Study Material & Notes for the Chapter 2
Partnership - Goodwill
I. GOODWILL - DEFINITION & FEATURES
A. Goodwill
Goodwill is the benefit and advantage of the good name, reputation, and connection of a business. It is the attractive force which brings in customers. It is one factor which distinguishes an old established business from a new business at its first start.
- Good will = Good name or Reputation
- Is an Intangible asset…cannot be seen or touched
- Places an enterprise at an advantageous position due to efforts made in the past
- Enterprise is able to earn higher profits without extra efforts
B. Factors affecting valuation of Goodwill
C. Need for valuation of Goodwill
- At the time of admission, retirement or death of a partner.
- Change in the profit-sharing ratio amongst the existing partners.
- When the partnership firm is sold out.
- When the firms amalgamate (merge)
- When the firm is converted into Company
D. Classification of Goodwill
1) Purchased (Acquired) Goodwill
- It is the goodwill that is acquired by a business after paying consideration in cash or in kind.
- For example, consideration paid Rs. 10 lacs for purchase of a business wherein Assets acquired valued Rs. 20 lacs & Liabilities taken over for Rs. 12 lacs. Extra Rs. 2 Lacs is paid here for Goodwill.
2) Self Generated Goodwill
- It is internally generated or hard-earned goodwill which arises due to continued hard work of the organization, its better-quality products and better customer services.
- Self-generated goodwill is not recorded in the books because no consideration in money or money’s worth is paid for it.
Important to Note: As per AS-26 Goodwill should not be recorded in books unless it is purchased