ZIMSEC O Level Principles of Accounting: Accounting for Partnerships: Goodwill and Partnership businesses: When a partner dies/retires
- Death is an inevitable part of life
- Sometimes a partner might die
- Also in other instances a partner might choose to leave the business i.e. retire
- In all the cases above the affected partner ends up leaving the business
- Technically speaking this leads to the dissolution of the partnership in question
- Often however the remaining partners might will choose to remain in business
- This technically means they are forming a new partnership which will likely have a different profit/loss sharing ratio
- Goodwill entries need to be made to account for such a change
Entries to be made in the books
- First the partners have to agree on the valuation of Goodwill i.e. determine the value of Goodwill
- Generally the following entries are required:
- Establish the value of Goodwill usually its the partners who determine this and the value of goodwill is given in the exam
- Establish the goodwill that belongs to the old partners before death/retirement and record this in the books via the following entries:
- Dr Goodwill to the Goodwill Account
- Cr The old partner’s Capital Account with their share of goodwill using the old profit/loss sharing ratio
- Write off the Goodwill Account in the partnership using the following entries:
- Dr Goodwill to the remaining partner’s Capital Account using the new profit/loss ratio
- Cr the Goodwill Account to goodwill account
- Alternatively the Goodwill Account can be ignored and the following entries are made:
- Cr Capital Accounts of those partners who are losing Goodwill in the new partnership with the amount of Goodwill they are losing
- Dr Goodwill the partner’s capital accounts for those partners who are gaining Goodwill with the amount of Goodwill they are gaining in the new partnership
- An example concerning Goodwill when a partner dies or retires can be found here
To access more topics go to the Principles of Accounts Notes.