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ACCOUNTANCY – XII          
 
TREATMENT OF GOODWILL 
CASE1: When old partner retires from the firm 
Step 1: find N.R. 
Step 2: find Gaining ratio = new ratio – old ratio 
Step 3: find retiring partners share in the firms goodwill (firms goodwill X retiring partner share) 
* if firms goodwill is not given than find the firms goodwill 
Step 4: pass journal entries 
Compulsory Journal entries 
 Particulars L.f. Amt 
DR. 
Amt. Cr. 
For goodwill 
                                        
In G.R. 
Remaining partner’s capital A/c                                                       dr. 
  To retiring partners A/c 
(in gaining ratio and only the share of the retiring partner ) 
   
Optional entries 
Old goodwill appears in the balance 
sheet/Old goodwill is to be written off   
                                        In O.R 
Old Partners capital A/c(A’s Capital A/c)            Dr. 
Old Partners capital A/c(B’s Capital A/c)            Dr. 
Old Partners capital A/c(C’s Capital A/c)            Dr. 
    To Goodwill A/c  
   
 
 
Profits of the new firm is given it will 
distributed In new ratio(after the 
admission of new partner) In N.R 
P & L Appropriation A/c                                     Dr. 
   To New Partners capital A/c(A’s Capital A/c) 
   To New Partners capital A/c(B’s Capital A/c) 
  
 
 
 
 
 
 
 
If losses of the new firm is given it will 
distributed In new ratio(after the 
admission of new partner) In N.R 
New Partners capital A/c(A’s Capital A/c)        Dr. 
New Partners capital A/c(B’s Capital A/c)        Dr. 
      To P & L A/c 
 
   
 
 
 
  
Page 2


ACCOUNTANCY – XII          
 
TREATMENT OF GOODWILL 
CASE1: When old partner retires from the firm 
Step 1: find N.R. 
Step 2: find Gaining ratio = new ratio – old ratio 
Step 3: find retiring partners share in the firms goodwill (firms goodwill X retiring partner share) 
* if firms goodwill is not given than find the firms goodwill 
Step 4: pass journal entries 
Compulsory Journal entries 
 Particulars L.f. Amt 
DR. 
Amt. Cr. 
For goodwill 
                                        
In G.R. 
Remaining partner’s capital A/c                                                       dr. 
  To retiring partners A/c 
(in gaining ratio and only the share of the retiring partner ) 
   
Optional entries 
Old goodwill appears in the balance 
sheet/Old goodwill is to be written off   
                                        In O.R 
Old Partners capital A/c(A’s Capital A/c)            Dr. 
Old Partners capital A/c(B’s Capital A/c)            Dr. 
Old Partners capital A/c(C’s Capital A/c)            Dr. 
    To Goodwill A/c  
   
 
 
Profits of the new firm is given it will 
distributed In new ratio(after the 
admission of new partner) In N.R 
P & L Appropriation A/c                                     Dr. 
   To New Partners capital A/c(A’s Capital A/c) 
   To New Partners capital A/c(B’s Capital A/c) 
  
 
 
 
 
 
 
 
If losses of the new firm is given it will 
distributed In new ratio(after the 
admission of new partner) In N.R 
New Partners capital A/c(A’s Capital A/c)        Dr. 
New Partners capital A/c(B’s Capital A/c)        Dr. 
      To P & L A/c 
 
   
 
 
 
  
ACCOUNTANCY – XII          
 
Case 2.  Hidden Goodwill 
P, Q and R are partners in a firm sharing profits in the ratio of 3:2:1. R retires, and the balance in his capital account 
after making necessary adjustments on account of reserves, revolution of assets and liabilities works-out to be Rs. 
60,000, P and Q agreed to pay him Rs. 75,000 in full settlement of his claim. It implies that Rs. 15,000 is R’s share of 
goodwill of the firm.  
 Particulars L.f. Amt 
DR. 
Amt. Cr. 
 P’s Capital A/c                                                                                                              
Q’s Capital A/c                                                                                                                     
         To R’s Capital A/c    
   
 9000 
6000 
 
 
15000 
It implies that Rs. 15,000 is R’s share of goodwill of the firm 
 
 
 
