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Accountancy > Admission of a Partner > Treatment of Goodwill
Admission of a Partner

Treatment of Goodwill

Goodwill is the result of overall efforts of all the partners including the retiring one. So at the time of retirement or death of the partner, he/she is entitled to his/her share of goodwill. Let us learn more about the treatment of goodwill.

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Treatment of Goodwill

The retiring or deceased partner is entitled to his/her share of goodwill at the time of retirement/death. The goodwill earned by the firm is the result of the efforts of all the existing partners in the past. Hence, as per agreement among the partners at the time of retirement/death of a partner, goodwill is valued.

Treatment of Goodwill

(Source: encryptedtbn0)

The retiring/ deceased partner gets his share of goodwill from the continuing partners in their gaining ratio. The accounting treatment for goodwill in such a situation depends upon whether or, not goodwill already appears in the books of the firm.

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Case 1: When goodwill does not appears in the books

There are four ways in which the retiring partner can be given the necessary credit for loss of his share of goodwill, these are as follows:

1] Raising the Goodwill to its full value and retaining it in the books

By debiting the Goodwill Account and crediting all the partner’s (including the retired/deceased partner) capital accounts in the old profit sharing ratio. The full value of goodwill will appear on the balance sheet of the reconstituted firm.

2] Raising the Goodwill to its full value and writing it off immediately

If it is decided that goodwill should not be refrained and shown in the balance sheet of the reconstituted firm then,

  • Raise the goodwill at its value by crediting all the partners’ capital accounts (including that of the retired/ deceased partners) and then
  • Written off by debiting the remaining partners in their new profit sharing ratio and crediting the goodwill account with its full value.

3] Raising the Goodwill to the extent of retired/deceased partner’s share and writing it off immediately

In this case, goodwill account is raised only to the extent of retired/deceased partner’s share. The goodwill account is debited with the proportionate amount and credited only to the retired/deceased partner’s capital account.

Thereafter, in the gaining ratio, the remaining partner’s capital accounts are debited and the goodwill account is credited to write it off.

4] By not raising the goodwill account at all in firm’s books

In this case, the goodwill account will not appear in the firm’s books at all. It is adjusted discretely through partner’s capital accounts by recording the following journal entry:

Continuing partners’ capital A/c’s (individually in their gaining ratio) Dr.
To Retiring/Deceased Partner’s Capital A/c (Retiring/deceased in the remaining partners’ capital accounts into their gaining ratio)

Solved Examples for You

Example 1:

X, Y, and Z are partners in the firm sharing profits in the ratio of 3:2:1. Y retires. The value of goodwill of the firm is Rs. 1,20,000. In the ratio of 3:1, the remaining partners X and Z continue to share profits. Pass the journal entries under various alternatives:

  • Raising the Goodwill to its full value and retaining it in the books
  • Raising the goodwill at full value and writing off immediately.
  • Raising the goodwill to the extent of retiring partner’s share and writing off immediately.
  • By not raising the goodwill account at all in firm’s books:

Solution:

Raising the Goodwill to its full value and retaining it in the books

Goodwill A/c’s Dr. 120000
To X’s capital A/c

To Y’s capital A/c

To Z’s capital A/c

    60000

40000

20000

(Goodwill raised at full value and credited to all the partners in their old profit sharing ratio)

Raising the goodwill at full value and writing off immediately.

(i) Goodwill A/c’s Dr. 120000
To X’s capital A/c

To Y’s capital A/c

To Z’s capital A/c

    60000

40000

20000

(Goodwill raised at full value and credited to all the partners in their old profit sharing ratio)
(ii) X’s capital A/c

Z’s capital A/c

Dr.

Dr.

90000

30000

To Goodwill A/c     120000
(Goodwill written off and debited to remaining partners in the new ratio)

Raising the goodwill to the extent of retiring partner’s share and writing off immediately.

(i) Goodwill A/c’s Dr. 40000
To Y’s capital A/c 40000
(Goodwill raised to the extent of Y’s share)    
X’s capital A/c

Z’s capital A/c

Dr.

Dr.

30000

10000

To Goodwill A/c     40000
(Goodwill written off by debiting remaining partners’ in gaining ratio)

By not raising the goodwill account at all in firm’s books:

X’s capital A/c

Z’s capital A/c

Dr.

Dr.

30000

10000

To Y’s capital A/c     40000
(Y’s share of goodwill adjusted to remaining partners’ capital accounts in gaining ratio)

Case 2:

When goodwill is already appearing in the books

Normally no adjustment is required if goodwill is already appearing in the books of the firm. However, goodwill appearing in the books of the firm should be equal to the current value of goodwill. As the goodwill stands credited in the accounts of all the partners including the retiring one, no adjustment is required.

In case the present value of goodwill is different from its book value:

An adjustment entry is required for the difference between the value already appearing in the books and its present value. In such a situation, there are two possibilities:

The book value of goodwill is lower than its current value:

In this case, the goodwill account is debited with the excess of its current value over the book value. And all partners’ capital accounts are credited in their old profit sharing ratio.

For example, Deepak, Suraj, and Roshni are partners sharing profits in the ratio of 5:3:2. Goodwill appears in the books at a value of Rs. 50,000. Deepak retires and, on the day of Deepak’s retirement, the value of goodwill is Rs. 30,000. In this case, this will be the following journal entry.

Books of Deepak, Suraj, and Roshni

Journal

Date Particulars Debit

Amount (Rs.)

Credit

Amount (Rs.)

Goodwill A/c Dr. 20000
To Deepak’s capital A/c

To Suraj’s capital A/c

To Roshni’s capital A/c

    10000

6000

4000

(Increase in the value of goodwill credited to all partners’ capital accounts in their old profit sharing ratio of 5:3:2)
 The book value is greater than its current value.

In this case, the goodwill account is credited with the difference between book value and its current value. And all partners’ capital accounts are debited in their old profit sharing ratio.

For example, Deepak, Suraj, and Roshni are partners sharing profits in the ratio of 5:3:2. Goodwill appears in the books at a value of Rs. 70,000. Deepak retires and, on the day of Deepak’s retirement, the value of goodwill is Rs. 50,000. In this case, this will be the following journal entry.

Books of Deepak, Suraj, and Roshni

Journal

Date Particulars Debit

Amount (Rs.)

Credit

Amount (Rs.)

Deepak’s capital A/c Dr. 10000
Suraj’s capital A/c Dr.  6000
 Roshni’s capital A/c  Dr.  4000
To Goodwill A/c     20000
(Decrease in the value of goodwill adjusted among all partners’ capital accounts in their old profit sharing ratio of 5:3:2)

 

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