explain accounting treatment of old Goodwill appearing in the balance sheet of the firm at the time of the retirement of a partner
Answers
Answer:
Treatment of Goodwill:
Goodwill of the firm is valued in the manner prescribed by the partnership deed. If there is no such clause in the partnership deed, it will be valued by mutual consent or arbitration. Retiring partner’s share of goodwill is then ascertained which depends on the share of profits the retiring partner has been getting. The retiring partner’s capital account is credited with his share of goodwill and the amount is debited to the remaining partners’ capital accounts in the ratio of their gain.
Explanation:
Treatment of Goodwill
Goodwill is the result of overall efforts of all the partners including the retiring one. So at the time of retirement or death of the partner, he/she is entitled to his/her share of goodwill. Let us learn more about the treatment of goodwill.
The retiring or deceased partner is entitled to his/her share of goodwill at the time of retirement/death. The goodwill earned by the firm is the result of the efforts of all the existing partners in the past. Hence, as per agreement among the partners at the time of retirement/death of a partner, goodwill is valued.
The retiring/ deceased partner gets his share of goodwill from the continuing partners in their gaining ratio. The accounting treatment for goodwill in such a situation depends upon whether or, not goodwill already appears in the books of the firm.
Case 1: When goodwill does not appears in the books
There are four ways in which the retiring partner can be given the necessary credit for loss of his share of goodwill, these are as follows:
1] Raising the Goodwill to its full value and retaining it in the books
By debiting the Goodwill Account and crediting all the partner’s (including the retired/deceased partner) capital accounts in the old profit sharing ratio. The full value of goodwill will appear on the balance sheet of the reconstituted firm.
2] Raising the Goodwill to its full value and writing it off immediately
If it is decided that goodwill should not be refrained and shown in the balance sheet of the reconstituted firm then,
Raise the goodwill at its value by crediting all the partners’ capital accounts (including that of the retired/ deceased partners) and then
Written off by debiting the remaining partners in their new profit sharing ratio and crediting the goodwill account with its full value.
3] Raising the Goodwill to the extent of retired/deceased partner’s share and writing it off immediately
In this case, goodwill account is raised only to the extent of retired/deceased partner’s share. The goodwill account is debited with the proportionate amount and credited only to the retired/deceased partner’s capital account.
Thereafter, in the gaining ratio, the remaining partner’s capital accounts are debited and the goodwill account is credited to write it off.
4] By not raising the goodwill account at all in firm’s books
In this case, the goodwill account will not appear in the firm’s books at all. It is adjusted discretely through partner’s capital accounts by recording the following journal entry:
