GOODWILL
• Goodwill is the value of benefits / advantages
,expressed in term of returns over and above
normal returns.
• It arise due to
i) Advantageous location
ii) Customer loyalty
iii) Efficient management
iv) Patents / copy rights
• Goodwill is valued when there is a change in
profit sharing ratio.
METHODS OF VALUATION OF
GOODWILL
Average profit method
• Calculate average profit by adding profots for
a No. of years (subtract loss) and divide by the
No of years
• The following should be adjusted:
add – abnormal losses
minus – abnormal profits , salary of partners
, income from investments
Super profit method
• In this method, we calculate normal profit with normal
rate on investment. Then we calculate super profit with
following formula.
• Super profit = actual profit/avg profit – normal profit
• Normal profit = capital employed *normal rate/100
• Goodwill = super profit X No. of purchase years
Capitalization method
• In this method, we calculate capital employed
with following formula
• Capital employed = average profit or normal
profit X 100/ Rate
• Goodwill = capital employed – Net Assets
SACRIFICING RATIO
It is the ratio /portion of profit which a partner gives
to another partner
It is calculated when
i) There is a change in profit sharing
ii) A new partner is admitted to partnership.
FORMULA:----Sacrificing ratio = old ratio – new ratio
GAINING RATIO
• Gaining ratio indicates the amount/ratio of gain of
profits
• It is calculated when:i) A partner retires or dies
ii) change in profit ratio
• Formula of calculating gaining ratio:G/R = new ratio – old ratio
Difference between S/R and G/R
Q.1 Distinguish between Sacrificing Ratio and Gaining Ratio.
Ans. 1
Basis
Sacrificing Ratio
(i) Meaning
Proportion in which old partners sacrifice their
share in favour of new partner.
(ii) Occasion
(iii) Formula
Sacrificing ratio is calculated at the time of
admission of new partner.
Sacrificing ratio = Old ratio – New ratio
Gaining Ratio
Proportion in which continuing partner
gain the share of outgoing partner on his
retirement.
Gaining ratio is calculated at the time of
retirement or death of a partner.
Gaining ratio – Old ratio
JOURNAL ENTRY
When there is change in profit sharing
agreement S/R or G/R is calculated
Adjustment is done by passing a journal entry as
follows
GAINING PARTNE’S CAPITAL A/C Dr xxx
TO SACRIFICING PARTNER’S CAPITAL A/C
xxx
PROBLEMS & SOLUTIONS
1) A:B::3:1. They decide to share future profits as 3:2.
Goodwill of the firm is valued as Rs. 1,50,000. Pass
entry to give effect to the above.
S/R = OR – NR
A’S Sacri. = 3/4 - 3/5
= (15-12)/20
= 3/20
B’s Sacri.
= 1/4 – 2/5
= -(3/20)gain
So , B will give share of goodwill to A
Amt of goodwill will be calculated as
G/W of firm * share of gain
1,50,000 * 3/20 = Rs. 22,500
Journal entry:----B’s Cap a/c-------------------Dr
22,500
to A’s Cap a/c--------------22,500
(being credit given to capital for loss of A’s profit
share.)
TREATMENT OF G/W APPEARING IN
BOOKS
• If g/w appears in books i.e. is shown on the
asset side of balance sheet it means it g/w
was valued or purchased.
• Such G/W must be WRITTEN OFF when ever
there is a change in profit ratio.
• Journal Entry :-Partners’ Capital A/C ----------Dr
To Goodwill A/C
TREATMENT OF RESERVES
• General reserves/Accumulated profits(losses).
These are to be transferred to partners’
capital(current) account
GENERAL RASERVE/PROFIT A/C ---------------Dr
TO ALL PARTNERS’ CAPITAL A/C
(being undistributed reserve/profit , transferred to
capital a/c.)
In case of losses(shown on asset side of B/S)
PARTNERS’ CAPITAL A/C------------------------Dr
TO PROFIT & LOSS A/C
TREATMENT OF RESERVE
Journal entry if reserve is not to be distributed
Gaining partner capital a/c
Dr
to sacrificing partner capital a/c
WORKMEN COMPENSTION RESERVE
Workmen Compensation Reserve/Fund is a reserve
created out of profits to make payment to workers
for any injury/loss.
Distribution of WCF
 When there is no claim
WORKMEN COMPENSATION FUND-----------Dr
TO ALL PARTNERS CAPITAL A/C
(old ratio)
 When there is claim/liability against WCF
It means that some payment has to be made
against the fund
WORKMEN COMPENSATION FUND-----------Dr
TO ALL PARTNERS CAPITAL A/C
(old ratio)
This entry will be passed with the balance(excess) amount
of fund.
For e.g.:- WCF is Rs 20,000 and claim against it is Rs.8,000.
A:B:: 2:1. Then journal entry will be
WCF A/C ------------------------------- Dr 12,000
TO A’s CAPITAL A/C
8,000
TO B’s CAPITAL A/C
4,000
(being balance reserve distributed )
20,000
- 8,000 = 12,000
(Total fund - claim = balance for distribution)
INVESTMENT FLACTUATION FUND
IFF is created out of profit to safeguard against
losses due to change(fluctuation) in market
price(value) of investment.
When there is no change in mkt price of
investment
IFFUND-------------------------Dr
TO PARTNERS’ CAPITAL A/C
(Full amt. of fund transferred to cap.in old
ratio)
When there is a change in market value of
investment i.e. market value is less than book
value(there is loss in investment)
IFFUND-------------------------Dr
TO PARTNERS’ CAPITAL A/C
(balance amt. of fund transferred to cap.in old ratio)
For e.g. govt bonds appear in books at Rs.45.000
and IFF is recorded in b/s at Rs.15,000. The mkt
value of govt. bonds is Rs.40,000 , then the amt of
IFF to be distributed in capital a/cs’ will be
Rs.10,000 (15,000-5,000)(IFF value – fall/(loss) in
value of investment)
EMPLOYEE PROVIDENT FUND
 EPF is created from the salary of employees’.
 It is given/paid to employees when they leave
the organization.
 It will NOT BE DISTRIBUTED to PARTNERS ‘
CAPITAL as it is NOT create out of profits.
 It will appear in new balance sheet at same
value.
Revaluation account
REVALUATION ACCOUNT