Treatment of Goodwill

Meaning of Goodwill

Goodwill, in accounting terms, is referred to as an intangible asset that represents the value created by the firm. The meaning of goodwill is very broad and is mostly used at times when one company acquires another company.

Goodwill is the price which companies are willing to pay for acquiring the other company at a price, which is in excess of its market value.

When computing for the partnership enterprises, the accounting treatment of goodwill in diverse scenarios is significant :

  • The retiring or deceased partner is authorised to his portion of goodwill during the death or retirement because the goodwill has been earned by the enterprise with the hard work and perseverance of all the existing partners
  • Hence, during the death/ retirement of a partner, goodwill is evaluated as per agreement among the partners the deceased/retiring partner recompensed for his portion of goodwill by the continuing partners (who have gained due to the accretion of the share of gain from the retiring/dead partner) in their respective gaining ratio.

In such a scenario, the accounting treatment for goodwill will rely on whether or not goodwill already exists in the company books.

The above mentioned is the concept that is explained in detail about Treatment of Goodwill for the class 12 Commerce students. To know more, stay tuned to CoolGyan’S.

Frequently Asked Questions on Treatment of Goodwill

How does the factor ‘location’ affect the goodwill of a firm?

The better location will attract more customers resulting in an increase in sales and profits which in turn, will result in an increase in the value of goodwill.

How does the factor ‘efficiency of management’ effect the goodwill of a firm?

Efficient management enables the firm to earn higher profits, which will increase the value of goodwill.

How does the factor ‘quality of product’ affect the goodwill of a firm?

Better quality of product will increase the sales and profits which will increase the value of goodwill.

How does access to supply affect the value of goodwill of a firm?

A firm which has better access to supply or supply of raw material and other inputs surely enjoys more goodwill than its competitors.

How does nature of business affect the value of goodwill of a firm?

The firm that produces high value-added products or has stable demand will be able to earn more profit and enjoy goodwill.

State any circumstance when there is a need to revalue goodwill other than reconstitution due to admission, retirement & death of a partner.

On Sale of business to a company