Learn On Your Own Accounting Entries For Raising Of Goodwill:

Raising of goodwill is a process by which the value of goodwill of the entity is brought into or recorded into the book of account at the fair value as on that date. Although its a normal annual procedure, but it needs to be compulsorily done in case of change of parnership i.e. in case of admission of a new partner, or retirement or death of an existing partner.

Accounting Standard 26 deals with intangible assets. This Standard says that self generated intangible assets like goodwill should not be shown in the Balance Sheet. As per Accounting Standard 26, goodwill can be recorded in the balance sheet only when some consideration in money or money's worth has been paid for it. This practice is to be followed mandatorily.

In case of change of profit sharing ratio due to admission, retirement, death or change in profit sharing ratio among existing partners, goodwill account cannot be raised as no consideration is paid for it. This means that goodwill of a partnership firm is an internally self generated goodwill, that is, the firm itself evaluates the value of its goodwill.

Accounting Standard 26 specifically states that internally generated goodwill should be immediately written off after it has been raised. Accounting Standard 26 states that, goodwill has to be adjusted as per partner's capital account.

In Case Of Admission Of A Partner:

When a new partner is admitted to a partnership firm, he is supposed to bring premium in for goodwill along with his share of capital. This premium is a self generated amount declared as premium. This Premium for goodwill is the amount which is required to be paid the by new partner for gaining a share in the goodwill of the firm.

The following journal entry needs to be passed to record the treatment of goodwill in case of admission of a partner:

If the New Partner Brings In Cash As Premium:

1. Cash/Bank A/c---------------------------------Dr.

        To Premium for Goodwill A/c

(Being the amount of premium brought in by new partner on admission)

2. Premium for Goodwill A/c Dr.

        To Old Partners Capital A/c (Sacrificing ratio)

(Being the amount of premium brought in by new partner shared by the old partner in old profit sharing ratio)

When The New Partner Is Unable To Bring In His Share Of Goodwill In Cash:

In such case goodwill account is to be raised in the book at its full value and is to be written off immediately:

The following entries are to be passed:

For Raising of Goodwill:

Goodwill A/c ----------------------------- Dr.

        To Old Partners Capital A/c

(Being goodwill raised in the book at its full value)

All Partners Capital A/c --------------------------Dr.

        To Goodwill A/c

(Being the value of goodwill written off including the new partner in new profit sharing ratio)

In Case Of Retirement Of A Partner:

Goodwill is the value of reputation of a firm resulted from the efforts of all the partners of a concern including the retiring partner. On retirement of a partner, the continuing partner gains in the future profits of the firm and the retiring partner is to be compensated by the existing partner in their gaining ratio.

According to Accounting Standard 26, goodwill can be shown in the balance sheet only when it is acquired or purchased. Thus in case of reconstitution of partnership goodwill cannot be raised in the book as no consideration is paid for it. But if goodwill is raised for the purpose of evaluation on reconstitution of partnership it has to be written off immediately.

On retirement of a partner goodwill needs to treated as follows:

For Raising of Goodwill:

Goodwill A/c ----------------------------- Dr.

        To All Partners Capital A/c

(Being goodwill raised in the book at its full value)

Continuing Partners Capital A/c --------------------------Dr.

        To Goodwill A/c

(Being the value of goodwill written off by continuing partner in new profit sharing ratio)

For Adjusting of Retiring Partners Share of Goodwill:

Continuing Partners Capital A/c ---------------Dr. (In gaining ratio)

        To Retiring Partners Capital A/c

(Being adjusting entry for goodwill made through partners capital account)