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When we write off old goodwill of the firm and is distributed among old partners then also why the parters are debited even if it is their profit??
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When we write off old goodwill of the firm and is distributed among ol...
Why are partners debited when old goodwill of the firm is written off and distributed?
What is goodwill?
Goodwill is the intangible asset of the firm that arises due to the reputation, brand value, customer loyalty, and other factors that contribute to the firm's earning capacity.
Writing off old goodwill
When a firm writes off its old goodwill, it means that the value of the goodwill has decreased or become obsolete due to various factors. The amount of old goodwill is written off from the firm's balance sheet and distributed among the old partners.
Why are partners debited?
Even though the old goodwill is distributed among the partners as their profit, they are debited because of the following reasons:
- Accounting principles: According to the accounting principles, any distribution of profit or loss among the partners is recorded in the partner's capital account. When the old goodwill is written off and distributed, it is treated as a loss for the firm. Hence, the partners' capital account is debited with their share of the loss.
- Adjustment of capital: When the old goodwill is written off and distributed, the partners' capital accounts are adjusted accordingly. The partners who have a higher share in the old goodwill will have a higher debit balance in their capital account, and vice versa.
- Tax implications: When the old goodwill is written off, it is treated as a loss for the firm. The partners can claim a deduction for their share of the loss in their individual income tax return. Hence, the partners' capital account is debited with their share of the loss to reflect the tax implications.
Conclusion
In conclusion, partners are debited when old goodwill of the firm is written off and distributed among them because of the accounting principles, adjustment of capital, and tax implications. Although the old goodwill is distributed as their profit, it is treated as a loss for the firm and recorded in their capital account.
Community Answer
When we write off old goodwill of the firm and is distributed among ol...
the benefit of goodwill has been already taken by the old partners, therefore at the time of reconstitution we debit the old partners and goodwill is credited as it will no longer appear in the books of accounts
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When we write off old goodwill of the firm and is distributed among old partners then also why the parters are debited even if it is their profit??
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When we write off old goodwill of the firm and is distributed among old partners then also why the parters are debited even if it is their profit?? for Class 12 2024 is part of Class 12 preparation. The Question and answers have been prepared according to the Class 12 exam syllabus. Information about When we write off old goodwill of the firm and is distributed among old partners then also why the parters are debited even if it is their profit?? covers all topics & solutions for Class 12 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for When we write off old goodwill of the firm and is distributed among old partners then also why the parters are debited even if it is their profit?? .
When we write off old goodwill of the firm and is distributed among old partners then also why the parters are debited even if it is their profit?? for Class 12 2024 is part of Class 12 preparation. The Question and answers have been prepared according to the Class 12 exam syllabus. Information about When we write off old goodwill of the firm and is distributed among old partners then also why the parters are debited even if it is their profit?? covers all topics & solutions for Class 12 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for When we write off old goodwill of the firm and is distributed among old partners then also why the parters are debited even if it is their profit?? .
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