Hidden Goodwill

Goodwill represents the reputation of a firm. Which provides some extra benefits/profits in the future in comparison to other firms. It builds up when the business has continued for some time. This is treated as intangible assets in accounts. It is not a fictitious asset. Hidden Goodwill may be defined as the value of a firm. Its effect is extra profit which firms earn over the normal rate of profit in the future.

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Hidden Goodwill

Hidden Goodwill means the value of goodwill that is not specified at the time of admission of a partner. If the new partner requires to bring the share of goodwill, then, in this case, we have to calculate the value of the firm’s goodwill.

Difference between the capitalized value of the firm and the net worth of the firm is treated as the value of Hidden Goodwill. In other words, we can say hidden Goodwill is the Inferred Goodwill. This is not given in question but is implied from brought in capital by the new partner for his share in the firm.

Browse more Topics under Admission Of A New Partner

• Revaluation Account
• Treatment of Reserves
• New profit Sharing Ratio

Learn more about Revaluation Account here in detail.

Example: M and N are two partners in a firm with the capital balances of ₹ 1,60,000 and ₹ 2,20,000 respectively. The firm had a general reserve of ₹ 40,000. They admitted P into the firm for the 1/4^th share of profits. He brings capital of ₹ 1,80,000. Calculate the firm’s goodwill and P’s share of goodwill.

Solution

Value of Goodwill = Capitalised Value of Firm – Net Worth

Capitalised Value of Firm = P’s Capital × Reciprocal of his Share

Net Worth = Total Capital (including P’s Capital) + Reserve

Net Worth = (1,60,000 + 2,20,000 + 1,80,000) + 40,000 = 6,00,000

Value of Goodwill = 7,20,000 – 6,00,000 = 1,20,000

Now we are going to discuss accounting treatment of Hidden Goodwill.

 

Accounting treatment of Hidden Goodwill

When the value of Goodwill of a firm is not specified, the value of Goodwill has to be calculated and adjusted as follows:

Particular	Amount
New partner capital *Reciprocal of new partner share	XXX
Less: Total capital (including new partner capital)	XXX
Value of Goodwill	XXX

 

Following is the Journal Entry

Date	Particular		Amount (Dr.)	Amount (Cr.)
	New Partner’s capital A/c	Dr.	XXX
	To Old Partner’s capital A/c	Cr.		XXX
	(Being new partner’s share of hidden  Goodwill adjusted through old partner’s capital account)

Solved Question on Hidden Goodwill

Amar and Akbar are in partnership sharing profits and losses equally. The Balance sheet of M/s. Amar and Akbar as on 31.12.2016 is:

Liabilities	Amount	Assets	Amount
Capital A/c:		Sunday fixed Assets	30000
Amar	22500	Inventories	15000
Akbar	22500	Bank	10000
Trade payables	10000
	55000		55000

 On 1.1.2017 they agree to take Anthony as a 1/3^rd partner to increase the capital base to ₹67500. Anthony agrees to pay ₹ 30000. Show the necessary journal entries and prepare the partner’s capital accounts.

Ans:

In the Books of M/s. Amar Akbar and Anthony

Journal Entries

Date	Particulars		Amount (Dr.)	Amount (Cr.)
1.	Bank A/c	Dr.	30000
	To Anthony capital A/c	Cr		30000
	(cash brought in by Anthony for 1/3rd share)
2.	Anthony capital A/c	Dr.	7500
	To Amar capital A/c	Cr.		3750
	To Akbar capital A/c	Cr.		3750
	(Being amount adjusted through partner’s capital accounts)
3	Amar capital A/c	Dr.	3750
	Akbar capital A/c	Dr.	3750
	To Bank A/c	Cr.		7500
	(Amount of Goodwill will due to Amar and Akbar withdrawn)

Partner’s capital A/c

Particulars	Amar	Akbar	Anthony	Particulars	Amar	Akbar	Anthony
To Amar			3750	By Balance b/d	22500	22500	–
To Akbar			3750	By  Bank	–	–	30000
To Bank	3750	3750	–	By Anthony	3750	3750	–
To Balance c/d	22500	22500	22500
	26250	26250	30000		26250	26250	30000

Workings:

• Old profit sharing Ratio 1:1
• New profit sharing Ratio 1:1:1
• Anthony share of capital ₹67500×1/3=22500
• Goodwill ₹30000 -22500=7500 for 1/3^rd share

Total Goodwill is 7500×3=22500