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Journal Entries of Goodwill

1 Vinod Kumar May 16, 2014

All type organisations have goodwill asset. It does not show physically but it has the value when we sell
or buy any other business. When we buy another company, we have to pay extra amount of goodwill to
vendor because vendor has done the same business before us and his reputation has some value
because on his company name or his reputation, we can get unsecured loan. So, it is necessary to pass
the journal entries of Goodwill.

Following are the main journal entries of Goodwill.

1. When company buys the goodwill and pays the amount for goodwill
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Sometime, vendor of company will demand excess value business than market value, difference will be
goodwill. It is intangible asset but we have to record it by passing following journal entry.

Rule Debit : Goodwill will come in business. Everything which comes in business will be debit. Goodwill
is asset. So, increase in asset of our business will be debit. So, Goodwill will also debit.

Rule Credit : Cash will go from our business. It will decrease in the amount of cash. So, cash will be
credit.

For example, ABC has bought XYZ company. ABC has paid $ 5,00,000 for goodwill of XYZ company.
Pass the journal entry.

Goodwill Account Debit 5,00,000

Cash Account Credit 5,00,000

Now, we will show this goodwill as our intangible asset in our balance sheet.

2. When Company Sells the Goodwill and Get the Amount for Goodwill

It is not sure, you will get same amount of goodwill what is showing in your books or balance sheet
because. Time is changing and if you have sold the goodwill also with your business, you can get
excess or low amount of goodwill difference will be profit or loss on selling of goodwill.

Rule Debit : You have received the cash by selling goodwill. It will increase your cash asset, so it will be
debit. If you get loss, it will be also debit because you loss will decrease your invested capital. Moreover
all losses and expenses will always debit.

Rule Credit : Goodwill account will be credit because it will decrease the asset of goodwill. If company
is gaining profit from sale of goodwill, it will also credit

For example : ABC company sold same XYZ after buying to MNO company at $ 6,00,000 but book
value is same as $ 5,00,000. Pass the journal entry.

Cash Account Debit 6,00,000

Profit on Sale of Goodwill Account Credit 1,00,000

Goodwill Account Credit 5,00,000

3. When Goodwill will be Impair
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Goodwill is intangible asset, so we do not depreciate its value after spending of time. But if goodwill's
book value is high but market value is low, it means, our goodwill's value has decreased. So, we have to
written off by transferring it to profit and loss account's debit side.

Rule Debit : Loss of Goodwill impairment is the decrease in value of goodwill. It will be debit

For example, we and our employees do not talk in sweet voice and properly. It will decrease our
customer. Decrease in the customer will decrease our goodwill. For example, in day, we have just 1
customer but our competitor has 20,000 customers in day. We have started our business before our
competitor. In past our sale was 20,000. Now, due to our bad behaviour, our goodwill value has
decreased in the market. So, show this in balance sheet through journal entry.

Rule Credit : Goodwill account will credit because our asset will decrease due to loss in its value.

Loss of Goodwill Impairment Account Debit

Goodwill Account Credit

If you are not in hurry, read whole list of journal entries.

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Meet Your Teacher
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Prof. Vinod Kumar has received the post graduate degree in Commerce from ...
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