Chartered Accountancy

CPT Course

Session 1, Section A
Fundamentals of Accounting

Lecture 17 Partnership Accounting Part 2

Method for Goodwill Valuation

1) Average profit basis: Take the Simple or Weighted Average of Past

Profits

Quick Revision Notes

Accounting Treatment of Goodwill in case of Admission

of a new partner

If new partner brings own goodwill in cash

Simple Average : If profits show no trend.

Weighted Average : If profits show increasing or decreasing trend, give more weight to
recent profits

Credit the capital accounts of old partners in sacrificing ratios with cash
brought by new partner
If new partner does not bring goodwill in cash

2) Super profit basis: Find Excess Profit firm can earn over others
a.
b.
c.
d.
e.

Identify Capital Employed

Find out the average profit earned
Determine normal rate of return
Find normal profit by applying normal rate of return on capital employed
Find Super Profit i.e. Average Profit Normal Profit

3) Annuity Method: Present Value of Super Profits

Discount the Super Profits to find our the present value of Super Profits.
4) Capitalization Basis: Difference between Normal Capital Employed
and Actual Capital Employed
a.
b.
c.
d.

Determine Normal Rate of return

Find out the average profit earned
Calculate Capital Employed
Find Normal Capital Employed by dividing average profit by normal rate of
return.
e. Find Difference of Actual Capital Employed and Normal Capital Employed

ICAI

Raise the Goodwill from Capital Accounts of Old Partners in old Profit
Sharing Ratio
Goodwill A/c
Dr.
(Amount of Goodwill)
To Old Partners Capital A/c (in Old Profit Sharing Ratio)
Write off the Goodwill from Capital Accounts of new partners +
remaining partners in new Profit Sharing ratio.
New + Remaining Partners Capital A/c
Dr.
(in Old Profit Sharing Ratio)
To Goodwill A/c
(Amount of Goodwill)