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Acc0802 treatment of goodwill in partnership accounts

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Acc0802 treatment of goodwill in partnership accounts

  1. 1. CPTSuccess<br />Revision Notes – Fundamentals of Accounting<br />Chapter 8. Partnership<br />Unit 2:Treatment of Goodwill in Partnership accounts<br />
  2. 2. Chapter 8. Partnership<br />Unit 2:Treatment of Goodwill in Partnership accounts<br /><ul><li>Goodwillis an intangible asset which is not fictitious in nature and does have a realizable value. The necessity for valuation of goodwill in a firm arises when:
  3. 3. The profit sharing ratio amongst the partners is changed
  4. 4. A new partner is admitted
  5. 5. A partner retires or dies
  6. 6. Business is dissolved or sold</li></ul>©<br />Revision Notes - Fundamentals of Accounting<br />CPTSuccess<br />www.cptsuccess.com<br />
  7. 7. Chapter 8. Partnership<br />Unit 2:Treatment of Goodwill in Partnership accounts<br /><ul><li>Methods for Goodwill valuation are:
  8. 8. Average profit basis – profits of past few years are averaged and adjusted for any expected change in future on simple average or weighted average basis
  9. 9. Super Profit basis – average rate profit earned by the firm is arrived and compared with the normal rate of return on capital employed. If average profit is greater than the normal rate of return then there exists a super profit and goodwill
  10. 10. Annuity method – In this method, time value of money is added to the super profit method and goodwill calculated accordingly as per annuity tables
  11. 11. Capitalization basis – under this method, value of whole basis is arrived by applying normal rate of return and if such value is higher than the capital employed by the business then the difference is goodwill</li></ul>©<br />Revision Notes - Fundamentals of Accounting<br />CPTSuccess<br />www.cptsuccess.com<br />
  12. 12. Chapter 8. Partnership<br />Unit 2:Treatment of Goodwill in Partnership accounts<br /><ul><li> Goodwill brought in by the new incoming partner in cash for joining in a partnership firm is taken away by the old partners in Sacrificing ratio.
  13. 13. Profit sacrificing ratio = Old ratio – new ratio</li></ul>©<br />Revision Notes - Fundamentals of Accounting<br />CPTSuccess<br />www.cptsuccess.com<br />
  14. 14. CPTSuccess<br />

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