Question

State the two effects of the provisions of Accounting Standard-26 as issued by the Institute of Chartered Accountants of India.

Answer 1

1. According to Paragraph 16 of Accounting Standard (AS) 26, goodwill can only be recorded in the firm’s books when there has been a payment made, either in cash or in kind, for it. This means only purchased goodwill can be accounted for. In situations such as the admission, retirement, or death of a partner, or when there’s a change in the profit-sharing ratio among existing partners, goodwill cannot be recognised in the firm’s books, as no actual payment (either in cash or kind) has been made for it.
2. If the firm’s goodwill is assessed and the new partner does not contribute their share of goodwill in cash, the goodwill should be adjusted through the capital accounts of the partners.