Treatment of Goodwill Part 2

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Admission of new partner results reduction in the share of existing partners. To compensate sacrificed share of profit new partner pays the Goodwill either in terms of cash or in any kind.

As per Accounting Standard 10(AS-10) that goodwill should be recorded in the books only when some consideration in money has been paid for it. Thus, if a new partner does not bring necessary cash for goodwill, no goodwill account can be raised in the books. He/she should pay for goodwill in addition to his/her contribution for capital.

There are different cases relating to the treatment of Goodwill.

I. If the amount of goodwill is paid privately by the new partner to the existing partners there will be no need of making any journal entries in the books of the firm.

II. If the new partner does not bring share of goodwill in cash: The Goodwill will be adjusted through new partner’s capital account. In this case new partner’s capital account is debited for his/her share of goodwill and the existing partner’s capital accounts are credited in their sacrificing ratio. Then Journal Entries will be

Partner does not bring goodwill in cash

Partner Does Not Bring Goodwill in Cash

Partner does not bring goodwill in cash

III. If new partner brings only a part of his share of Goodwill: In this case part of goodwill will be paid in cash and the remaining will be deducted from new partner’s capital account. Goodwill brought by him will be credited to Goodwill A/c. At the time of goodwill transferred to capital account of existing partner’s, new partner’s capital account is debited with his unpaid share of goodwill besides debiting goodwill account with the amount of goodwill is paid by him.

Journal Entries will be –

Partner brings goodwill

Partner Brings Goodwill

Partner brings goodwill

IV. The new partner brings his share of goodwill in cash: Journal Entries will be

Image of Journal Entries will be

Image of Journal Entries Will Be

Image of Journal Entries will be

Adjustment for Revaluation of Assets and Reassessment of Liabilities:

On admission of new partner assets and liabilities will be revalued to show the true position of the firm. The value of Assets may increase or decrease and in the similar manner value of liabilities may increase or decrease. This result either gain or loss to the existing partners. Journal Entries for the above-mentioned cases will be –

Increase in value of assets

Increase in Value of Assets

Increase in value of assets

Proforma of Revaluation Account:

Dr. Cr.

Table of Proforma of Revaluation Account
Title: Table of Proforma of Revaluation Account

Particulars

Amount (Rs.)

Particulars

Amount (Rs.)

Assets (Decrease in value)

Liabilities (Increase in value)

Liabilities (Unrecorded)

Profit transferred to Capital A/c

(individually in existing ratio)

Assets (Increase in value)

Liabilities (Decrease in value)

Assets (Unrecorded)

Loss transferred to Capital A/c

(individually in existing ratio)

Adjustments of Reserves and Accumulated Profit or Losses:

On admission of new partner any accumulated profit or reserve appearing in the balance sheet will be credited to the existing partner’s capital account in the existing profit-sharing ratio. If there is any loss, the same will be debited to the existing partner in the existing ratio. Journal entries as follow –

Reserves and accumulated profit or losses

Reserves and Accumulated Profit or Losses

Reserves and accumulated profit or losses

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