Treatment of Goodwill Part 2

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Goodwill is the result of efforts put by all partners. If someone is retiring that person should be compensated for his goodwill contribution. As per Accounting Standard 10 (AS-10),

goodwill is recorded in the books only when some consideration in money is paid for it. At that time goodwill account will be adjusted as per the rules. Adjustments as per situation –

When No Goodwill Account Appears in the Books of the Firm

In this case, Goodwill account will be adjusted through partner’s capital accounts. Journal Entry will be

No Goodwill account appears

No Goodwill Account Appears

No Goodwill account appears

When the Goodwill Account Already Appears in the Books

Normally the goodwill is not shown in the books of the firm. If goodwill account appears in the Balance Sheet of the firm, it will be written off by debiting all the partners’ capital account in their existing profit sharing ratio and crediting the goodwill account.

Journal entry is:

Goodwill Account already appears

Goodwill Account Already Appears

Goodwill Account already appears

Revaluation of Assets and Liabilities:

Revaluation Account is prepared if someone is retiring, in order to know the true position of the firm. This is done to adjust the changes in value of assets and liabilities at the time of retirement/death of a partner. Any profit or loss due to revaluation is divided amongst all the partners including retiring/deceased in their existing profit sharing ratio. Journal Entries

Revaluation of Assets and Liabilities

Revaluation of Assets and Liabilities

Revaluation of Assets and Liabilities

Treatment of Accumulated Reserves and Undistributed Profit:

Every business firm will maintain certain reserves for future use out of their profits. At the time of retirement of some partners all these accumulated reserves and undistributed profits will be distributed among all the partners including retiring partners as per their old profit-sharing ratios. The following entries are made:

Accumulated Reserves and Undistributed Profit

Accumulated Reserves and Undistributed Profit

Accumulated Reserves and Undistributed Profit

Settlement of Retiring Partner’S Claim:

The amount due to the retiring partner is paid according to the terms of partnership agreement. The retiring partners’ claim consists of

  1. The credit balance of Capital Account;

  2. His/her share in the Goodwill of the firm;

  3. His/her share in the Revaluation Profit:

  4. His/her share in General Reserve and Accumulated Profit

  5. Interest on Capital

But, the following deductions are made from his/her Capital Account on account of

  1. His/her share in the Revaluation loss;

  2. His/her Drawings and Interest on Drawings up to the date of retirement

  3. His/her share of any accumulated losses (d). Loan taken from the firm.

The total amount after deductions will be considered as the claim of the retiring partner. Retiring partner may get the total claim either in single payment (payment in lump sum) or in installments. Of course, as per Indian Partnership Act, retiring partner is supposed to get interest on due of the claim.

For the payment in lump sum: The following journal entry is made for disposal of-the amount payable to the retiring partner in single payment.

Amount paid to retiring partner

Amount Paid to Retiring Partner

Amount paid to retiring partner

For the Payment in installments: Sometimes retiring partner will get his claim in installments. According to Sec 37 of Indian Partnership Act 1932, if the amount due to him is not paid immediately on his retirement, he can claim interest @ 6% p.a. on the amount due or at agreed rate.

Journal Entries:

Tiltle: Imagge of Payment in installment Journal Entries

Payment of Installments

Tiltle: Imagge of Payment in installment Journal Entries

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