Accounting Treatment of Goodwill in case of Dissolution of Firm
Goodwill is nothing but a monetary value of a reputation of a business firm in the market, earned by the firm by serving its customers. In a Partnership firm, Goodwill is treated like an asset; every partner has a right over the firm’s goodwill up to his/her share in the business.
In case of the Dissolution of a Partnership, Goodwill, like other assets is realised, and all the partners share the proceeds.
Accounting Treatment:
A. When Goodwill appears in the Balance Sheet of the Firm:
1. On transfer to Realisation Account:
Journal Entry:
2. Realisation of Goodwill:
(i) Goodwill realised in cash:
Journal Entry:
(ii) If any of the partners take over the Goodwill and agrees to pay for Goodwill:
Journal Entry:
B. When Goodwill does not appear in the Balance Sheet of the Firm:
1. On transfer to Realisation Account:
No Entry
Note:
Goodwill doesn’t exist in the books of the firm, so nothing is to be transferred to Realisation Account.
2. Realisation of Goodwill:
(i) Goodwill realised in cash:
Journal Entry:
(ii) If any of the partners take over the Goodwill and agrees to pay for Goodwill:
Journal Entry:
Illustration:
Kapil, Rohit, and David are partners sharing profit and losses in a ratio of 2 : 1 : 1. On 31st March 2020, they decided to dissolve the firm. Their balance Sheet as on the same date stood as :
Additional Information:
1. Half of the Goodwill realised for ₹ 20,000 and half is taken over by Rohit for ₹ 20,000.
2. Assets Realised for:
Land and Building: ₹ 2,00,000
Plant: ₹ 1,00,000
Machinery: ₹ 56,000
Debtors: 50% of Book Value
3. Realisation Expense cost ₹ 4,000.
Prepare Realisation Account, Partner’s Loan Account, Partner’s Capital Account and Cash Account and Pass necessary Journal Entries.
Solution:
Working Note:
1. Value of Asset Realised:
Goodwill (Half) = 20,000
Land and Building = 2,00,000
Plant = 1,00,000
Machinery = 56,000
Debtors =
Total = 4,24,000
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