Who's willing to help with ' Goodwill'??

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT student discussion
The December exams are just around the corner and i am currently reviewing some past papers.
Generally the paper is okay although i am a little confused with Goodwill and Partership accounts..

Anybody in the same situation who can help??

Thanks in advance.. :lol:

Comments

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Who's willing to help with ' Goodwill'??

    Can you be more specific with your queries on goodwill?
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Who's willing to help with ' Goodwill'??

    Check the June 06 paper in section 2 and you will find one question based on Goodwill. The financial year ends on 30 April 2006.

    Initially they shared profits equally but when Pat joined the ratio changed.

    As soon as Pat joined the partnership the entry to introduce the Goodwill made was credit goodwill introduced and debit the elimination in the new ratio. Can u tell why this is so? Is interest on capital then found on the balance??

    What else can u tell me about goodwill?? Any useful info? :-o
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Who's willing to help with ' Goodwill'??

    Goodwill is defined as:

    an intangible asset valued according to the advantage or reputation a business has acquired (over and above its tangible assets)

    In one of my mock papers i got asked to define the two types of goodwill:
    -Inherent goodwill: Goodwill accumulated on reputation location etc
    -Purchased goodwill: Goodwill achieved on the difference between purchases and assets.

    It is difficult to attribute a monetary value to goodwill, but like in the June 06 paper, to eliminate it you would:

    Dr Partners Capital A/C
    Cr Goodwill

    With necessary proportions. This is simply the new partner buying out what goodwill was accumulated. I havent explained it very well :oops:

    You think it will come up again?
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Who's willing to help with ' Goodwill'??

    Goodwill is an intangible asset. It is based primarily on the relationship between a business and the wider community. It is a financial estimate of how much the business is worth above the value of its tangible assets- stock, machinery, and so on.

    Capital is a liability. It is a measure of what the business owes its owners- how much the partners have invested in it. When a business is founded, this capital is usually introduced as cash, but could equally be a vehicle, stock or even a factory. While the business trades, the owners are generating goodwill from the business community. In this way, the double-entry is completed: the asset of Goodwill is balanced by the liability of Capital.

    Usually a new partner will introduce capital in some other form. In exam questions it is almost certain to be cash.

    When a new partner is introduced, Goodwill is divided between the old partners in their profit-share ratio:
    Dr Goodwill
    Cr Capital - Partner A
    Cr Capital - Partner B

    Then, it is divided between the new partners in the new profit share ratio:
    Cr Goodwill
    Dr Capital - Partner A
    Dr Capital - Partner B
    Dr Capital - Partner C

    What should happen as a result is that the Goodwill account will now have a zero balance, Partners A and B will have a greater credit balance on their Capital account, and partner C will have a lower credit balance.

    eg
    Capital accounts - partner A £60, partner B £60
    Goodwill has been valued at £100,
    old profit share A 50%, B 50%
    Partner C introduces £30 capital
    New profit share 40% A, 40% B, 20% C

    Solution:
    (T-accounts don't work well on the forum. Try sketching these out on a sheet of paper: you need 4 accounts:
    Goodwill (no opening balance),
    Capital Partner A (opening balance £60 CREDIT),
    Capital Parther B (opening balance £60 CREDIT),
    Capital Parnter C (opening balance £30 CREDIT)

    DR Goodwill £100
    CR Capital Partner A £50
    CR Capital Partner B £50

    CR Goodwill £100
    DR Capital Partner A £40
    DR Capital Partner B £40
    DR Capital Partner C £20

    now, if you balance these you should have
    Goodwill £0
    Capital Partner A £70
    Capital Partner B £70
    Capital Partner C £10

    Hope this helps
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Who's willing to help with ' Goodwill'??

    in addition if u still don't understand why dr,cr in goodwill a/c.simple thing but might help.
    goodwill a/c is opened temporary for porpose of spliting it between partners.
    dr-goodwill goes into a/c
    cr-it goes out.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Who's willing to help with ' Goodwill'??

    Thanks for all your help!! :lol:

    I found everything useful. All i need now is some practice.

    Where can i get some free accounting information and questions regarding the latter subject apart from the aat site(i have viewed all the papers)??

    Thanks again! :wink:

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