Basic Bookkeeping Treatment or Double Entry of Goodwill

Debit      Goodwill Account

Credit     Capital Account

When goodwill is WRITTEN OFF:

Debit      Profit or loss or Capital Account

Credit    Goodwill Account

When will we need to value or evaluate goodwill?

As goodwill is an intangible asset (invisible and not physical asset), hence it is generally not valued in the books of account of a business.

Situations where valuation of goodwill are necessary:

• When the owner wish to make a claim for the goodwill which he or she has build up over the years when he SELLS the business to a new owner who will benefit from such goodwill
• Any change in ownership of a business like partnership and its profit sharing will require the evaluation of its goodwill
• Amalgamation of businesses
• Admission of a new partners into an existing business

Salient point on accounting for goodwill:

(a) Goodwill after being valued needs to be credited to the former owner (s) before the change in ownership

(b) Once goodwill which was previously not recorded in the book now been taken up into the books of accounts will affect the NET WORTH of a business

(c) Any gain derives from valuation of goodwill needs to be adjusted to the Capital Accounts of the original owner(s).

( see article on basic bookkeeping treatment or double entry of goodwill)