Partnership Goodwill Notes1

Study Material & Notes for the Chapter 2

Partnership - Goodwill

I. GOODWILL - DEFINITION & FEATURES

A. Goodwill

Goodwill is the benefit and advantage of the good name, reputation, and connection of a business. It is the attractive force which brings in customers. It is one factor which distinguishes an old established business from a new business at its first start.

  • Good will = Good name or Reputation
  • Is an Intangible asset…cannot be seen or touched
  • Places an enterprise at an advantageous position due to efforts made in the past
  • Enterprise is able to earn higher profits without extra efforts
B. Factors affecting valuation of Goodwill
Table 3.1.B1
C. Need for valuation of Goodwill
  1. At the time of admission, retirement or death of a partner.
  2. Change in the profit-sharing ratio amongst the existing partners.
  3. When the partnership firm is sold out.
  4. When the firms amalgamate (merge)
  5. When the firm is converted into Company
D. Classification of Goodwill
1) Purchased (Acquired) Goodwill
  • It is the goodwill that is acquired by a business after paying consideration in cash or in kind.
  • For example, consideration paid Rs. 10 lacs for purchase of a business wherein Assets acquired valued Rs. 20 lacs & Liabilities taken over for Rs. 12 lacs. Extra Rs. 2 Lacs is paid here for Goodwill.
2) Self Generated Goodwill
  • It is internally generated or hard-earned goodwill which arises due to continued hard work of the organization, its better-quality products and better customer services.
  • Self-generated goodwill is not recorded in the books because no consideration in money or money’s worth is paid for it.

Important to Note: As per AS-26 Goodwill should not be recorded in books unless it is purchased