Treatment of Goodwill in the Retirement / Death of a Partner: Goodwill is the value of a firm’s reputation and its good brand name in the market goodwill is the value of a firm’s reputation and its good brand name in the market. It is an intangible asset of a firm that is earned by the hard work and the efforts of all the partners of the firm. As we know that in the case of admission of a new partner, the new partner has to bring in an additional amount (besides capital) in the form of premium for goodwill to compensate the old partners. In contrast, in the case of the retirement/death of a partner, the remaining/continuing partners need to compensate the outgoing (retiring/deceased) partner. This is because, after the retirement/death of a partner, the fruits of the collective past performances and reputation will be shared only by the continuing partners. Hence, the remaining partners compensate the retiring or the deceased partner by entitling him/her a share of the firm’s goodwill.
Accounting Standard 26- Treatment of Goodwill in the Retirement / Death of a Partner
As per the Accounting Standard 26 of ICAI, goodwill is recorded in the books only when some consideration in money or money’s worth has been paid for it. This practice is mandatory to follow. In the case of 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 implies that the goodwill of a partnership firm is self-generated goodwill, that is, the firm itself evaluates the value of the goodwill. The AS-26 standard specifies that goodwill should be immediately written off after it has been raised. That is, as per this accounting standard, goodwill has to be adjusted through Partners’ Capital Account.
Important Note: It should be noted that the treatment of goodwill in the cases of retirement and death of a partner remains the same. There is no difference in the treatment of goodwill and its posting in the Partners’ Capital Account in both cases.
Different Cases of Treatment of Goodwill in the Retirement / Death of a Partner
The following are the two probable cases on which the treatment of goodwill rests.
Case 1: If Goodwill Already appears in the Books of the Firm As in the case of admission, if goodwill already appears in the Old Balance Sheet, then this goodwill is written-off among the old partners. Similarly, in case of retirement/death of a partner, if goodwill already appears in the Old Balance Sheet, then first of all this goodwill is written-off among all the partners and after that, the retiring/deceased partner’s share of goodwill is adjusted through the continuing Partner’s Capital Accounts in their gaining ratio.
Case 2: If no Goodwill appears in the Books of the Firm at the time of retirement/death of a partner In this case, as no goodwill is appearing in the books of account, so there is no need to pass the Journal entry for writing-off goodwill. Here, only the retiring/deceased partner’s share of goodwill is to be adjusted through the remaining partners’ capital accounts in their gaining ratio. It is done by debiting the remaining partners’ capital accounts in their gaining ratio and crediting the retiring/deceased partner’s capital account with the share of his/her goodwill.
A profit and Loss Account is the second financial statement prepared by an organization. This account is prepared to ascertain the net results of a firm in form of net profit earned or net loss incurred during an accounting period.
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Transaction Processing System (TPS) refers to a computerized system that records, processes, validates, and stores routine transactions that occur in various functional areas of a business on daily basis.
In the case of Hidden Goodwill, the value of goodwill is not mentioned at the time of admission of a new partner. It can be considered as one of the methods for calculating the value of goodwill of the firm.