# 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.

## 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

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 1/4th 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 1/3rd 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 1/3rd share

Total Goodwill is 7500×3=22500

Share with friends
Browse
##### Admission of a New Partner
Customize your course in 30 seconds

Which class are you in?

5th
6th
7th
8th
9th
10th
11th
12th
Get ready for all-new Live Classes!
Now learn Live with India's best teachers. Join courses with the best schedule and enjoy fun and interactive classes.
Ashhar Firdausi
IIT Roorkee
Biology
Dr. Nazma Shaik
VTU
Chemistry
Gaurav Tiwari
APJAKTU
Physics
Get Started
Browse