Case 2 When goodwill already appears in the books

When goodwill already appears in the books (i.e., it appears in the asset side of the Balance Sheet) at the time of admission of the partner, it is written off among the old partners in the old profit-sharing ratio.

A. When goodwill appears in the old balance sheet and an incoming partner brings in premium for goodwill in full or in part:

(i) Writing off Existing Goodwill in the Balance sheet:

Journal Entry:

(ii) Premium for goodwill brought in by new partner:

Journal Entry:

(iii) For giving credit of goodwill to sacrificing partners in their sacrificing ratio:

Journal Entry:

(iv) When the new partner does not bring part of his share of goodwill in cash:

Journal Entry:

Illustration: 

E and F are partners in the firm, sharing profit and loss in the ratio 3:2. They admitted G into the firm as the new partner. They decided to share the future profit and loss sharing ratio to be 2:2:1. G brings in ₹ 75,000 as capital and is unable to bring in his full share of goodwill. He brings in ₹8,500 out of his share of ₹13,500 in cash. Goodwill already appears in the balance sheet of the firm is ₹9,000. Pass necessary journal entry on the admission of P.

Solution:

Workings:

1. Calculation of sacrificing ratio:

B. When goodwill appears in the old balance sheet and the incoming partner is unable to bring his share of premium for goodwill in cash:

(i) Writing off Existing Goodwill in the Balance sheet:

Journal Entry:

(ii) When the new partner does not bring his share of goodwill in cash:

Journal Entry:

Illustration: 

Sonam and Shweta are partners in the firm, sharing profit and loss in the ratio 1:1. They admitted Sunita in the firm as the new partner for 1/6th share in the firm’s profit and loss sharing ratio. Sunita brings in ₹ 1,26,000 as capital and is unable to bring in his share of goodwill, which is ₹31,200 in cash. Goodwill already appears in the balance sheet of the firm is ₹18,600. Pass necessary journal entry on the admission of Sunita.

Solution:

Working Notes:

1. Calculation of new ratio and sacrificing ratio:

Let, the total profit = 1

Share of Sonam and Shweta = 

= ( this will be shared among Sonam and Shweta in a 1:1 ratio)

Sonam’s share =  

= 

Shweta’s share = 

=  

Sonam and Shweta share =  

What is Goodwill?

Goodwill is an intangible asset that is either self-generated or purchased. It is the value of benefits that a business has because of the factors that help in increasing its profitability, say its location, favourable contracts, access to supplies and customer loyalty, etc. Goodwill is the reputation earned by the business through hard work, honesty and quality, and satisfactory services to customers. The efforts and hard work done by the existing partners frame the goodwill of the firm.

At the time of admission, the new partner is required to bring his share of goodwill to the firm. Hence, at the time of admission of a partner, goodwill is valued as per agreement among the partners. New partner compensates the old partner for acquiring his/her share of profit in the firm. 

New Partner’s Share of Goodwill = Value of Goodwill on the date of admission x New partner’s share in the firm

Goodwill is adjusted by taking the following steps:

Step 1: Calculate the Sacrificing ratio of the old partners.

Sacrificing Ratio = Old Ratio – New Ratio

Step 2: Calculate the goodwill of the firm or what is stated in the question.

Step 3: Calculate the share of goodwill of the new partner.