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Partnership accounting doubt

shwetha (CWA learner) (447 Points)

21 November 2011

Can any body give me a brief note on treatment of goodwill at the time of admission of a partner. pls give me journals also.

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3 Replies

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1st method

Private distribution of goodwill

Under this method , new partner gives his share of goodwill to old partners personally .So there is no need to record it to the books of firm . No journal entry will pass .

2nd method

Goodwill is given in cash form by new partner

Under this method , old partner bring his share of goodwill in cash form in the firm and it is taken by old partner in their sacrifice ratio . For this following journal entry pass in the books of firm
Cash / Bank Account Debit xxxxxxxxx

To Goodwill / Premium Account xxxxxxxxxx

Goodwill account debit xxxxxxxx ( share of new partner’s goodwill )

To old partner’s capital account xxxxxxx ( divide in sacrifice ratio )

3rd method

when new partner bring goodwill in cash in business and taken by old partner and then withdraw by old partner

Above two entries will pass as same as in second method but third new entry will pass

Old partner’s capital account Debit xxxxxxxxxxx

To cash / bank account xxxxxxxx

4th method

when new partner do not bring goodwill in cash form

If new partner do not bring goodwill in cash in firm , then following entry will pass for the adjustment of goodwill .

New partner’s capital account debit xxxxxxxx (share of goodwill )
To old partner’s capital account xxxxxxxxx (division in sacrifice ratio)

5th method

If partial in cash form of goodwill

Part of cash goodwill
Cash account dr. xxxxxx
To goodwill / premium account xxxxxxxx

Goodwill account debit ( cash goodwill) xxxxxxxxx
New partner account debit ( not in cash goodwill ) xxxx
To old partner capital account in sacrifice ratio xxxxxxx

6th method

If goodwill already exits in balance sheet of old partner , then it must be transfer to old partner’s capital account in old ratio . Other method is same above from 1 to 5 method .

Entry passed for transferring of old goodwill

Old partner’s capital account debit xxxxxxx
To goodwill xxxxxxx

7th method

If new partner brings other asset as goodwill of his share of goodwill . Then following entry will pass

Asset account debit xxxxxx
To goodwill account xxxxxxxx

Goodwill account debit xxxxxxxxx
To old partner’s capital account in sacrifice ratio xxxxxxxxxx

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Sanket (!..Live to Give..!) (16427 Points)
Replied 21 November 2011

Accounting treatment of goodwill at the time of admission of a partner is classified in four parts:

(1) When new partner pays amount of goodwill privately: In this case no entry will be passed in the books of the firm.

(2) When new partner brings his share of goodwill in Cash or kind. In this case the following entries are passed:

Cash / Bank/ Assets A/c Dr.

To New Partner’s Capital A/c (for amount of capital)

To Premium A/c (for amount of goodwill)

Premium A/c Dr.

To Old Partner’s Capital A/cs

For amount of Capital + Goodwill brought in by new partner
For amount of goodwill brought in by new partner credited to Old Partner’s Capital A/cs in their Sacrificing Ratio.
When old partners withdraw the amount of goodwill.

Old Partner’s Capital A/c Dr.

To Cash/Bank A/c

3) When new partner does not bring his share of goodwill in cash.

In this case new partner’s share of goodwill is charged to his capital account and t/f to old partner’s capital accounts in their sacrificing ratio. Entries for this will be:

(i) For amount of capital brought in by new partner

Cash / Bank/ Assets A/c Dr.

To New Partner’s Capital A/c

(ii) For new partner’s share of goodwill credited to old partner’s capital accounts in their sacrificing ratio

New Partner’s Capital A/c Dr.

To Old Partner’s Capital A/cs

(iii) When old partners withdraw the amount of goodwill.

Old Partner’s Capital A/c Dr.

To Cash/Bank A/c

4) When new partner brings only a part of his share of goodwill in cash or kind.

In this case amount brought in by new partner as his share of goodwill t/f to old partner’s capital accounts in their sacrificing ratio and the amount that is not brought in by him is charged to his capital account and is also t/f to old partner’s capital accounts in their sacrificing ratio. Entries will be in following manner:

Cash / Bank/ Assets A/c Dr.

To New Partner’s Capital A/c (Amount of Capital)

To Premium A/c (Amount of Goodwill brought in by new partner)

Premium A/c Dr.

To Old Partner’s Capital A/cs

For amount of Capital + Goodwill brought in by new partner
For amount of goodwill brought in by new partner credited to old partner’s capital accounts in their sacrificing ratio.
For amount of goodwill not brought in by new partner charged to his capital account and credited to old partner’s capital accounts in their sacrificing ratio.

New Partner’s Capital A/c Dr.

To Old Partner’s Capital A/cs...

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