AS 10 : Accountiug for Fixed Assets and Goodwill: It has already been stated while discussing treatment of goodwill in the preceding chapter, that goodwill account should be raised in the books only when it is paid for and not self-generated by the firm. Hence, the following treatment for goodwill should be preferred in case of retirement, death, change in profit sharing ratio or amalgamation of firms.

(i) Goodwill on Retirement: Death of a Partner: In the case of retirement of a partner, the continuing partners will gain in tenns of profit sharing ratio. Hence, the continuing partners have to share the burden ofthe share of goodwill of the retiring partner in their gaining ratio. In this case the retiring partner’s capital account should be credited with his share of goodwill and the continuing partners’ capital accounts should be debited with the amount in their gaining ratio. Alternatively, the total value ofhe goodwill may be raised by debiting the goodwill account and crediting all the partners’ capital account in the old profits sharing ratio. The goodwill may then be written off debiting the capital accounts of the remaining partners in the new ratio and crediting the goodwill account.

The net effect in the above cases is the same. The point to be remembered is that in no case, goodwill account should be shown in the books of account.

Similarly, in case of death ofa partner, the continuing partners should bear the share of goodwill in their gaining ratio due to the heirs of the deceased partner. Thus, the same accounting treatment as in the case of retirement is to be followed on the death of a partner.

Note; In case of illutration 3.1, the (ii) and (iv) are more appropriate methods for treatment of goodwill in case of retirement of a partner.

(ii) Goodwill for Change in Profit Sharing Ratio: In case there is a change of profit sharing ratio, the value of goodwill should be determined and adjusted through the capital accounts of the partners on the basis of their sacrificing ratio. Alternatively, goodwill account should be raised in the books of the firm by crediting partners’ capital accounts in their old profit sharing ratio and then immediately written off by debiting the partners’ capital accounts in the new profit sharing ratio.

(iii) Goodwill on Amalgamation or Sale ofPartnership Firm: When  there is an amalgamation or sale of partnership firm to a company, the problem of recording goodwill would arise. If an existing partnership firm acquires another finn or business of a sole trader and purchase consideration exceeds the value of net assets required, it is a case of purchased goodwill. The difference will be debited to Goodwill Account in the books of the purchasing firm.