  
Page 3


ACCOUNTANCY – XII          
 
TREATMENT OF GOODWILL 
CASE1: When old partner retires from the firm 
Step 1: find N.R. 
Step 2: find Gaining ratio = new ratio – old ratio 
Step 3: find retiring partners share in the firms goodwill (firms goodwill X retiring partner share) 
* if firms goodwill is not given than find the firms goodwill 
Step 4: pass journal entries 
Compulsory Journal entries 
 Particulars L.f. Amt 
DR. 
Amt. Cr. 
For goodwill 
                                        
In G.R. 
Remaining partner’s capital A/c                                                       dr. 
  To retiring partners A/c 
(in gaining ratio and only the share of the retiring partner ) 
   
Optional entries 
Old goodwill appears in the balance 
sheet/Old goodwill is to be written off   
                                        In O.R 
Old Partners capital A/c(A’s Capital A/c)            Dr. 
Old Partners capital A/c(B’s Capital A/c)            Dr. 
Old Partners capital A/c(C’s Capital A/c)            Dr. 
    To Goodwill A/c  
   
 
 
Profits of the new firm is given it will 
distributed In new ratio(after the 
admission of new partner) In N.R 
P & L Appropriation A/c                                     Dr. 
   To New Partners capital A/c(A’s Capital A/c) 
   To New Partners capital A/c(B’s Capital A/c) 
  
 
 
 
 
 
 
 
If losses of the new firm is given it will 
distributed In new ratio(after the 
admission of new partner) In N.R 
New Partners capital A/c(A’s Capital A/c)        Dr. 
New Partners capital A/c(B’s Capital A/c)        Dr. 
      To P & L A/c 
 
   
 
 
 
  
ACCOUNTANCY – XII          
 
Case 2.  Hidden Goodwill 
P, Q and R are partners in a firm sharing profits in the ratio of 3:2:1. R retires, and the balance in his capital account 
after making necessary adjustments on account of reserves, revolution of assets and liabilities works-out to be Rs. 
60,000, P and Q agreed to pay him Rs. 75,000 in full settlement of his claim. It implies that Rs. 15,000 is R’s share of 
goodwill of the firm.  
 Particulars L.f. Amt 
DR. 
Amt. Cr. 
 P’s Capital A/c                                                                                                              
Q’s Capital A/c                                                                                                                     
         To R’s Capital A/c    
   
 9000 
6000 
 
 
15000 
It implies that Rs. 15,000 is R’s share of goodwill of the firm 
 
 
 
  
ACCOUNTANCY – XII          
 
CASE3 : When old partner retires from the firm and a new partner starts gaining  
Step 1: find N.R. 
Step 2: find Gaining ratio = new ratio – old ratio 
Step 3: find retiring partners share in the firms goodwill (firms goodwill X retiring partner share) 
Step 4: multiply the sacrificer share with the firms goodwill (firms goodwill X sacrificer share {negative wala}) 
* if firms goodwill is not given than find the firms goodwill 
Step 4: pass journal entries 
 
 Particulars L.f. Amt 
DR. 
Amt. Cr. 
For goodwill 
                                        
In G.R. 
Remaining partners capital A/c                                                        dr. 
Gainer’s a/c                                                                                         dr. 
  To Sacrificer’s capital a/c 
  To Retiring partners A/c 
(in gaining ratio and only the share of the retiring partner ) 
   
 
     
 
 
  
Page 4


ACCOUNTANCY – XII          
 
TREATMENT OF GOODWILL 
CASE1: When old partner retires from the firm 
Step 1: find N.R. 
Step 2: find Gaining ratio = new ratio – old ratio 
Step 3: find retiring partners share in the firms goodwill (firms goodwill X retiring partner share) 
* if firms goodwill is not given than find the firms goodwill 
Step 4: pass journal entries 
Compulsory Journal entries 
 Particulars L.f. Amt 
DR. 
Amt. Cr. 
For goodwill 
                                        
In G.R. 
Remaining partner’s capital A/c                                                       dr. 
  To retiring partners A/c 
(in gaining ratio and only the share of the retiring partner ) 
   
