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Accounting for goodwillAccounting for 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

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Goodwill

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

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Goodwill on the admission of a new partner

When the incoming partner pays his share of

Firm’s goodwill Privately.

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Goodwill ( Case 1)

No entry

When the incoming partner brings in his share

of Firm’s goodwill in cash

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Goodwill ( Case 2)

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

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Goodwill ( Case 2)

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

When the incoming partner brings in his share

of Firm’s goodwill in Kind

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Goodwill ( Case 3)

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

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Goodwill ( Case 3)

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

When the incoming partner brings in only part

of his share of Firm’s goodwill in cash

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Goodwill ( Case 4)

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

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Goodwill ( Case 4)

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 )

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

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

When the incoming partner does not brings in

his part of his share of Firm’s goodwill in cash

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Goodwill ( Case 5)

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

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Goodwill ( Case 5)

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