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Accounts Preperation 2 - Goodwill accounts

HeatherS19HeatherS19 Just JoinedRegistered Posts: 6
can someone help me with goodwill accounts because i cannot rack my brain around it!

thanks

Comments

  • crispycrispy Trusted Regular SouthamptonRegistered Posts: 456
    Hello,

    Not done this for a while but from memory this arises when a new member joins into a partership. You would 1) Create Goodwill in the old partnerhip agreement 2) Then eliminate the Goodwill under the new partnership agreement. Simple example: -

    A & B have a business established 5 years and profit share equally
    C joins - the new equal profit share is now between 3

    Because the business has been established now for 5 years, has made good profits and wide customer base goodwill has been valued at £ 100,000

    Create Goodwill in original agreement:
    Dr Goodwill £ 100,00
    Cr A's Account £ 50,000
    Cr B's Account £ 50,000

    The eliminate in new agreement:
    Dr A's Account £ 33,333
    Dr B's Account £ 33,333
    Dr C's Account £ 33,333
    Cr Goodwill £ 100,000

    The goodwill is created in order to reward A & B for their established business and so that C does not get a 'cheap bargain' by immediately entering the business and enjoying the same as A and B.

    This may / may not of helped :P
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