ZIMSEC O Level Principles of Accounting: Accounting for Partnerships: Goodwill and Partnership businesses

  • Now that we have explained the idea of goodwill
  • It is time we examine the concept of goodwill in relation with partnerships
  • As already explained accounting standards require that goodwill be recorded only when a business is bought or sold
  • Partnership business are special in their nature:
  • Technically a partnership business ceases to exist when the following happens:
    • One partner dies
    • A partner leaves the partnership
    • A new partner is admitted
    • When there is a change in the profit sharing ratio among existing partners
  • It is often the case that when either of these events occur the partners will continue in business
  • However from an accounting and legal standpoint it means the business was in essence “sold” by the old partners and “sold” to the new partners
  • For this reason it is necessary to account for goodwill when either one of these things occur in a partnership business
  • This is because even though it is not recorded goodwill already exist in a business before it is sold/bought
  • Unless it has been agreed differently, partners own a share in the goodwill in the same ratio in
    which they share profits
  • Each partner therefore is entitled to their share of goodwill up to the point where change occurs
  • To reiterate this is true even if there is no goodwill account i.e. goodwill is not on the books
  • When these changes occur it essentially means one of the partners is giving up their share of goodwill
  • To make sure that they get something in return partnership changes such as those above are accompanied by certain entries
  • These goodwill entries are unique to partnerships

Illustration

  • To drive home this point consider two partners A and B who share profits equally
  • If their business were to be sold today for $20 000 above the net asset price
  • Each would be entitled to $10 000 share of goodwill
  • However if they change their profit sharing ratio to A 25% and B 75%
  • A would be entitled to $5 000 and B $15 000
  • In essence A has lost $5 000 merely due to the change in ratios
  • Entries have to be made in the books to make sure that this does not happen

To access more topics go to the Principles of Accounts Notes.

- See latest Zimbabwe grocery prices -

Deals

SEE LATEST SUPERMARKET PRICES, SHOP FOR GROCERIES VIA WHATSAPP
SEE PRICES & NEWS
We publish the latest grocery prices from Zimbabwean supermarkets. We also deliver groceries online

Quick NetOne, Telecel, Africom, And Econet Airtime Recharge

If anything goes wrong, click here to enter your query.