Question

Explain the accounting treatment of goodwill when a goodwill account appears in the books of the firm and the new partner brings his share of goodwill in cash.

Answer 1

If a goodwill account is already recorded in the firm’s books, it must be written off by debiting the old partners’ capital accounts in their old profit-sharing ratio and crediting the goodwill account. Next, the bank account will be debited, and the premium account will be credited. Then, the premium account will be debited, and the old partners’ capital accounts will be 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 If any or all of the premium is withdrawn by the old partners, their Capital Accounts are debited, and the Bank Account is credited.