Optional entries 
Old goodwill appears in the balance 
sheet/Old goodwill is to be written off   
                                        In O.R 
Old Partners capital A/c(A’s Capital A/c)            Dr. 
Old Partners capital A/c(B’s Capital A/c)            Dr. 
Old Partners capital A/c(C’s Capital A/c)            Dr. 
    To Goodwill A/c  
   
 
 
Profits of the new firm is given it will 
distributed In new ratio(after the 
admission of new partner) In N.R 
P & L Appropriation A/c                                     Dr. 
   To New Partners capital A/c(A’s Capital A/c) 
   To New Partners capital A/c(B’s Capital A/c) 
  
 
 
 
 
 
 
 
If losses of the new firm is given it will 
distributed In new ratio(after the 
admission of new partner) In N.R 
New Partners capital A/c(A’s Capital A/c)        Dr. 
New Partners capital A/c(B’s Capital A/c)        Dr. 
      To P & L A/c 
 
   
 
 
 
  
ACCOUNTANCY – XII          
 
Case 2.  Hidden Goodwill 
P, Q and R are partners in a firm sharing profits in the ratio of 3:2:1. R retires, and the balance in his capital account 
after making necessary adjustments on account of reserves, revolution of assets and liabilities works-out to be Rs. 
60,000, P and Q agreed to pay him Rs. 75,000 in full settlement of his claim. It implies that Rs. 15,000 is R’s share of 
goodwill of the firm.  
 Particulars L.f. Amt 
DR. 
Amt. Cr. 
 P’s Capital A/c                                                                                                              
Q’s Capital A/c                                                                                                                     
         To R’s Capital A/c    
   
 9000 
6000 
 
 
15000 
It implies that Rs. 15,000 is R’s share of goodwill of the firm 
 
 
 
  
ACCOUNTANCY – XII          
 
CASE3 : When old partner retires from the firm and a new partner starts gaining  
Step 1: find N.R. 
Step 2: find Gaining ratio = new ratio – old ratio 
Step 3: find retiring partners share in the firms goodwill (firms goodwill X retiring partner share) 
Step 4: multiply the sacrificer share with the firms goodwill (firms goodwill X sacrificer share {negative wala}) 
* if firms goodwill is not given than find the firms goodwill 
Step 4: pass journal entries 
 
 Particulars L.f. Amt 
DR. 
Amt. Cr. 
For goodwill 
                                        
In G.R. 
Remaining partners capital A/c                                                        dr. 
Gainer’s a/c                                                                                         dr. 
  To Sacrificer’s capital a/c 
  To Retiring partners A/c 
(in gaining ratio and only the share of the retiring partner ) 
   
 
     
 
 
  
ACCOUNTANCY – XII          
 
Disposal of Amount Due to Retiring Partner 
Case 1. No info. 
When retiring partner’s whole 
amount is treated as loan 
 
Retiring Partner’s Capital A/c                                     
             To Retiring Partner’s Loan A/c 
   
 
 
Case 2. When retiring partner is paid 
cash in full. 
Retiring Partner’s Capital A/c                                      
To Cash/Bank A/c 
   
 
 
Case 3. When retiring partner is 
partly paid in cash and the remaining 
amount treated 
as loan. 
Retiring Partner’s Capital A/c Dr.  (Total Amount 
due) 
To Cash/Bank A/c (Amount Paid) 
To Retiring Partner’s Loan A/c (Amount of Loan) 
   
? The balance of the retiring partner’s loan account is shown on the liabilities side of the Balance Sheet. 
? The amount paid to the retiring partner’s will be deducted from the balance of bank in the balance sheet 
and arrange a bank o.d if required (if balance comes in negative) 
 
