explain the treatment of goodwill? class 12th long answer
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The goodwill amounts to the excess of the "purchase consideration" (the money paid to purchase the asset or business) over the net value of the assets minus liabilities. It is classified as an intangible asset on the balance sheet, since it can neither be seen nor touched.Since in future profits will arise because of the present goodwill. The retiring or the deceased partner will not be sharing future profits. Therefore all continuing partners pay to retiring partner the share of Goodwill in gaining ratio. It is fair to compensate the retiring or deceased partner for the same.Under this method, when the incoming partner brings his share of goodwill in cash, the existing partners share it in the sacrificing ratio. However, when the amount of goodwill is paid privately by the new partner to old partners privately in cash, no entry is passed in the books of the firm.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. ... 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.