Question

Explain the accounting treatment of goodwill when no goodwill account appears in the books of the firm and the new partner brings his share of goodwill in cash.

Answer 1

Initially, the goodwill amount (commonly referred to as the premium for goodwill) is debited to the ‘Bank Account’ and credited to the ‘Premium Account’. Then, the ‘Premium Account’ is debited, and the ‘Old Partners’ Capital Accounts’ are credited in the sacrificing ratio. If any or all of the premium is withdrawn by the old partners, their ‘Capital Accounts’ are debited, and the ‘Bank Account’ is credited with the withdrawn amount. However, if the new partner directly pays the premium to the old partners outside the business in cash, no accounting entries are necessary.