14, Maitrinagar Society, B/h. Pragatinagar Bus-stop, Naranpura,
Ahmedabad. 380 013. Ph.No. 079- 27473392
CH : 5 Admission of a New Partner
Goodwill & its accounting effects :-
Two methods are used for accounting treatment of goodwill :(A)Premium method(B)Revaluation method
(A)Premium Method :-1)When goodwill is brought in cash & the same is retained into the business.
Cash / Bank a/cDr.To old Partners capita a/cs(Being share of new partner in total value of goodwill is distributed between old partners asper their sacrifice ratio.)
2)When goodwill is brought in cash & it is withdrawn by the old partners.
Cash / Bank a/cDr.To old Partners’ capital accountsOld Partners’ capital a/csDr.To cash / bank a/c
Note :- When new partner brings his share of Goodwill in cash, goodwill will not appear inthe New Balance Sheet as an Asset.(B)Revaluation Method :-
When new partner brings his own share of goodwill in cash, premium method is usedbut when new partner does not bring his own share of goodwill in cash, revaluation methodis used to incorporate accounting treatment of goodwill.
1)When Goodwill a/c is not there in the books of partnership firm.
(a)Goodwill a/cDr. (Total value of goodwill)To old Partners’ capital a/cs(Being goodwill a/c is raised or created at its full value by old partners in their old profitsharing ratio & goodwill will be shown as an asset in new balance sheet)(b)For writing off goodwill Partners’ capital a/csDr.To Goodwill a/c(Being created value of goodwill is fully written off to all partners’ capital a/cs(including new partner) in their new profit sharing ratio & no value of goodwill will bedisclosed in the new balance sheet)
2)When Goodwill Account is there in the books of Partnership firm.(a)New value of goodwill is more than old disclosed value
Goodwill a/cDr. (increased value of goodwill)To old partners’ capital a/cs.