Treatment of Goodwill - Explanation

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Treatment of Goodwill - Explanation

  1. 1. Treatment of Goodwill December 9, 2010 Treatment of Goodwill at the time of Admission of Partner Ex. A and B are partners sharing profits & losses in the ratio of 3 : 2. C is admitted. New profit sharing ratio of A, B & C is 5:3:2. Sacrifice ratio is 1:1. Goodwill of the firm = 30,000. 2  Cs share of Goodwill = 30,000  = 6,000. 10 (A) Goodwill brought in Cash (C) Goodwill is raised (1) If C brings in cash for Goodwill. Goodwill A/c Dr. (Total) 30000 Cash A/c Dr. 6000 To A’s Capital A/c 18000 To Goodwill A/c 6000 To B’s Capital A/c 12000 (C’s share in Goodwill) (In Old Ratio) (2) Goodwill A/c Dr. 6000 To A’s Capital A/c 3000 To B’s Capital A/c 3000 (In Sacrific Ratio 1 : 1) (B) If Goodwill amount is withdrawn (D) If Goodwill is written off A’s Capital A/c Dr. A’s Capital A/c Dr. 15000 B’s Capital A/c Dr. B’s Capital A/c Dr. 9000 To Cash A/c C’s Capital A/c Dr. 6000 (Actual Amount withdrawn) To Goodwill A/c 30000 (In New Ratio) Goodwill treatment in retirement : Method I : Goodwill of the firm is raised It means entire firms Goodwill is recorded as an Asset. Method II : Goodwill of the retiring partner is raised: It means only retiring partners share in Goodwill is recorded as an Asset. Method III : Goodwill adjustment without opening goodwill A/c : It means retiring partner’s share of goodwill is adjusted directly to the capital A/c of the gaining partners. eg. A,B & C are partners & C retires Old Profit Sharing Ratio 3 : 2 : 1 (A, B & C) New Profit Sharing Ratio 3 : 2 (A & B) Goodwill of firm = 30,000VXplain 2 Score More – Post your Doubts to us at vxplain@gmail.com Page 1
  2. 2. Treatment of Goodwill December 9, 2010 1  Cs share of Goodwill = 30,000  = 5,000. 6 Method I Method II Total Goodwill of firm is raised C’s share of Goodwill is raised Goodwill A/c Dr. 30,000 Goodwill A/c Dr. 5,000 To A’s Capital A/c 15,000 To C’s Capital A/c 5,000 To B’s Capital A/c 10,000 To C’s Capital A/c 5,000 (O R. i.e. 3:2:1) If Goodwill is written off. If Goodwill is written off A’s Capital A/c Dr. 18,000 A’s Capital A/c Dr. 3,000 B’s Capital A/c Dr. 12,000 B’s Capital A/c Dr. 2,000 To Goodwill A/c 30,000 To Goodwill A/c 5,000 (N R 3:2) (In Gain /Agreed Ratio) Method III : It means Retiring partners share of Goodwill is adjusted directly through the capital a/c’s of the Gaining Partners in their Gain Ratio. If Goodwill adjustment is to be done without opening Goodwill A/c directly in Partners Capitals A’s Capital A/c Dr. 3000 (Remaining Partners) B’s Capital A/c Dr. 2000 } To C’s Capital A/c (Retiring Partner) (C’s share of Goodwill) 5000 (In Gain Ratio)NR-means New Ratio .OR-means Old Ratio .VXplain 2 Score More – Post your Doubts to us at vxplain@gmail.com Page 2

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