Where a partner does not bring in goodwill, we need to raise the goodwill amount In the books. Hence, goodwill will be debited to the current account of the new partner while sacrificing partners' capital accounts will be credited for their respective sacrificing ratio.
Revaluation Method: This method of treatment of goodwill is employed when the new partner opts not to contribute their share of goodwill in cash. In such cases, the firm can increase the goodwill account by debiting it and crediting the old partners' capital account according to the existing profit-sharing ratio.
We use this method when the new partner decides not to bring his share of goodwill in cash. Thus, we need to raise the goodwill account in the books by debiting Goodwill account and crediting old partners' capital accounts in the old profit-sharing ratio.
Revaluation Method: This method is used when the new partner decides not to bring his share of goodwill in cash. In this case, the goodwill account in the books can be raised by debiting the goodwill account and crediting the old partners' capital account in the old profit-sharing ratio.
Key Points When a new partner brings their share of goodwill in cash, the amount is debited to the Cash A/c (Cash Account). This is because the new partner is contributing cash to the partnership, which increases the partnership's cash balance.
When a new partner is not able to bring goodwill in cash then his current account is debited and old partners capital are credited in their sacrificing ratio .
If the new partner does not bring any or only a part of the goodwill in cash, the goodwill amount not brought is debited to the new partner's current account. Simultaneously, the capital accounts of the sacrificing partners are credited for their respective shares.
Cash flow statement: Goodwill is not directly reported in the cash flow statement. However, cash flows associated with the acquisition of a business that includes goodwill are disclosed in the investing activities section of the cash flow statement.
If the new partner brings in his share of goodwill in cash and this amount is retained in the business, the amount is credited to the Capital Accounts of old partners in their sacrificing ratio. The following two entries are passed for this purpose: i) Cash/Bank A/c.
When a new partner is admitted, goodwill of the business is valued again. The value of goodwill is the value associated with the total business, including the existing goodwill. If the existing goodwill is not written off, it will have the effect of crediting partners with an excessive amount of goodwill.
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