explain how is goodwill treated in the books of accounts when the incoming partner does not bring his share of goodwill in cash.
Answers
In case C (New Partner) is unable to bring his share of goodwill, then adjustment for goodwill be made through the capital accounts/current accounts of the partners.
Example: A and B share profits equally and they admit C for 1/3 share in the firm and he brings Rs.100000 as capital. Goodwill for this purpose is valued at Rs.60000 but C is unable to bring in his share of goodwill. How adjustment for goodwill will be made?
IMP: Since neither new ratio is given nor sacrifice made by old partners is given, we may safely assume that old partners sacrificed in their old profit sharing ratio i.e. 1:1. Journal entries to be passed are:
Cash A/c Dr 100000
To C’s Capital A/c 100000
C’s Capital A/c Dr. 20000
To A’s Capital A/c 10000
To B’s Capital A/c 10000
(A and B credited in the sacrificing ratio for C’s share of Goodwill)
Note: 1. In this question there is no mention whether the capital accounts are maintained as Fixed or Flucating. In such a case it is always assumed that capital accounts are Flucating.
2. In case question mentions that their capital accounts are Fixed, then adjustment on account of goodwill will be made through Current Accounts as given below:
Cash A/c Dr 100000
To C’s Capital A/c 100000
C’s Current A/c Dr. 20000
To A’s Current A/c 10000
To B’s Current A/c 10000
entry will be done as above