 
Some special entries 
Transaction Particulars L.f. Amt 
DR. 
Amt. Cr. 
Assets are sold off at a loss 
(asset of Rs.12k sold at Rs.10k ) 
Revaluation a/c     (loss) 
   To assets a/c 
 2 k   
2k  
Bank a/c 
  To assets 
 10k  
10k 
Assets are sold off at a profit 
(asset of Rs.10k sold at Rs.12k ) 
Assets a/c  
   To revaluation  
 2k  
2k 
Bank a/c 
  To assets 
 12k  
12k 
Assets are taken over by a 
partner at a loss (asset of 
Rs.12k taken by a partner 
Rs.10k ) 
Revaluation a/c     (loss) 
   To assets a/c 
 2 k   
2k  
Partner’s Capital A/c 
   To Assets a/c 
 10k  
10k 
Assets are taken over by a 
partner at a gain (asset of Rs.10 
k taken by a partner Rs.12k ) 
Assets a/c  
   To revaluation  
 2k  
2k 
Partner’s Capital A/c 
   To Assets a/c 
 12k  
12k 
Assets are sold at par (10k = 
10k) 
Bank a/c 
   To assets  
(money received from sale of assets is added to 
bank a/c) 
 10k  
10k 
Assets are taken over by a 
partner at par (10k = 10k) 
Partner’s Capital A/c  
   To assets 
(partner’s capital a/c will be debited) 
 10k  
10k 
If any Asset is not taken by the 
new firm 
Assets a/c  
 To Old Partners capital A/c  
(will be distributed in the partners in old ratio) 
   
Liabilities are paid off  Liabilities a/c dr.  
   To bank a/c 
   
Liabilities are paid off at a 
discount (creditors of 10k 
settled at Rs.9k ) 
Liabilities a/c dr.  
      To revaluation a/c 
 1k  
1k 
Liabilities a/c dr.  
      To bank a/c 
 9k  
9k 
Liabilities are paid off  more 
then the book value (creditors 
of 10k settled at Rs.11k ) 
Revaluation a/c dr. 
  To Liabilities a/c 
 1k  
1k 
Liabilities a/c dr.  
      To bank a/c 
 11k  
11k 
Page 5


ACCOUNTANCY – XII          
 
TREATMENT OF GOODWILL 
CASE1: When old partner retires from the firm 
Step 1: find N.R. 
Step 2: find Gaining ratio = new ratio – old ratio 
Step 3: find retiring partners share in the firms goodwill (firms goodwill X retiring partner share) 
* if firms goodwill is not given than find the firms goodwill 
Step 4: pass journal entries 
Compulsory Journal entries 
 Particulars L.f. Amt 
DR. 
Amt. Cr. 
For goodwill 
                                        
In G.R. 
Remaining partner’s capital A/c                                                       dr. 
  To retiring partners A/c 
(in gaining ratio and only the share of the retiring partner ) 
   
Optional entries 
Old goodwill appears in the balance 
sheet/Old goodwill is to be written off   
                                        In O.R 
Old Partners capital A/c(A’s Capital A/c)            Dr. 
Old Partners capital A/c(B’s Capital A/c)            Dr. 
Old Partners capital A/c(C’s Capital A/c)            Dr. 
    To Goodwill A/c  
   
 
 
Profits of the new firm is given it will 
distributed In new ratio(after the 
admission of new partner) In N.R 
P & L Appropriation A/c                                     Dr. 
   To New Partners capital A/c(A’s Capital A/c) 
   To New Partners capital A/c(B’s Capital A/c) 
  
 
 
 
 
 
 
 
If losses of the new firm is given it will 
distributed In new ratio(after the 
admission of new partner) In N.R 
New Partners capital A/c(A’s Capital A/c)        Dr. 
New Partners capital A/c(B’s Capital A/c)        Dr. 
      To P & L A/c 
 
   
 
 
 
  
ACCOUNTANCY – XII          
 
Case 2.  Hidden Goodwill 
P, Q and R are partners in a firm sharing profits in the ratio of 3:2:1. R retires, and the balance in his capital account 
after making necessary adjustments on account of reserves, revolution of assets and liabilities works-out to be Rs. 
60,000, P and Q agreed to pay him Rs. 75,000 in full settlement of his claim. It implies that Rs. 15,000 is R’s share of 
goodwill of the firm.  
 Particulars L.f. Amt 
DR. 
Amt. Cr. 
 P’s Capital A/c                                                                                                              
Q’s Capital A/c                                                                                                                     
         To R’s Capital A/c    
   
 9000 
6000 
 
 
15000 
It implies that Rs. 15,000 is R’s share of goodwill of the firm 
 
 
 
