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Accounting Treatment of Goodwill in case of Dissolution of Firm

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Goodwill is nothing but a monetary value of a reputation of a business firm in the market, earned by the firm by serving its customers. In a Partnership firm, Goodwill is treated like an asset; every partner has a right over the firm’s goodwill up to his/her share in the business.

In case of the Dissolution of a Partnership, Goodwill, like other assets is realised, and all the partners share the proceeds.

Accounting Treatment:

A. When Goodwill appears in the Balance Sheet of the Firm:

1. On transfer to Realisation Account:

Journal Entry:

 

2. Realisation of Goodwill:

(i) Goodwill realised in cash:

Journal Entry:

 

(ii) If any of the partners take over the Goodwill and agrees to pay for Goodwill:

Journal Entry:

 

B. When Goodwill does not appear in the Balance Sheet of the Firm:

1. On transfer to Realisation Account:

No Entry

Note:

Goodwill doesn’t exist in the books of the firm, so nothing is to be transferred to Realisation Account. 

2. Realisation of Goodwill:

(i) Goodwill realised in cash:

Journal Entry:

 

(ii) If any of the partners take over the Goodwill and agrees to pay for Goodwill:

Journal Entry:

 

Illustration:

Kapil, Rohit, and David are partners sharing profit and losses in a ratio of 2 : 1 : 1. On 31st March 2020, they decided to dissolve the firm. Their balance Sheet as on the same date stood as :

 

Additional Information:

1. Half of the Goodwill realised for ₹ 20,000 and half is taken over by Rohit for ₹ 20,000. 

2. Assets Realised for:

Land and Building: ₹ 2,00,000

Plant: ₹ 1,00,000

Machinery: ₹ 56,000

Debtors: 50% of Book Value

3. Realisation Expense cost ₹ 4,000.

Prepare Realisation Account, Partner’s Loan Account, Partner’s Capital Account and Cash Account and Pass necessary Journal Entries.

Solution:

 

 

 

 

 

 

Working Note:

1. Value of Asset Realised:

Goodwill (Half) = 20,000

Land and Building  = 2,00,000

Plant = 1,00,000

Machinery = 56,000

Debtors =  96,000\times\frac{50}{100}~=~48,000

Total = 4,24,000



Last Updated : 16 Mar, 2023
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