Question

Study of the method of valuation of goodwill and accounting treatment in case of admission, retirement or death of a partner goodwill

Answer 1

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SLIDESHARE + STUDY OF VALUATION OF GOOD WILL.

SLIDESHARE + ACCOUNTING TREATMENT IN + ADMISSION OF PARTNER

+ RETIREMENT OF PARTNER

+ DEATH OF PARTNER

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Answer 2

The method of valuation of goodwill and accounting treatment in case of admission, retirement or death of a partner goodwill:

Goodwill is an intangible asset that every company or a firm acquires due to it’s reputation, public behavior and it’s the asset that is acquired by a purchaser once, he/she buys the business. The goodwill of a firm is based on it’s possible future profits and present financial position.

Explanation:

Goodwill is revalued when any of these situations occur:-

• Change in profit sharing ratio

• Admission of a new partner

• Death of a partner

• Or the business is sold.

Death of the partner:

When a partner dies, the goodwill is shared in the deceased partner’s ratio at the time of retirement or death, because the goodwill of the firm is also the effort of the deceased partner.

The journal treatment is:

Old partner a/c…….dr     (gaining ratio)

To deceased partner a/c  (his share of goodwill)

(being goodwill shared at the gaining and sacrificing ratio)

Admission of a new partner:

The incoming/new partner brings in some amount of money as his share of goodwill or premium to compensate the existing partners for the loss of their share in the future profits of the firm as they sacrifice a certain amount in the profit sharing ratio. Thus, at the time of admission of a partner, there are two ways to treat goodwill

Cash a/c……..dr

To new partner’s a/c

New partner’s capital a/c ………….dr

To existing partner’s capital a/c

Existing partner’s a/c…….dr

To cash a/c

Retirement of a partner:

The retiring partner is entitled to his/her share of goodwill at the time of retirement because of the fact that the goodwill is the result of the efforts of all partners including the retiring one in the past. When a partner retires from the firm, the continuing partners will gain in future profits. These are the 2 cases on how to treat retirement of a partner.

Goodwill a/c…..dr

To all partner’s a/c

(being goodwill raised in fill value)

Continuing partner a/c….dr

To retiring partner a/c

(being goodwill written off)

This is how to treat goodwill in the case of admission, retirement and death of a partner.