Accounting Treatment for Goodwill On Admission Of Partners(Part1of3)

October 14th, 2008 Comments off
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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

  • A goodwill account is opened and the amount of goodwill is debited to this account.
  • Existing/old partners Capital Accounts are credited in the proportion of their old profit sharing ratio

Accounting entries:

Debit: Goodwill Account

Credit: Old partners’ Capital Accounts in old profit sharing ratio

Illustration:

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)

Goodwill Account

DR

$

CR

$

Partners Capital Account

100,000

Capital Account

DR

CR

$

$

$

Jim

John

Alex

Goodwill Account

50,000

50,000

NIL

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Financial Accounting

 
 

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