Goodwill entries

Goodwill entries

To retire a partner move their current account balance on to their capital account.<BR><BR>Then recognise goodwill by debiting goodwill account and crediting the partners capital accounts with the goodwill value in the current profit share ratio.<BR><BR>Total the retiring partners capital account, this is the total owed to them by the business.<BR><BR>Then debit his account with amount paid to him and credit bank.<BR><BR>(If there is not enough money in the bank you may need to debit the capital account and credit a creditors account as he becomes a creditor of the business.)<BR><BR>Then eliminate goodwill from the accounts by debiting to the existing partners in the new profit share ratio. (and credit goodwill)<BR><BR>Effectively the existing partners have been charged for the retiring partners goodwill.<BR><BR>When introducing a partner you record goodwill in the existing capital accounts in existing ratio (dr goodwill cr capital a/c's), then add new partners capital, then eliminate goodwill again in new profit share (cr goodwill dr capital a/c's).<BR><BR>Hope this helps!<BR>

Goodwill entries

Also bear in mind if there is a change in profit sharing ration (even with the same partners) then goodwill will have to be created and written off in much the same way as above (only if specifically asked to do so). The reason being is the partner that increases his Profit share is effectively paying the other partner or partners for that increase.<BR><BR>

Goodwill entries

Yep you've got it correct in one, I've never come across it before in any previous exam papers - I would assume as its much the same calculations as adding a new partner for example.<BR><BR>For extra clarification though this is kinda quoting from Osborne Clark Tuturial: (exuse typing errors in middle of practice exam :-) )<BR><BR>"Changes in Profit-Sharing Ratios<BR><BR>In may be necessary, from time-to-time, to change the partnership profit-sharing ratios of partners. A Partners share of profits might be increased because of an increase in capital in relation to the other partners, or because of a more active role in running the business. Equally, a share of profits may be decreased if a partner withdraws capital or spends less time in the business. Clearly the agreement of all partners is needed to make changes and guidance of the partnership agreement should be followed.<BR><BR>Generally a change in profit sharing ratios involve establishing a figure for goodwill, even if the partnership is to continue with the same partners. This is to establish how much goodwill built up while they shared profits in their old ratios. Each partner will therefore recieve a value for the goodwill based on the old profit sharing ratio.<BR><BR>Old profit sharing ratio: goodwill created<BR>Debit Goodwill A/C (with amount of agreed goodwill)<BR>Credit Capital accounts in old sharing ratio<BR><BR>New profit sharing ratio: Goodwill written off<BR>Debit capital Accounts in New profit sharing ratio<BR>Credit Goodwill account (with previously agreed goodwill amount)"<BR><BR>Hope that makes sense, some of the past exams papers do ask questions about the appropriation of profit in the P&L after a profit sharing change but usually state you do not need to worry about goodwill entries.<BR><BR>