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Principles and Practice of Accounting > Treatment of Goodwill > Accounting Treatment of Goodwill in case of Admission of Partner
Treatment of Goodwill

Accounting Treatment of Goodwill in case of Admission of Partner

As per the AS 10, we shall record Goodwill in the books only when some consideration in money or money’s worth has been paid for it. It also says that in case of admission of partner, retirement or death of a partner, goodwill should not be raised in the books of the firm. Let us take a look.

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Accounting Treatment of Goodwill in case of Admission of Partner

The incoming partner brings in some amount as his share of Goodwill or Premium to compensate the existing partners for the loss of their share in the future profits of the firm. Thus, at the time of admission of a partner, there are following two ways to treat goodwill.

1] Premium Method

Under this method, when the incoming partner brings his share of goodwill in cash, the existing partners share it in the sacrificing ratio. However, when the amount of goodwill is paid privately by the new partner to old partners privately in cash, no entry is passed in the books of the firm.

A. Goodwill does not appear in the books:

Date Particulars   Amount (Dr.) Amount (Cr.)
1. The new partner brings goodwill in cash Cash A/c  Dr.
     To Goodwill A/c  Cr.
(Being share of goodwill of new partner brought in cash)
2. Old partners distribute Goodwill Goodwill A/c  Dr.
      To Old Partners Capital A/c          (Individually)  Cr.
(Being goodwill distributed among the old partners in their sacrificing ratio)

Alternatively, we can credit the share of goodwill that the new partner brings in cash to the new partner’s capital account and then adjust existing partners’ capital accounts in their sacrificing ratio. The following are the Journal Entries:

Date Particulars   Amount (Dr.) Amount (Cr.)
1. The new partner brings goodwill in cash Cash A/c  Dr.  XXX
     To New Partner’s Capital               A/c  Cr,  XXX
(Being amount brought by new partner for his share of goodwill)
2. Old partners distribute Goodwill New Partner’s Capital A/c  Dr.  XXX
     To Existing Partner’s Capital       A/c (Individually)  Cr,  XXX
(Being goodwill brought by new partner distributed among the existing partners in their sacrificing ratio)
3. Old partners withdraw goodwill Existing Partner’s Capital A/c (Individually)  Dr.  XXX
     To Cash A/c  Cr,  XXX
(Being the amount of goodwill withdrawn by the old partners)

B. When Goodwill already exists in the books:

(a) Goodwill not to appear in books in the future:

Date Particulars   Amount (Dr.) Amount (Cr.)
1. Write off old goodwill Old Partners Capital A/c (Individually in the old ratio)  Dr.  XXX
     To Goodwill A/c (old)  Cr.  XXX
(Being old goodwill written off)
2. New Partner brings goodwill in cash Cash A/c  Dr.  XXX
     To Goodwill A/c  Cr.  XXX
(Being share of the goodwill of new partner brought in cash)
3. Old partners distribute goodwill Goodwill A/c  Dr.  XXX
     To Old Partners Capital A/c        (Individually)  Cr.  XXX
(Being old partners distribute goodwill)

(b) Goodwill continues to appear in the books:

When the partners decide that goodwill continues to appear in the books, the new partner will bring his proportionate share of goodwill only in respect of the difference between the new value and the book value. All the journal entries in this respect are the same.

Admission of Partner

2] Revaluation Method

We use this method when the new partner decides not to bring his share of goodwill in cash. Thus, we need to raise the goodwill account in the books by debiting Goodwill account and crediting old partners’ capital accounts in the old profit-sharing ratio.

 AGoodwill does not appear in the books:

Date Particulars   Amount (Dr.) Amount (Cr.)
1. Raising Goodwill A/c Goodwill A/c (full value)  Dr.  XXX
     To Old Partners’ Capital  A/c       (Individually in old ratio)  Cr.  XXX
(Being Goodwill raised at full value in the old ratio)

B. When Goodwill already exists in the books:

Date Particulars   Amount (Dr.) Amount (Cr.)
1. Agreed value of goodwill is more Goodwill A/c  Dr.  XXX  
      To Old Partners Capital A/c                (Individually in old ratio)  Cr.    XXX
(Being goodwill raised to its agreed value)    
2. Agreed value of goodwill is less Old Partners Capital A/c (Individually in old ratio)  Dr.  XXX
     To Goodwill A/c  Cr. XXX
(Being goodwill reduced to the agreed value)
3. Writing off goodwill All Partners’ Capital A/c (individually in new ratio)  Dr. XXX
      To Goodwill A/c  Cr.  XXX
(Being goodwill written off)

You want to know more about Accounting Treatment of Goodwill- Death/Retirement of Partner

Solved Example on Admission of Partner

Q. A and B are partners in a firm, Zed Enterprises with an equal share of profit and capital of ₹120000 each. They decide to admit C as their new partner for an equal share admission of partner). The value of the Goodwill in the firm’s books of accounts is ₹60000. C brings ₹20000 as his share of goodwill in cash. The partners decide that goodwill will not appear in the books in the future. Pass necessary Journal entries.

Ans: In the books of Zed Enterprises

Date Particulars   Amount (Dr.) Amount (Cr.)
1. A’s Capital A/c  Dr. 30000
B’s Capital A/c  Dr. 30000
     To Goodwill A/c  Cr. 60000
(Being old goodwill written off in old ratio)
2. Cash A/c  Dr. 20000
     To Goodwill A/c  Cr. 20000
(Being share of goodwill of C brought in cash)
3. Goodwill A/c  Dr. 20000
     To A’s Capital A/c  Cr. 10000
     To B’s Capital A/c  Cr. 10000
(Being old partners distribute goodwill)

 

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