Accounts Preperation 2 - Goodwill accounts

HeatherS19

can someone help me with goodwill accounts because i cannot rack my brain around it!

thanks

crispy

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