Video narration
Why should a newcomer compensate the existing partners? Imagine a new student joining an established project team. They inherit its reputation and credit. A new partner enjoys the firm's goodwill and customer confidence. But admission changes future profits. The old partners give up part of their share. Goodwill is not simply extra money added to the firm. It compensates the old partners for what they sacrifice. When the new partner brings a Premium for Goodwill in cash, credit it to the old partners in their sacrificing ratio, not the old profit-sharing ratio. If cash is not brought in, make the corresponding adjustment through the partners' capital or current accounts, as required by the question. Existing goodwill in the books can change the entry. So why pay? Because the newcomer benefits from the firm's established reputation. Goodwill compensates the old partners for the share they give up.