  
ACCOUNTANCY – XII          
 
CASE3 : When old partner retires from the firm and a new partner starts gaining  
Step 1: find N.R. 
Step 2: find Gaining ratio = new ratio – old ratio 
Step 3: find retiring partners share in the firms goodwill (firms goodwill X retiring partner share) 
Step 4: multiply the sacrificer share with the firms goodwill (firms goodwill X sacrificer share {negative wala}) 
* if firms goodwill is not given than find the firms goodwill 
Step 4: pass journal entries 
 
 Particulars L.f. Amt 
DR. 
Amt. Cr. 
For goodwill 
                                        
In G.R. 
Remaining partners capital A/c                                                        dr. 
Gainer’s a/c                                                                                         dr. 
  To Sacrificer’s capital a/c 
  To Retiring partners A/c 
(in gaining ratio and only the share of the retiring partner ) 
   
 
     
 
 
  
ACCOUNTANCY – XII          
 
Disposal of Amount Due to Retiring Partner 
Case 1. No info. 
When retiring partner’s whole 
amount is treated as loan 
 
Retiring Partner’s Capital A/c                                     
             To Retiring Partner’s Loan A/c 
   
 
 
Case 2. When retiring partner is paid 
cash in full. 
Retiring Partner’s Capital A/c                                      
To Cash/Bank A/c 
   
 
 
Case 3. When retiring partner is 
partly paid in cash and the remaining 
amount treated 
as loan. 
Retiring Partner’s Capital A/c Dr.  (Total Amount 
due) 
To Cash/Bank A/c (Amount Paid) 
To Retiring Partner’s Loan A/c (Amount of Loan) 
   
? The balance of the retiring partner’s loan account is shown on the liabilities side of the Balance Sheet. 
? The amount paid to the retiring partner’s will be deducted from the balance of bank in the balance sheet 
and arrange a bank o.d if required (if balance comes in negative) 
 
 
Some special entries 
Transaction Particulars L.f. Amt 
DR. 
Amt. Cr. 
Assets are sold off at a loss 
(asset of Rs.12k sold at Rs.10k ) 
Revaluation a/c     (loss) 
   To assets a/c 
 2 k   
2k  
Bank a/c 
  To assets 
 10k  
10k 
Assets are sold off at a profit 
(asset of Rs.10k sold at Rs.12k ) 
Assets a/c  
   To revaluation  
 2k  
2k 
Bank a/c 
  To assets 
 12k  
12k 
Assets are taken over by a 
partner at a loss (asset of 
Rs.12k taken by a partner 
Rs.10k ) 
Revaluation a/c     (loss) 
   To assets a/c 
 2 k   
2k  
Partner’s Capital A/c 
   To Assets a/c 
 10k  
10k 
Assets are taken over by a 
partner at a gain (asset of Rs.10 
k taken by a partner Rs.12k ) 
Assets a/c  
   To revaluation  
 2k  
2k 
Partner’s Capital A/c 
   To Assets a/c 
 12k  
12k 
Assets are sold at par (10k = 
10k) 
Bank a/c 
   To assets  
(money received from sale of assets is added to 
bank a/c) 
 10k  
10k 
Assets are taken over by a 
partner at par (10k = 10k) 
Partner’s Capital A/c  
   To assets 
(partner’s capital a/c will be debited) 
 10k  
10k 
If any Asset is not taken by the 
new firm 
Assets a/c  
 To Old Partners capital A/c  
(will be distributed in the partners in old ratio) 
   
Liabilities are paid off  Liabilities a/c dr.  
   To bank a/c 
   
Liabilities are paid off at a 
discount (creditors of 10k 
settled at Rs.9k ) 
Liabilities a/c dr.  
      To revaluation a/c 
 1k  
1k 
Liabilities a/c dr.  
      To bank a/c 
 9k  
9k 
Liabilities are paid off  more 
then the book value (creditors 
of 10k settled at Rs.11k ) 
Revaluation a/c dr. 
  To Liabilities a/c 
 1k  
1k 
Liabilities a/c dr.  
      To bank a/c 
 11k  
11k 
ACCOUNTANCY – XII          
 
Liabilities are paid off by a 
partner  
Liabilities a/c dr.  
   To Partner’s Capital a/c 
 10k 
 
