Question -
Answer -
The methods for the treatment of goodwill on the admission of a new partner are given below.
1. Premium Method
2. Revaluation Method
It should be noted that before following any of the below mentioned methods of goodwill, if goodwill already appears in the old books (old Balance Sheet) of the firm, then first of all, this goodwill should be written off among all the old partners in their old profit sharing ratio. The following Journal entry is passed to distribute the goodwill.
1. Premium Method- This method is used when a new partner pays his/her share of goodwill in cash. The following are the different situations under this method.
i) When the new partner privately pays his/her share of goodwill to the old partners.
In this case, there is no need to pass any Journal entry in the books of accounts as the goodwill is privately paid.
ii) When the new partner brings his/her share of goodwill in cash and the goodwill is retained in the business.
Accounting Entries
a) For premium or goodwill brought in cash by the new partner