The value of goodwill is calculated based on the total capital of the firm. The total capital equals the new partner's capital multiplied by the reciprocal of their share. The goodwill is then calculated as the total capital minus the combined capital contributions of all partners.
The document provides two examples of calculating goodwill. In the first example, the goodwill of a firm with partners sharing profits 3:2 and admitting a new 1/5 partner is ₹220,000. In the second example, the goodwill of a different firm is ₹30,000.
The document also notes that accumulated losses and reserves are shared by old partners in their old profit sharing ratios, and provides journal entries to
1. HIDDEN GOODWILL
value of good will is determined on the basis of net worth or total capital of the firm
Net worth/ Total capital of firm=capital of new partner x reciprocal of the share of new partner
OR (Assets-Liabilities+ New partner’s capital)
Less: Capital of all partners
2. A & B are partners sharing profits in the ratio of
3:2.Their capitals are 160000 and 100000.They admit
Somesh for 1/5 th share. He brought 120000 as his
capital. Calculate value of goodwill.
• Total capital of firm=capital of new partner X reciprocal of share
= 120000 x 5/1=60000
Less: Capital of all Partners(160000+100000+120000) =380000
VALUE OF GOOD WILL OF THE FIRM= 600000-380000
=220000
3. 34. Total capital of firm=70000 x 4/1=280000
Less: Capital of partners(60000+120000+70000)=250000
Good will=280000-250000
=30000
4. Accounting of Accumulated losses and
reserve
• Accumulated losses and reserve shared by old partners in their old ratio
Journal entry for sharing of accumulated losses
Partners Capital Account Dr
To Profit and loss account’
Journal entry for sharing of reserve
General Reserve account Dr
To Partners Capital account
