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Page 1 Treatment of Goodwill in Partnership Accounts CPT Section A Fundamentals of Accountancy Chapter 8 Unit 2 – Part 2 CA. Ajay Lunawat Page 2 Treatment of Goodwill in Partnership Accounts CPT Section A Fundamentals of Accountancy Chapter 8 Unit 2 – Part 2 CA. Ajay Lunawat Learning objectives Need for valuation of Goodwill Valuation of Goodwill in case of admission of partner Accounting treatment of goodwill in case of • admission of a new partner • change in profit sharing ratio • retirement or death of a partner Page 3 Treatment of Goodwill in Partnership Accounts CPT Section A Fundamentals of Accountancy Chapter 8 Unit 2 – Part 2 CA. Ajay Lunawat Learning objectives Need for valuation of Goodwill Valuation of Goodwill in case of admission of partner Accounting treatment of goodwill in case of • admission of a new partner • change in profit sharing ratio • retirement or death of a partner Need for valuation of Goodwill Whenever there is any change in the existing relationship of the partners inter se, some partners have to sacrifice their future profit and some others would gain Gaining Partner Should compensate Sacrificing Partner Page 4 Treatment of Goodwill in Partnership Accounts CPT Section A Fundamentals of Accountancy Chapter 8 Unit 2 – Part 2 CA. Ajay Lunawat Learning objectives Need for valuation of Goodwill Valuation of Goodwill in case of admission of partner Accounting treatment of goodwill in case of • admission of a new partner • change in profit sharing ratio • retirement or death of a partner Need for valuation of Goodwill Whenever there is any change in the existing relationship of the partners inter se, some partners have to sacrifice their future profit and some others would gain Gaining Partner Should compensate Sacrificing Partner Valuation of Goodwill in case of admission of partner • When a new partner is admitted into a partnership, certain adjustments in accounts become necessary New partner will acquire a share in the profits The old partners will stand to lose Page 5 Treatment of Goodwill in Partnership Accounts CPT Section A Fundamentals of Accountancy Chapter 8 Unit 2 – Part 2 CA. Ajay Lunawat Learning objectives Need for valuation of Goodwill Valuation of Goodwill in case of admission of partner Accounting treatment of goodwill in case of • admission of a new partner • change in profit sharing ratio • retirement or death of a partner Need for valuation of Goodwill Whenever there is any change in the existing relationship of the partners inter se, some partners have to sacrifice their future profit and some others would gain Gaining Partner Should compensate Sacrificing Partner Valuation of Goodwill in case of admission of partner • When a new partner is admitted into a partnership, certain adjustments in accounts become necessary New partner will acquire a share in the profits The old partners will stand to lose Example of admission If their profits are Rs. 20,000 A will get Rs. 12,000 B will get Rs. 8,000 A and B are partners sharing profits in the ratio of 3:2Read More
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FAQs on PPT : Treatment of goodwill in Partnership Accounts - 2 - Accountancy Class 12 - Commerce
| 1. What is goodwill in partnership accounts? |  |
Ans. Goodwill in partnership accounts refers to the intangible asset that arises when a partnership firm has a reputation, customer base, brand value, or any other unique advantage that gives it a competitive edge in the market. It represents the value of the firm's positive reputation and its ability to generate higher profits compared to its competitors.
| 2. How is goodwill treated in partnership accounts? | |
Ans. Goodwill is recorded as an asset in the partnership's balance sheet. It is initially valued based on either the agreed amount between partners or calculated using a specific formula. The value of goodwill is then distributed among the partners' capital accounts in their profit and loss sharing ratio. This distribution allows the partners to share in the benefits of the firm's goodwill.
| 3. Can goodwill be sold or transferred in a partnership? | |
Ans. Yes, goodwill can be sold or transferred in a partnership. If a partner decides to leave the partnership, the remaining partners can purchase the departing partner's share of the goodwill based on its agreed value. Similarly, if a new partner joins the partnership, they may be required to contribute capital equivalent to their share of the existing goodwill.
| 4. How is the value of goodwill determined in partnership accounts? | |
Ans. The value of goodwill in partnership accounts can be determined through various methods such as the average profits method, super profits method, capitalization method, or the discounted future earnings method. These methods consider factors like historical profits, future earnings potential, industry standards, and market conditions to arrive at a reasonable value for goodwill.
| 5. What are the tax implications of goodwill in partnership accounts? | |
Ans. The tax treatment of goodwill in partnership accounts varies depending on the jurisdiction and tax laws. In some countries, goodwill may be subject to capital gains tax when sold or transferred. However, in certain situations, tax laws may allow for the amortization of goodwill over a certain period, reducing the tax burden. It is advisable to consult with a tax professional or accountant to understand the specific tax implications of goodwill in a partnership.
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