Treatment of Goodwill

At the time of retirement of a partner, adjustment for goodwill of the firm, if any, has to be made as in admission. In retirement too, we confine to the Revaluation Method only

a) Goodwill is raised in the books of the firm:

At the time of retirement, Goodwill is raised to its present value and brought into record.

The entry is

Goodwill A/c                                               Dr                     ….
To All partners’ capital A/c                                                  …

(Goodwill raised and adjusted to the all partners’ capital account)

 

b) Goodwill appears in the books -understated:

If the goodwill appears in the balance sheet at a value less than the present value of goodwill, the difference in the goodwill account is transferred to all partners’ capital accounts in the old ratio.

The entry is

Goodwill A/c                                            Dr                ……

                                                        To All Partners’ capital A/c                                         ……..

(Increase in the value of goodwill transferred to all partners’ capital accounts in the old ratio)

c) Goodwill appears in the books – overstated :

If the goodwill appears in the balance sheet at a value more than the present value of goodwill, the difference in the goodwill is transferred to all partners in the old ratio.

The entry is

All Partners’ Capital A/c                         Dr                 …
To Goodwill A/c                                                               …

(Decrease in the value of goodwill transferred to all partners’ capital accounts in the old ratio)

Illustration : 

Thamizhselvi, Kalaiselvi and Thenmozhi are partners sharing profits in the ratio of 5 : 3 : 2. Kalaiselvi decided to retire. Goodwill of the firmis to be valued at Rs.40,000. Give journal entries if

a) there is no goodwill in the books of the firm.

b) the goodwill appears at Rs.30,000

c) the goodwill appears at Rs.50,000

Solution:

Journal Entries

Date	Particulars	L.F.	Debit Rs.	Credit Rs.
	(a)
	Goodwill A/c                                       Dr		40,000
	To Thamizhselvi A/c			20,000
	To Kalaiselvi A/c			12,000
	To Thenmozhi A/c			8,000
	(Goodwill raised and transferred to old partners in the old ratio)
	(b)
	Goodwill A/c                                       Dr		10,000
	To Thamizhselvi A/c			5,000
	To Kalaiselvi A/c			3,000
	To Thenmozhi A/c			2,000
	(Increase in goodwill transferred)

	(c)
	Thamizh selvi A/c                               Dr		5,000
	Kalaiselvi A/c                                      Dr		3,000
	Thenmozhi A/c                                   Dr		2 ,000
	To Goodwill			10,000

(Decrease in goodwill transferred  to the old partners in the old ratio)