 
10 k 
If any liability  
is not taken by the new firm 
Liabilities a/c dr.  
 To Partner’s Capital a/c 
(will be distributed in partners in the old ratio) 
   
Decrease in the value of assets Revaluation a/c  
  To assets a/c 
   
Increase in the value of assets Assets a/c  
  To Revaluation a/c 
   
Increase in the value of 
liabilities 
Revaluation a/c  
  To liabilities a/c 
   
Decrease in the value of 
liabilities 
liabilities a/c 
 To Revaluation a/c 
   
Profit at the time of 
revaluation 
Revaluation a/c  
  To old partners capital a/c  
(in old ratio) 
   
Losses at the time of 
revaluation 
 Old Partners capital A/c 
  To Revaluation a/c   
(in old ratio) 
   
For bank loan Bank  
  To bank loan a/c 
(there is no entry for primary security and bank loan 
will be shown in the liabilities) 
   
Special cases    
When a bank loan is arranged for the payment of retiring partner    Bank a/c 
   To bank loan a/c 
Partner capital a/c  
   To bank a/c 
When retiring partner is paid off and through cheque and arrange a bank overdraft 
(bank o.d will be shown in the balance sheet liabilities side) 
 Partner capital a/c  
   To bank a/c 
When any assets is mortgaged for the repayment of retiring partners capital a/c 
 
(there is no special treatment for the assets which has been mortgaged ) 
 Bank a/c 
   To bank loan a/c 
Partner capital a/c  
   To bank a/c 
 
Revaluation of assets and liabilities (8 marks) 
Step  1  FIND N.R. 
Step 2  FIND G.R.= N.R.-O.R. 
Step 3     PASS ENTRIES  
 
GOODWILL RESERVES / LOSSES REVALUATION 
Remaining   
   To retiring partners 
(G.R.) 
Reserves a/c(LIABILITY)  
   To old partner’s capital a/c (O.R.) 
Revaluation a/c (profits) 
   To old partner’s capital a/c (O.R. 
) 
 Old partner’s capital a/c  (assets) 
  To LOSSES/P&L dr./GW         (O.R.) 
Old partner’s capital a/c (LOSSES) 
   To Revaluation a/c 
 
 
Step 4 revaluation a/c 
Particulars Rs. Particulars Rs. 
Losses   
                  A  
                
                 L  
 Gains  
              A  
             
               L  
 
 
Step 5 partner’s capital a/c (c retires) 
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FAQs on Treatment of Goodwill & Cases - Crash Course of Accountancy - Class 12 - Commerce

1. What is goodwill in the context of commerce?
Ans. Goodwill in commerce refers to the intangible asset that represents the reputation, value, and customer loyalty a company has built over time. It includes the brand name, customer base, positive associations, and other intangible factors that contribute to the overall value of the business.
2. How is goodwill treated in accounting?
Ans. Goodwill is treated as an intangible asset in accounting and is recorded on the balance sheet. It is typically created when a company acquires another business for a price higher than the fair value of its identifiable tangible and intangible assets. Goodwill is not amortized but is subject to impairment testing annually or whenever there is an indication of impairment.
3. What are the factors that can lead to impairment of goodwill?
Ans. There are several factors that can lead to the impairment of goodwill, including a decline in the market value of the company, negative changes in the industry or economy, loss of key customers or contracts, increased competition, regulatory changes, and poor financial performance. These factors can reduce the value of the intangible asset and require the company to recognize an impairment loss.
4. How is the impairment of goodwill recorded in the financial statements?
Ans. When an impairment of goodwill occurs, the company must record an impairment loss on its financial statements. The loss is calculated by comparing the carrying value of the goodwill to its recoverable amount, which is the higher of its fair value less costs to sell or its value in use. The impairment loss is recognized as an expense on the income statement and reduces the carrying value of the goodwill on the balance sheet.
5. Can goodwill be increased or improved over time?
Ans. Yes, goodwill can be increased or improved over time through various strategies. Building a strong brand, providing exceptional customer service, investing in marketing and advertising, maintaining positive relationships with stakeholders, and consistently delivering high-quality products or services can all contribute to enhancing goodwill. However, any increase in goodwill must be supported by tangible value creation and positive market perception.
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