{"id":1413,"date":"2019-06-22T11:44:46","date_gmt":"2019-06-22T11:44:46","guid":{"rendered":"https:\/\/commerceiets.com\/?p=1413"},"modified":"2019-06-22T11:44:46","modified_gmt":"2019-06-22T11:44:46","slug":"treatment-of-goodwill-on-admission-of-partner","status":"publish","type":"post","link":"https:\/\/commerceiets.com\/treatment-of-goodwill-on-admission-of-partner\/","title":{"rendered":"TREATMENT OF GOODWILL ON ADMISSION OF PARTNER"},"content":{"rendered":"\n

TREATMENT\nOF GOODWILL ON ADMISSION OF PARTNER<\/strong><\/h2>\n\n\n\n

Goodwill <\/a>is an intangible asset which enables a firm to earn higher profit than the normal profit earned by the other firms in the industry. Goodwill is created through the sincere and honest efforts made by the partners in the past. The goodwill so generated is known as internally i.e. Self Generated Goodwill. Treatment of Goodwill on the Admission of Partner is done to compensate the sacrificing partners by the new partner who acquires the share in future profits. Payment of premium for goodwill is mode of compensating the sacrificing partners for the sacrifice they make in favor of the new partner.<\/p>\n\n\n\n

There can be following situations relating to the Treatment of Goodwill on Admission of Partner:<\/p>\n\n\n\n

CASE 1: GOODWILL IS PAID PRIVATELY BY NEW PARTNER TO OLD PARTNERS<\/strong><\/p>\n\n\n\n

On the\nadmission of a new partner, it may happen, that new partner pays goodwill to\nthe old partners off the record of the firm i.e. privately. The amount paid\nprivately as goodwill will not be recorded in the books of the firm.<\/p>\n\n\n\n

EXAMPLE:<\/strong> X and Y are partners in a firm sharing profits and losses in the ratio of 3:2. They admit Z as a partner for 1\/4th<\/sup> share. Z paid directly \u20b980,000 to X and Y as his share of goodwill. Show the treatment.<\/p>\n\n\n\n

SOLUTION:<\/strong> No journal entry will be passed in the books as Z has paid his share of goodwill to X and Y directly, i.e., privately outside the firm.<\/p>\n\n\n\n

CASE 2: GOODWILL IS BROUGHT IN CASH BY THE NEW OR INCOMING PARTNER AND IS RETAINED IN THE BUSINESS.<\/strong><\/p>\n\n\n\n

The new partner is required to compensate the old partners by paying amount of his share of goodwill. The amount so paid by the new partner to old partners through the firm is debited to cash account and credited to premium account. Then premium Account is closed by transferring it to old partner\u2019s capital account in sacrificing ratio<\/a>. Thus premium account is closed and it will not appear in the balance sheet.<\/p>\n\n\n\n
When Premium (goodwill) is brought in cash <\/strong>
Cash A\/c                        Dr.    
To Premium A\/c
(Being premium brought in cash) <\/td><\/tr>
Premium is credited to old partners in sacrificing ratio: <\/strong>
Premium A\/c                Dr.    
To old partner\u2019s capital A\/c
(Being premium credited in sacrificing ratio) <\/td><\/tr><\/tbody><\/table>\n\n\n\n

EXAMPLE:<\/strong> A and B are partners sharing profits and losses in the ratio of 3:2. C is admitted for 1\/4th<\/sup> share and bring his share of goodwill amounted to \u20b920,000 in cash. The journal entries will be:<\/p>\n\n\n\n

SOLUTION:<\/strong> TREATMENT OF GOODWILL ON ADMISSION OF PARTNER<\/strong> C IS<\/strong>:<\/p>\n\n\n\n
PARTICULARS <\/strong><\/td><\/tr>
Cash\/ Bank A\/c         Dr.   20,000
   To Premium A\/c 20,000
(Being the amount brought by C for his share
of goodwill) <\/td><\/tr>
Premium A\/c           Dr.   20,000
    To A\u2019s capital A\/c   12,000
    To B\u2019s Capital A\/c 8,000
(Being goodwill transferred to old partners in
sacrificing ratio.)<\/td><\/tr><\/tbody><\/table>\n\n\n\n

