Explain the treatment
of goodwill at the time of retirement or on the event of death of a
partner?
Explain the treatment of goodwill at the time of retirement or on the event of death of a partner?
At the time of retirement or at the event of death of a
partner, the goodwill is adjusted among the partners in gaining ratio with the
share of goodwill of the retiring or the deceased partner. As per Para 16 of
Accounting Standard 10, it is mandatory to record goodwill in the books only
when consideration in money or money’s worth has been paid for it.
In case of retirement and death of a partner, goodwill
account cannot be raised. There are namely two probable situations on which the
treatment of goodwill rests.
1. If goodwill already appears in
the books of the firm.
2. If no goodwill appears in the books of the
firm.
Situation 1: If goodwill already appears in
the books of the firm.
Step 1: Write off the existing goodwill
If goodwill already appears in the old balance sheet of the
firm (if mentioned in the question), then first of all, this goodwill should be
written off and should be distributed among all the partners of the firm
including the retiring or the deceased partner in their old profit sharing
ratio. The following Journal entry is passed to write off the old/existing
goodwill.
All Partners' Capital A/c
Dr.
To Goodwill A/c
(Goodwill written of among
all the partners in their
old ratio)
Step 2: Adjusting goodwill through partner's
capital account.
After writing off the old goodwill, the goodwill need to be
adjusted through the partner's capital account with the share of the goodwill
of the retiring or the deceased partner. The following Journal entry is passed.
Remaining Partner's Capital
A/c
Dr.
To Retiring/Deceased
Partner's Capital A/c
(Gaining Partner's Capital
A/c is debited in their
gaining share and
retiring/deceased partner's capital
account in credited for
their share of goodwill)
Situation 2: If no goodwill appears in the books
of the firm.
As no goodwill appears in the books of the firm, so the
goodwill is adjusted through the partner's capital account with the share of
the goodwill of the retiring or the deceased partner. The following Journal
entry is passed.
Remaining Partner's Capital
A/c
Dr.
To Retiring/Deceased
Partner's Capital A/c
(Gaining partner's capital
account is debited in their gaining
share and retiring/deceased
partner's capital account in
credited for their share of
goodwill)
At the time of retirement or at the event of death of a partner, the goodwill is adjusted among the partners in gaining ratio with the share of goodwill of the retiring or the deceased partner. As per Para 16 of Accounting Standard 10, it is mandatory to record goodwill in the books only when consideration in money or money’s worth has been paid for it.
In case of retirement and death of a partner, goodwill account cannot be raised. There are namely two probable situations on which the treatment of goodwill rests.
1. If goodwill already appears in the books of the firm.
2. If no goodwill appears in the books of the firm.
Situation 1: If goodwill already appears in the books of the firm.
Step 1: Write off the existing goodwill
If goodwill already appears in the old balance sheet of the firm (if mentioned in the question), then first of all, this goodwill should be written off and should be distributed among all the partners of the firm including the retiring or the deceased partner in their old profit sharing ratio. The following Journal entry is passed to write off the old/existing goodwill.
|
All Partners' Capital A/c |
Dr. |
|
|
|
To Goodwill A/c |
|
|
(Goodwill written of among all the partners in their old ratio) |
|
|
Step 2: Adjusting goodwill through partner's capital account.
After writing off the old goodwill, the goodwill need to be adjusted through the partner's capital account with the share of the goodwill of the retiring or the deceased partner. The following Journal entry is passed.
|
Remaining Partner's Capital A/c |
Dr. |
|
|
|
To Retiring/Deceased Partner's Capital A/c |
|
|
(Gaining Partner's Capital A/c is debited in their gaining share and retiring/deceased partner's capital account in credited for their share of goodwill) |
|
|
Situation 2: If no goodwill appears in the books of the firm.
As no goodwill appears in the books of the firm, so the goodwill is adjusted through the partner's capital account with the share of the goodwill of the retiring or the deceased partner. The following Journal entry is passed.
|
Remaining Partner's Capital A/c |
Dr. |
|
|
|
To Retiring/Deceased Partner's Capital A/c |
|
|
(Gaining partner's capital account is debited in their gaining share and retiring/deceased partner's capital account in credited for their share of goodwill) |
|
|
