It is very important to note that goodwill at the time of an admission belongs entirely to the existing partners who have created it. Refer to earlier articles on what’s goodwill, how it comes about, etc.
Basically, there are three (3) ways of valuing goodwill on admission of partners.
The first method is as follows:
Method No. 1: Goodwill is recorded in FULL in the books
Debit: Goodwill Account
Credit: Old partners’ Capital Accounts in old profit sharing ratio
Jim and John are in partnership sharing 50:50. They admitted Alex as a partner and the new profit sharing ratio is 40:40:20. Goodwill is agreed to be valued at $100,000.
Goodwill is recorded as follows ( based on above accounting entries)
- Accounting Treatment for Goodwill On Admission Of Partners ( Part 2 of 3 )
- Revaluation of Assets Before Admission Of New Partner(s)
- Simple Illustration On Partnership’s Dissolution
- Accounting Treatment for Goodwill On Admission Of Partners(Part3of3)
- Basic Bookkeeping Treatment or Double Entry of Goodwill