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Segment 2.1(Concept) - Admission of a Partner

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19 views

Segment 2.1(Concept) - Admission of a Partner

Uploaded by

garvit atri
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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CLASS XII

ACCOUNTANCY
ADMISSION OF PARTNER
SEGMENT 2.1 - CONCEPT

ACCOUNTING FOR GOODWILL

ACCOUNTING STANDARD-26 (AS-26), 'INTANGIBLE ASSETS'


AS-26, 'Intangible Assets' prescribes that goodwill should be recognised in the books of
account only when consideration in money or money's worth is paid for it, i.e., when
goodwill is purchased. Thus, in case of change in profit-sharing ratio among partners or
admission or retirement/death of a partner, goodwill should not be recognised in the
books of the firm because consideration in money or money's worth is not paid for it.

Goodwill is an intangible asset which enables a firm to earn higher profit than normal
profit (i.e.., Super Profit) earned by other firms in the industry. It arises due to efforts
made by the existing partners in the past. Such Goodwill is known as self-generated
goodwill.
At the time of admission, new partner (who takes share in future profits from the existing
(old) partners) compensates the sacrificing partners by paying them an amount, termed
as goodwill or premium for goodwill.
An existing (old) partner may gift his/her profit share to the new partner. Since, gifts are
free from consideration, new or incoming partner will not pay premium for goodwill to that
partner for gifting his/her profit share.

1
Villa 13, Basement , Block III, Eros Garden, Charmwood Village, Faridabad-121009
9999656277;9871309181 ; 0129-4056277
ACCOUNTING OF GOODWILL AT THE TIME OF ADMISSION OF A PARTNER

There can be following five situations for accounting of goodwill:


(i) Goodwill (Premium for Goodwill) is paid privately.
(ii) Goodwill (Premium for Goodwill) is brought in cash or by cheque by the new or
Incoming Partner and is retained in business.
(iii) Goodwill (Premium for Goodwill) is brought in cash or by cheque by the new or
Incoming Partner and is withdrawn by Sacrificing Partners fully or partly.
(iv) Goodwill (Premium for Goodwill) is brought in kind;
(v) When a part of Goodwill (Premium for Goodwill) is brought.
(vi) When the new partner does not bring his/her share of goodwill.

CASE 1
(i) Goodwill (Premium for Goodwill) is paid Privately
When goodwill (premium for goodwill) is paid privately (i.e.., outside the business) by the
new or incoming partner to the sacrificing partners, Journal entry is not passed in the
books of account because compensation paid is not through the firm.
CASE 2
(ii) Goodwill (Premium for Goodwill) is brought (in cash or by cheque) by the New or
Incoming Partner and is Retained in Business
When the new or incoming partner brings amount for goodwill for his share, it is
transferred to Capital Accounts of the sacrificing partners in their sacrificing ratio

ACCOUNTING ENTRIES
For premium for goodwill Brought in cash or by cheque By the new or incoming Partner.

For Capital Brought in cash or by cheque by the new or incoming Partner.

Alternatively, instead of above two entries, single entry may be passed


For sharing premium for Goodwill by sacrificing partner’s

3
Villa 13, Basement , Block III, Eros Garden, Charmwood Village, Faridabad-121009
9999656277;9871309181 ; 0129-4056277
CASE 3
(iii) Goodwill (Premium for Goodwill) is brought (in cash or by cheque)by New or
Incoming Partner and is withdrawn by Sacrificing Partners Fully or Partly
Amount of premium for goodwill brought by the new or incoming partner is shared
by the sacrificing partners in the sacrificing ratio. The sacrificing partners may
withdraw the premium amount fully or partly as is agreed by the partners.

Accounting Entries
For premium for goodwill brought by the new partner:

For sharing of premium for goodwill:

For withdrawal of premium amount fully/partly:


CASE 4
(iv) Goodwill (Premium for Goodwill) is brought in Kind
New or incoming partner instead of bringing cash for his share in Premium for
Goodwill, may bring assets equal to the value of his share of Premium for Goodwill.
In this situation, the assets brought are debited individually with their agreed values
and Premium for Goodwill Account is credited. Thereafter, Premium for Goodwill
(Share of Goodwill) is transferred to the Capital Accounts of the sacrificing partners
in their sacrificing ratio.

Accounting Entries
For Assets brought in by the New Partner:

For Crediting Sacrificing Partners' Capital Accounts for Goodwill:

The amount of Premium for Goodwill credited to Partner's Capital/Current Account


may be withdrawn (fully or partially) or may not be withdrawn. If the amount is
withdrawn, the Journal entry is:

5
Villa 13, Basement , Block III, Eros Garden, Charmwood Village, Faridabad-121009
9999656277;9871309181 ; 0129-4056277
CASE 5

(v) When the New Partner does not bring his/her Share of Goodwill
If the new partner does not bring his share of goodwill, premium for goodwill is
adjusted through Current Account of the New Partner. Following Journal entry is
passed for this purpose:
CASE 6
(vi) When only a part of Goodwill (Premium for Goodwill) is brought by the new
partner
New or incoming partner may not bring his total share of goodwill (premium for
goodwill). In this situation:
(a) Cash/Bank Account is debited by the amount of goodwill (Premium for Goodwill)
brought by the new or incoming partner. The amount brought is credited to
Premium for Goodwill Account.
(b) The amount of goodwill not brought by the new or incoming partner is debited to
New or Incoming Partner's Current Account and credited to Sacrificing Partners'
Capital Accounts.

Accounting Entries
For Amount Brought by the Incoming Partner:

For Crediting Sacrificing Partners by Incoming Partner's total share of Goodwill:

7
Villa 13, Basement , Block III, Eros Garden, Charmwood Village, Faridabad-121009
9999656277;9871309181 ; 0129-4056277
(NOTES)

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