Study Material & Notes for the Chapter 6
Partnership - Retirement of Partner
III. VALUATION AND ADJUSTMENT OF GOODWILL
A. Accounting Treatment of Goodwill
- The retiring partner is entitled to his/her share of goodwill at the time of retirement because the goodwill of the firm has been earned with the efforts of all the existing partners including the retiring partner.
- Hence, at the time of retirement of a partner, goodwill is valued as per agreement among the partners.
- The retiring partner is compensated for his/her share of goodwill by the continuing partners (who have gained due to acquisition of share of profit from the retiring/deceased partner) in their gaining ratio.
- The accounting treatment for goodwill in such a situation depends upon whether or, not goodwill already appears in the books of the firm.
- Therefore, in case of retirement of a partner, the goodwill is adjusted through partner’s capital accounts. The retiring partner’s capital account is credited with. his/her share of goodwill and remaining partner’s capital account is debited in their gaining ratio.
B. When Goodwill is already appearing in the books
- As per Accounting Standard-26 (AS-26), goodwill can be recorded/debited in the books only when some consideration in money or money’s worth has been paid for it.
- Thus only purchased goodwill should be recorded in the firm’s books
- If at the time of retirement of a partner, goodwill is appearing in the Balance sheet of a firm, it would be desirable to close the Goodwill Account
C. Goodwill is not appearing in books and computed-Known Goodwill
Step-1 Firm’s Goodwill = Its given in the question or computed as per valuation methods
Step-2 Goodwill Share of the Retiring Partner = Firm’s Goodwill X Retiring Partner’s share
Step-3 Goodwill Share of the Remaining Partner = Goodwill share of the Retiring Partner X Gaining Ratio
The goodwill is adjusted through partner’s capital accounts. The retiring partner’s capital account is credited with. his/her share of goodwill and remaining partner’s capital account is debited in their gaining ratio.
D. Hidden Goodwill
If the firm has agreed to settle the retiring or deceased partner’s account by paying him a lump sum amount, then the amount paid to him in excess of what is due to him, based on the balance in his capital account after making necessary adjustments in respect of accumulated profits and losses and revaluation of assets and liabilities, etc., shall be treated as his share of goodwill (known as hidden goodwill).
Hidden Goodwill = Total Lumpsum payment to the Retiring partner – Retiring Partner’s adjusted capital balance