CASE 3: GOODWILL IS BROUGHT IN BY NEW PARTNER IN CASH AND SAME IS PARTLY OR FULLY WITHDRAWN BY THE OLD PARTNERS<\/strong><\/p>\n\n\n\n

In\nthis case, the cash introduced by the new partner as goodwill is given to the\nold partners in sacrifice ratio and subsequently the old partners withdraw the\namount from business. The following enteries will be passed in this case:<\/p>\n\n\n\n
When Premium (goodwill) is brought in cash <\/strong>
Cash A\/c                        Dr.    
To Premium A\/c
(Being premium brought in cash) <\/td><\/tr>
Premium is credited to old partners in sacrificing ratio: <\/strong>
Premium A\/c                Dr.
    To old partner\u2019s capital A\/c
(Being premium credited in sacrificing ratio) <\/td><\/tr>
Premium is withdrawn by old partners from the business <\/strong>
Old partner\u2019s Capital A\/c    Dr.
     To Bank\/ Cash A\/c
(Being goodwill is withdrawn by the old partners)<\/td><\/tr><\/tbody><\/table>\n\n\n\n

EXAMPLE:<\/strong> A, B and C are partners in 3:2:1 ratio. They admitted D for 1\/4th<\/sup> share. D brings cash \u20b9100,000 including \u20b930,000 for goodwill. A and B withdrew the full amount of premium credited to their account.<\/p>\n\n\n\n

SOLUTION:<\/strong> TREATMENT OF GOODWILL ON ADMISSION OF PARTNER D IS:<\/strong><\/p>\n\n\n\n
PARTICULARS <\/strong><\/td><\/tr>
Cash\/ Bank A\/c         Dr. 1,00,000
    To D\u2019s Capital A\/c 70,000
    To Premium A\/c 30,000
(Being the amount brought by C for his
share of goodwill) <\/td><\/tr>
Premium A\/c           Dr. 30,000
    To A\u2019s capital A\/c   15,000
    To B\u2019s Capital A\/c 10,000
    To C\u2019s Capital A\/c 5,000
(Being premium distributed to the partners)<\/td><\/tr>
A\u2019s capital A\/c        Dr. 15,000
B\u2019s Capital A\/c        Dr. 10,000
C\u2019s Capital A\/c        Dr.  5,000
     To Cash A\/c 30,000
(Being goodwill is withdrawn by the old
partners)<\/td><\/tr><\/tbody><\/table>\n\n\n\n

CASE 4: GOODWILL IS NOT BROUGHT IN CASH BY NEW PARTNER<\/strong><\/p>\n\n\n\n

Accounting\nStandard 26 (Intangible Assets) specifies that goodwill can be recorded in the\nbooks only when some consideration in money or money\u2019s worth has been paid for\nit. It means that only purchased goodwill can be recorded in the books. At the\ntime of admission, retirement or death of a partner or in case of change in the\nprofit sharing ratio among existing partners, goodwill account cannot be raised\nin the books of the firm because it will be non- purchased goodwill and no\nconsideration in money or money\u2019s worth has been paid for it.<\/p>\n\n\n\n

When the goodwill of the firm is evaluated and the new partner does not bring his share of goodwill in cash, goodwill should be adjusted through partner\u2019s capital accounts<\/a>. For this purpose new partner\u2019s current account is debited from his share of goodwill and the old partner\u2019s capital accounts are credited in their sacrificing ratio. Following journal entry is passed for this purpose:<\/p>\n\n\n\n
New partner\u2019s Current A\/c                Dr. 
    To old partner\u2019s capital A\/c <\/td><\/tr><\/tbody><\/table>\n\n\n\n

EXAMPLE:<\/strong> A and B are partners sharing profits and losses in the ratio of 3:2. C is admitted for 1\/4th<\/sup> share and bring his share of goodwill amounted to \u20b920,000 which he is unable to bring in cash. The journal entry will be:<\/p>\n\n\n\n

