ACCOUNT TREATMENT OF GOODWILL ON ADMISSION OF PARTNERS

At the time of an admission belongs entirely to the existing partners who have created it. There are three ways of valuing goodwill on admission of partners as follows: -

Method No.1 :
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Goodwill is recorded in FULL in the books of accounts
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- A goodwill account is opened and the amount of goodwill is debited to this account.
- Existing/Old Partners Capital Accounts are credited in the proportion of their old profit sharing ratio

Account Entries:
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Debit : Goodwill Account
Credit : Old Partner?s Capital Accounts in old profit sharing ratio


Method No.2 :
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Scenario No. 1 : Where Goodwill is NOT recorded in the books of accounts
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- Goodwill is not recorded in the books hence NO goodwill account is open
- Incoming partner pay his proportion of the agreed value of goodwill in CASH.
- Additional cash brought in by new partner is known as premium and is credited to the Capital Accounts of the existing partners in their old profit sharing ratio

Account Entries:
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Debit : Cash Account (Total Cash brought in by the new partners)
Credit : New Partner?s Account (Capital introduced)
Credit : Existing / Old Partners (Premium of Goodwill)

Scenario No. 2 : Where Goodwill is Opened and the written off from the books of accounts
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- There is a more tedious way of doing it.
- You need to open goodwill account in the books and then write off using the new profit sharing ratio
- Using this method you still get back the result as scenario one where goodwill is never open / created in the books


Account Entries:
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Debit : Goodwill Account with total value of goodwill
Credit : Old / Existing Partner?s Capital Account with goodwill in old profit sharing ratio

Method No.3 :
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Goodwill is NOT recorded in the books and paid DIRECT to the existing /old partners
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- No record in the partnership?s books
- Least advantageous to incoming partners as the money which he pays for goodwill is not kept in the business