HELP!!! Goodwill!

Re:HELP!!! Goodwill!

I always remember old profit share ratio (credit side) and new profit share ratio (debit side).
You share the goodwill to the current partners by there usually profit share (credit side), then share it by all partners by there new profit share (debit side) it should balance off. Hope this helps!!!! :?

Re:HELP!!! Goodwill!

Hi Swanzbabe

I'll try and explain Goodwill to you. Goodwill is basically an amount of money temporarily added to the value of a business when a new partner leaves or enters the business. It can also be used if the business is sold. The Goodwill takes into account things like the reputation of the business and customers.

Put it like this, if you started a partnership with a friend and you were in that business for a few years and in that time the business earned a large profit each year and had a good reputation with lots of customers then you decided for whatever reason to leave the business it would be crazy to think your only entitled to take your capital out of the business. You'd want extra money to cover all of the benefits that the remaining partner would be getting. This extra money is the Goodwill.

It would be up to the partners to decide how to work out the amount of goodwill.

This is an example of how it would work in double entry:

Bob (partner that's staying)
Todd (partner that's leaving)

If the accounting period is Jan to Dec and Todd decides to leave at the end of August they would need to decide on an amount of Goodwill. Lets say £10,000. Lets say their profit sharing ratio is 60% Bob and 40% Todd because Todd put less capital into the business at the start and doesn't have such an active role in the business. You'd just have to debit the GW account £10,000 and credit Bob's current account £6,000 (60% of 10,000) and Todd's current account £4,000 (40% of 10,000). Then as the new profit sharing ratio would be 100% for Bob you would debit Bob's current account the full £10,000 and credit the GW account £10,000. At the end of this the GW account will balance as it always should and Bob's account would be down £4,000 (£4,000 on the debit side of his account) and Todd's account would be up £4,000 (£4,000 on the credit side of his account). This £4,000 is 40% of the £10,000 which is what Todd is entitled to from the profit sharing ratio.

By the way it doesn't make a difference what month Todd leaves the business. The figures would still be the same.

Hope this has helped rather than confused you more.

Re:HELP!!! Goodwill!

Hi im confused by goodwill. When you have to close down the good will account where do the figures get posted to the current account or the capital account.

aly

Re:HELP!!! Goodwill!

Thanks,
im feeling really stressed dont think i will pass tomorrows exam. after doing dec 05 past paper i didnt have a clue where to start been okay with the others.

Be glad when its all over resit in dec.

aly