There can be different situations for accounting for Goodwill :
- Where the goodwill is paid privately
- Where the new partner brings his share of Goodwill
- In Cash
- In the form of any asset other than cash
- Where the new partner does not bring his share of Goodwill
Below we will discuss accounting entries for each of the above cases.
Where the goodwill is paid privately
Normally , first the new partner will pay Goodwill brought in by him to the firm and then firm will pay each old partners share to them.
But if Goodwill is paid privately then it means that the new partner has paid the goodwill to the old partners directly and not to firm. Since we are passing entries in the books of accounts of the partnership firm so no accounting entry will be passed in this case.
Where the new partner brings his share of Goodwill in cash/other assets
- Cash/Bank A/c Dr.. (with the amount brought by new partner)
- To Premium for Goodwill A/c
- Premium for Goodwill A/c Dr..
- To Old (only sacrificing) Partners Capital/Current A/c (each partner share of goodwill in sacrificing ratio)
If the new partner has brought any other assets instead of cash then the respective asset/s a/c will get debited. This is called Goodwill brought in kind. First journal entry as above will change and the second journal entry will be same.
- Machinery A/c Dr..
- Building A/c Dr..
- Vehicle A/c Dr..
- Computer A/c Dr..
- Any Other asset A/c Dr..
- To Premium for Goodwill A/c
Where the new partner does not bring his share of Goodwill
- New Partner Current A/c Dr.. (with his share of goodwill)
- To Old partners (only sacrificing) Capital/Current A/c (each partner share of goodwill in sacrificing ratio)
It is possible that the new partner only brings part of his share of goodwill in cash. In this case, the journal entry will be a combination of both the second and third methods.
- Cash A/c Dr.. (with the amount brought in cash)
- New partner Current A/c Dr.. (with the amount of share not brought in)
- To Old partners (only sacrificing) Capital/Current A/c (each partner share of goodwill in sacrificing ratio)
It is to be noted that if the new partner does not bring his share of goodwill, then his current account will get debited, and not the capital account.
For old partners, the capital account or current account will get credited depending upon whether the fixed or fluctuating method of accounting for partner capital accounts is followed.
- If fixed method - Credit Partner Current A/c
- If fluctuating method - Credit Partner Capital A/c
If old partners withdraw their share of goodwill
If old partners withdraw their share of goodwill, then the normal journal entry for drawings will be passed.
- Partners Capital/Current A/c Dr.. (with the amount of drawings)
- To Cash/Bank A/c
A typical Case
It is possible that at the time of admission of new partner, the old ratio of old partners is also changed in a manner that few partners may gain instead of sacrifice. In such cases journal entries to be passed as discussed in topic 'Change in Profit Sharing Ratio'. Gaining partners capital/current A/c gets debited instead of credited in the above entries.