VIDYA BHARTI EDUCATIONAL INSTITUTIONS

ACCOUNTING FOR GOODWILL

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GOODWILL• Buyer may be willing to pay more for

a business as a going concern because of:

- Good location- Good customer relations- Good reputation- Well-known products- Experienced and efficient employees

and management team- Good relation with suppliers

• The new partner is required to pay for his share of the tangible assets as well as the goodwill, according to the profit-sharing ratio

• On the admission of a new partner, goodwill must be revalued

• However, not all business keep a goodwill account in their books. Goodwill adjustments can be done:– Goodwill account opened– Goodwill account not opened

GOODWILL ON THE ADMISSION OF A NEW

PARTNER

• When the incoming partner pays his share of Firm’s goodwill Privately.

NO ENTRY

GOODWILL CASE 1

• When the incoming partner brings in his share of Firm’s goodwill in cash

Dr Capital account (old partners only)Cr Goodwill account

( Being existing goodwill written off in old ratio )

Write off the existing book value of goodwill ( if any ) appearing in the books of the firm

Dr Cash account Cr To incoming partner’s accountCr To premium for Goodwill Account

( Being the amount brought in by the new partner )

Record the amount brought in by the new partner

GOODWILL CASE 2

6

Dr Premium for goodwillCr to sacrificing Partner’s cap Account ( Being the share of incoming partner in the firms goodwill credited to sacrificing partner in their sacrificing ratio )

Give credit for incoming partner share of goodwill to sacrificing partners

Dr Cash account Cr To incoming partner’s accountCr To premium for Goodwill Account

( Being the amount brought in by the new partner )

Record the withdrawal ( if any ) of amount of goodwill by sacrificing partner

GOODWILL CASE 2

• When the incoming partner brings in his share of Firm’s goodwill in Kind

7

Dr Capital account (old partners only)Cr Goodwill account

( Being existing goodwill written off in old ratio )

Write off the existing book value of goodwill ( if any ) appearing in the books of the firm

Dr Assets account ( individually )Cr To incoming partner’s accountCr To premium for Goodwill Account

( Being the amount brought in by the new partner )

Record the amount brought in by the new partner

GOODWILL CASE 3

8

Dr Premium for goodwillCr to sacrificing Partner’s cap Account ( Being the share of incoming partner in the firms goodwill credited to sacrificing partner in their sacrificing ratio )

Give credit for incoming partner share of goodwill to sacrificing partners

Dr Cash account Cr To incoming partner’s accountCr To premium for Goodwill Account

( Being the amount brought in by the new partner )

Record the withdrawal ( if any ) of amount of goodwill by sacrificing partner

GOODWILL CASE 3

• WHEN THE INCOMING PARTNER BRINGS IN ONLY PART OF HIS SHARE OF FIRM’S GOODWILL IN CASH

9

Dr Capital account (old partners only)Cr Goodwill account ( Being existing goodwill written off in old ratio )

Write off the existing book value of goodwill ( if any ) appearing in the books of the firm

Dr Cash ( individually )Cr To incoming partner’s accountCr To premium for Goodwill Account

( Being the amount brought in by the new partner )

Record the amount brought in by the new partner

GOODWILL CASE 4

10

D r P r e m i u m f o r g o o d w i l lC r t o s a c r i fi c i n g Pa r t n e r ’ s c a p A c c o u n t ( B e i n g t h e s h a r e o f i n c o m i n g p a r t n e r i n t h e fi r m s g o o d w i l l c r e d i t e d t o s a c r i fi c i n g p a r t n e r i n t h e i r s a c r i fi c i n g r a t i o )

D r I n c o m i n g p a r t n e r ’ s c a p A / C ( w i t h u n p a i d s h a r e o f g o o d w i l l )C r t o s a c r i fi c i n g Pa r t n e r ’ s c a p A c c o u n t

G i v e c r e d i t f o r i n c o m i n g p a r t n e r s h a r e o f g o o d w i l l t o s a c r i fi c i n g p a r t n e r s

D r C a s h a c c o u n t C r To i n c o m i n g p a r t n e r ’ s a c c o u n tC r To p r e m i u m f o r G o o d w i l l A c c o u n t

( B e i n g t h e a m o u n t b r o u g h t i n b y t h e n e w p a r t n e r )

R e c o r d t h e w i t h d r a w a l ( i f a n y ) o f a m o u n t o f g o o d w i l l b y s a c r i fi c i n g p a r t n e r

GOODWILL CASE 4

• When the incoming partner does not brings in his part of his share of Firm’s goodwill in cash

11

Dr Capital account (old partners only)Cr Goodwill account ( Being existing goodwill written off in old ratio )

Write off the existing book value of goodwill ( if any ) appearing in the books of the firm

Dr Cash ( individually )Cr To incoming partner’s account

( Being the amount brought in by the new partner )

Record the amount brought in by the new partner

GOODWILL CASE 5

12

Dr Incoming partner’s cap A/C ( with unpaid share of goodwill )Cr to sacrificing Partner’s cap Account

( Being the share of incoming partner in firm’s goodwill credited to sacrificing partners in their sacrificing ratio )

Give credit for incoming partner share of goodwill to sacrificing partners

Dr Cash account Cr To incoming partner’s accountCr To premium for Goodwill Account

( Being the amount brought in by the new partner )

Record the withdrawal ( if any ) of amount of goodwill by sacrificing partner

GOODWILL CASE 5

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