Treatment of Goodwill on Admission of Partner
Different cases of Treatment of Goodwill
Old partners must be compensated by the new partner for sacrificing their share of profit, by way of goodwill.
1. When goodwill is paid privately.
2. When goodwill is brought in cash or in kind.
3. When goodwill is not brought in cash or in kind (Sometimes, raised and then written off).
4. When there is part payment of goodwill.
5. When the goodwill is hidden.
1. When goodwill is paid privately.
No journal entry is passed in this case.
2. When goodwill is brought in cash or in kind.
Following journal entries are passed in this case:
(a) For amount of goodwill brought in cash/kind/asset:
Cash/Bank/Other Assets A/c Dr. (separately)
To Premium for Goodwill A/c
(b) Distribution of premium among sacrificing partners in their sacrificing ratio:
Premium for Goodwill A/c Dr.
To Old Partner's Capital A/c (in sacrificing ratio)
(c)If goodwill is withdrawn by old partners:
Old Partner's Capital A/c Dr.
To Cash/Bank A/c
3. When goodwill is not brought in cash or in kind.
New Partner's Current A/c Dr
To Old Partner's Capital A/c
(New partner's share shared in sacrificing ratio)
4. When there is part payment of goodwill.
(a) For the amount of goodwill brought in cash:
Cash/Bank A/c Dr.
To Premium for Goodwill A/c
(b) For sharing goodwill among old partners in sacrificing ratio:
Premium for Goodwill A/c Dr. (for bringing cash for goodwill)
New Partner's Current A/c Dr. (for unpaid goodwill)
To Old Partner's Capital A/c (New partner's share shared in sacrificing ratio)
Existing Goodwill
Existing Goodwill is Written off:
Old goodwill should always be written off among old partners in the old ratio by passing the following entry:
Old Partners’ Capital A/cs Dr. (Existing Goodwill written off in Old Profit-Sharing Ratio.)
To Goodwill A/c
Note: If Partners' Capitals are Fixed, Current Accounts are to be used instead of their Capital Accounts.
Hidden Goodwill on Admission of Partner
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