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Accounting Treatment of Goodwill

The share of future profits which the incoming partner receives is equal to the sacrifice of profit by existing partners of a partnership firm. The compensation that the new partner pays against this sacrifice is called goodwill.

Recommendation of AS-26

  • Goodwill can be recorded in the books of accounts if and only if some consideration in money or money’s worth has been paid for it. In other words, only purchased goodwill can be recorded in the books of accounts.
  • In case of partnership accounts, self-raised goodwill should not be recorded in the books as no consideration is paid for the same.
  • If any partner brings in any sum towards goodwill at the time of admission, such amount should be distributed among the old partners in the sacrificing ratio.
  • In case of change in constitution of the firm, the value of goodwill of the firm should be adjusted through partner’s capital account.

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In case of admission of a partner, the incoming partner is a gaining partner and some or all the existing partners are sacrificing partners and hence, the incoming partner should compensate to the sacrificing partners.

Steps to be followed to record goodwill in case of admission of a partner:


  1. Write off the existing value of goodwill (if any) appearing in the books of accounts
  2. Record the amount bought in by the incoming partner towards goodwill
  3. Transfer such goodwill to the sacrificing partners
  4. Record for cash withdrawn by the partners

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