Theory question 104
Partnership Admission, Retirement and Dissolution4. (a) What is goodwill? (b) State four instances in which goodwill is valued and recorded in the books of a partnership. (c) Describe the accounting entries made in partnership books when: (i) goodwill is created on admission of a new partner (ii) goodwill is written off from the books.
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(a) Goodwill is the value of a business above its net assets, arising from reputation, customers, location and so on.
(b) Any four: admission of a new partner; retirement of a partner; death of a partner; change in profit-sharing ratio; sale of the business or conversion to a company; amalgamation.
(c)(i) Debit goodwill account; credit the old partners' capital accounts in their old profit-sharing ratio.
(ii) Debit the partners' capital accounts in the new profit-sharing ratio; credit goodwill account.
Goodwill created goes to the old partners; writing it off is borne by the new partnership.