SOLUTION:<\/strong> TREATMENT OF GOODWILL ON ADMISSION OF PARTNER C IS:<\/strong><\/p>\n\n\n\n
PARTICULARS <\/strong><\/td><\/tr>
C\u2019 Current  A\/c           Dr.  20,000
    To A\u2019s capital A\/c 12,000
    To B\u2019s Capital A\/c 8,000<\/td><\/tr><\/tbody><\/table>\n\n\n\n

CASE 5: TREATMENT OF GOODWILL ALREADY EXISTING IN BOOKS ON ADMISSION<\/strong><\/p>\n\n\n\n

Sometimes,\nat the time of admission of a new partner, there may appear the goodwill in the\nbooks of the firm. The reason for goodwill being appearing in the books could\nbe:<\/p>\n\n\n\n

  • That\nit was brought by the old partners in the past<\/li>
  • The\ngoodwill might have been raised in the past before the issuance of Accounting\nStandard 26.<\/li><\/ul>\n\n\n\n

    It\nmust be remembered that goodwill which is existing in the books must be written\noff between old partners in the old ratio. The accounting treatment of such\ngoodwill is as follows:<\/p>\n\n\n\n
    Old partner\u2019s Capital A\/c                Dr.   
        To Goodwill A\/c <\/td><\/tr><\/tbody><\/table>\n\n\n\n

    The\nentry to write off existing goodwill is always passed whether the goodwill is\nbrought in cash or not. After passing the above entry, goodwill will not appear\nin the new balance sheet.<\/p>\n\n\n\n

    EXAMPLE: <\/strong>X and Y are partners sharing profits in the ratio of 4:3. On 1 April 2018, they admitted Z as partner. Z brought in \u20b91,00,000 for his capital and \u20b921,000 for 1\/3rd<\/sup> share of goodwill premium. On Z\u2019s admission, goodwill appeared in the books of the firm at \u20b928,000. The journal entries will be:<\/p>\n\n\n\n

    SOLUTION:<\/strong> TREATMENT OF GOODWILL ON ADMISSION OF PARTNER Z IS:<\/strong><\/p>\n\n\n\n
    X\u2019s Capital  A\/c         Dr. 16,000
    Y\u2019s Capital A\/c          Dr. 12,000
        To Goodwill A\/c 28,000
    (Being the existing goodwill written off prior
    to Z\u2019s admission) <\/td><\/tr>
    Bank A\/c           Dr.   1,21,000
        To Z\u2019s capital A\/c 1,00,000
        To Premium A\/c 21,000
    (Being Z brought in cash for his capital and
    his share of goodwill) <\/td><\/tr>
    Premium for Goodwill A\/c       Dr.   21,000
        To X\u2019s Capital A\/c   12,000
      To Y\u2019s Capital A\/c 9,000
    (Being the goodwill\/ premium for goodwill
    brought in by Z is transferred to the Capital
    Accounts of X and Y I their sacrificing ratio, i.e. 4:3) <\/td><\/tr><\/tbody><\/table>\n\n\n\n

    CASE 6: GOODWILL IS PARTLY BROUGHT IN CASH BY NEW PARTNER<\/strong><\/p>\n\n\n\n

    New or\nIncoming partner may not be able to bring the amount of his share of goodwill\nfully or partly in cash. In this situation:<\/p>\n\n\n\n

    Premium\nfor Goodwill Account is credited with the amount of premium for goodwill\nbrought by the new or incoming partner.<\/p>\n\n\n\n

    At the\ntime of recording the transfer entry, New or Incoming partner\u2019s Capital\/\nCurrent Account is debited with the amount of premium for the goodwill not\nbrought by him besides debiting Premium for Goodwill Account with the amount of\npremium paid by him. In case, Capital Accounts are maintained following Fixed\nCapital Accounts Method, It is debited to his Current Account. <\/p>\n\n\n\n
    Cash A\/c                        Dr.
         To New partner\u2019s Capital A\/c   
         To Premium A\/c <\/td><\/tr>
    Premium A\/c                Dr.
    New Partner\u2019s Current A\/c    Dr.
        To Old Partner\u2019s Capital A\/c <\/td><\/tr><\/tbody><\/table>\n\n\n\n

