Question 8: Explain the procedure for the treatment of goodwill in the books of a partnership firm.

Procedure for Treatment of Goodwill:

1. Valuation of Goodwill:

The first step in the treatment of goodwill is to determine its value. Goodwill can be valued by various methods like the average profit method, super profit method, capitalization method, etc. The value of goodwill is recorded in the books of the firm.

2. Distribution of Goodwill:

Once the value of goodwill is determined, it needs to be distributed among the partners. The partners' share in goodwill can be based on their profit-sharing ratio or a mutually agreed ratio. The amount of goodwill distributed to each partner is credited to their respective capital accounts.

3. Treatment of Residual Goodwill:

If the value of goodwill is not fully distributed among the partners, the remaining amount is called residual goodwill. Residual goodwill is shown in the balance sheet as an asset of the firm.

4. Amortization of Goodwill:

Goodwill is an intangible asset and, therefore, needs to be amortized over a period of time. The period of amortization is decided by the partners and is generally based on the expected life of the goodwill. The amount of amortization is debited to the profit and loss account and credited to the goodwill account.

5. Revaluation of Goodwill:

If there is any change in the value of goodwill due to any reason, it needs to be revalued. The revaluation can either result in an increase or decrease in the value of goodwill. The adjusted value of goodwill is recorded in the books of the firm.

Conclusion:

The treatment of goodwill in the books of a partnership firm involves the valuation of goodwill, distribution of goodwill among the partners, treatment of residual goodwill, amortization of goodwill, and revaluation of goodwill. Proper accounting of goodwill is essential for the smooth functioning of the partnership firm.