \text{Capital} + \text{Current account} + \text{Goodwill share} \pm \text{Revaluation share}$

(plus any salary/profit owed to the date of retirement).

This amount can be settled by:

• paying cash immediately;
• transferring the balance to a loan account (the firm owes the retiring partner, often with interest) to be repaid later;
• a combination — part cash now, the rest as a loan.

Any unpaid balance is shown as a loan from the retiring partner (a liability) in the new firm's statement of financial position. The continuing partners' capital accounts are updated for goodwill (new ratio) and revaluation (old ratio) as usual.