    EXAMPLE:<\/strong> A and B are partners sharing profits equally. They admit C into partnership. C paying only \u20b91,000 for premium out of his share of premium of \u20b91,800 for 1\/4th<\/sup> share of profit. Give the necessary Journal entries.<\/p>\n\n\n\n

    SOLUTION: <\/strong><\/p>\n\n\n\n
    PARTICULARS <\/strong><\/td><\/tr>
    Cash A\/c                        Dr.  1,000
        To Premium A\/c 1,000<\/td><\/tr>
    Premium A\/c      Dr. 1,000
    C\u2019s Current A\/c    Dr. 800
        To A\u2019s Capital A\/c 1,000
        To B\u2019s Capital A\/c 800<\/td><\/tr><\/tbody><\/table>\n\n\n\n

    CASE 7: GOODWILL IS BROUGHT IN KIND BY NEW PARTNER<\/strong><\/p>\n\n\n\n

    New or\nIncoming partner may bring his share of Premium for Goodwill in the form of the\nassets. In this situation, the assets brought in debited individually with\ntheir values and Premium for Goodwill Account is credited with his share of\ngoodwill and also new Partner\u2019s capital Account with his capital. Thereafter,\nPremium for Goodwill is transferred to the capital Accounts of the sacrificing\npartners in their sacrificing ratio. The Accounting entries in this case will\nbe:<\/p>\n\n\n\n
    Assets A\/c                        Dr.
         To New partner\u2019s Capital A\/c   
         To Premium for Goodwill A\/c <\/td><\/tr>
    Premium A\/c                Dr.
        To Old Partner\u2019s Capital A\/c <\/td><\/tr><\/tbody><\/table>\n\n\n\n

    EXAMPLE:<\/strong> Ravi and Amit are partners in 3:2 ratio. They admitted Ajay. Ravi gave 1\/5 from his share to Ajay and Amit gave 1\/5 of his share to Ajay. Ajay contributed stock \u20b96,000; Machinery \u20b927,000 and Computer \u20b916,000 for his share in goodwill. He paid \u20b91,60,000 on account of his capital. Pass journal entries.<\/p>\n\n\n\n

    SOLUTION: <\/strong><\/p>\n\n\n\n
    PARTICULARS <\/strong><\/td><\/tr>
    Cash A\/c           Dr.  1,60,000
        To Ajay Capital A\/c 1,60,000
    (Being capital contributed by Ajay) <\/td><\/tr>
    Stock A\/c                 Dr. 6,000
    Machinery A\/c       Dr. 27,000
    Computer A\/c         Dr. 16,000
          To Premium A\/c 49,000
    (Being goodwill brought in kind) <\/td><\/tr>
    Premium A\/c          Dr.  49,000 
        To Amit Capital A\/c   35,000
        To Ravi Capital A\/c 14,000
    (Being goodwill credited to Amit and
    Ravi in sacrificing ratio 5:2) <\/td><\/tr><\/tbody><\/table>\n\n\n\n

     CASE 8: OLD PARTNERS DO NOTHAVE GOODWILL BUT NEW PARTNER HAS GOODWILL<\/strong><\/p>\n\n\n\n

    A\nsituation may arise when old partners are running their business in losses,\nhence they do not have any kind of goodwill. On the other hand, the new partner\nhaving similar nature of trade is earning profits ad has goodwill. In this\ncase, the old partners will compensate the new partners with their share in the\ngoodwill of the new partner, which means the old partner\u2019s capital\/current\naccount will be debited with their share in sacrifice ratio and new partner\u2019s\ncapital\/ current account will be credited.<\/p>\n\n\n\n
    Old Partner\u2019s Capital A\/c              Dr.  
         To New Partner\u2019s Capital A\/c
    (With the share of old partners) <\/td><\/tr><\/tbody><\/table>\n\n\n\n

