Different cases of Treatment of Goodwill on Admission

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/Assets A/c                                 Dr.

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(c)If goodwill is withdrawn by old partners: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 Capital A/c                             Dr

To Old Partner’s Capital A/c

(New partner’s share shared in sacrificing ratio)

 

Alternative Method:

 

Goodwill is raised then written off:

Sometimes, In this case Old Partners decide to raise the Goodwill of the firm at its full value. Goodwill must be written off after raising it.

When goodwill is raised:

Goodwill A/c                                                Dr.     (With full value)

To Old Partners’ Capital A/c                                                         (In their old ratio)

When Goodwill is written off:

All Partners’ Capital A/cs                            Dr.     (In new ratio)

To Goodwill                                         (With full value)

Net Effect under this  method is also the same.

4. When there is part payment of goodwill.

(a) For the amount of goodwill brought in cash:

Cash 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 Capital A/c                                  Dr. (for unpaid goodwill)

To Old Partner’s Capital A/c  (New partner’s share shared in sacrificing ratio)

If in any case, goodwill is existing in the Balance Sheet of the firm, it must be written off by passing the following journal entry:

Old Partner’s Capital A/c                              Dr. (Existing goodwill written off in old ratio)

To Goodwill A/c

Hidden Goodwill on Admission of Partner

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