    EXAMPLE:<\/strong> A and B are partners in 3:2 ratio doing Auto Parts business. They are suffering losses from the last many years. C is also doing the same type of business. A and B persuaded C to join them for 2\/5th<\/sup> share because C is having a profitable business. C agreed. His goodwill was valued at \u20b940,000 whereas A and B do not have any goodwill. C brings \u20b950,000 as his capital. Pass necessary journal entries.<\/p>\n\n\n\n

    SOLUTION:<\/strong><\/p>\n\n\n\n
    PARTICULARS <\/strong><\/td><\/tr>
    Cash A\/c         Dr.  50,000
        To C\u2019s Capital A\/c 50,000
    (Being C brings Capital) <\/td><\/tr>
    A\u2019s Capital A\/c         Dr. 14,400
    B\u2019s Capital A\/c         Dr.  9,600
          To C\u2019s capital A\/c 24,000<\/td><\/tr><\/tbody><\/table>\n\n\n\n

    CASE 9: HIDDEN GOODWILL<\/strong><\/p>\n\n\n\n

    Sometimes,\nthe value of the goodwill of the business is not given, it has to be inferred\non the basis of the net worth of the firm.<\/p>\n\n\n\n

    Calculation of Hidden Goodwill<\/strong><\/p>\n\n\n\n

    Step 1:<\/strong> Find put the total capital of the new firm on the basis of new partner\u2019s capital and his share of profit.<\/p>\n\n\n\n

    Total capital of the new firm= New Partner\u2019s Capital * Reverse of new partner\u2019s share.<\/strong><\/p>\n\n\n\n

    Step 2:<\/strong> Calculate combined capitals of all the partners (old partners as well as new partner).<\/p>\n\n\n\n

    Step 3:<\/strong> Find out the difference between the old capital calculated as per Step 1 and Step 2. It will be the goodwill of the firm.<\/p>\n\n\n\n

    EXAMPLE:<\/strong> A and B are partners with the capitals of \u20b91,60,000 and \u20b91,20,000 respectively. They admit C as a partner on 1st<\/sup> April, 2018 for 1\/4th<\/sup> share in the profits of the firm. C brings in 1,60,000 as his share of capital. Pass journal entries.<\/p>\n\n\n\n

    SOLUTION: <\/strong>Calculation of hidden goodwill:<\/p>\n\n\n\n

    1. Total Capital of new firm=\n1,60,000 * 4\/1= \u20b96,40,000<\/li>
    2. A, B and C\u2019s combined Capital= \u20b91,60,000+ \u20b91,20,000+ \u20b91,60,000= \u20b94,40,000<\/li>
    3. Goodwill of the firm will be=\n6,40,000-4,40,000= \u20b92,00,000<\/li>
    4. C\u2019s share of goodwill= \u20b92,00,000*1\/4=\u20b950,000<\/li><\/ol>\n\n\n\n
      PARTICULARS <\/strong><\/td><\/tr>
      Cash\/ Bank A\/c         Dr. 1,60,000
          To C\u2019s Capital A\/c 1,60,000
      (Being the amount brought by C for
      his capital) <\/td><\/tr>
      C\u2019s Capital A\/c           Dr.   50,000
         To A\u2019s capital A\/c    25,000
         To B\u2019s Capital A\/c 25,000<\/td><\/tr><\/tbody><\/table>\n","protected":false},"excerpt":{"rendered":"

      TREATMENT OF GOODWILL ON ADMISSION OF PARTNER Goodwill is an intangible asset which enables a firm to earn higher profit than the normal profit earned by the other firms in the industry. Goodwill is created through the sincere and honest efforts made by the partners in the past. The goodwill so generated is known as…<\/p>\n

      Read More “TREATMENT OF GOODWILL ON ADMISSION OF PARTNER”<\/span> »<\/a><\/p>\n","protected":false},"author":2,"featured_media":1424,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[19,21],"tags":[48],"_links":{"self":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/posts\/1413"}],"collection":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/comments?post=1413"}],"version-history":[{"count":0,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/posts\/1413\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/media\/1424"}],"wp:attachment":[{"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/media?parent=1413"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/categories?post=1413"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/commerceiets.com\/wp-json\/wp\/v2\/tags?post=1413"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}