STRUCTURAL CHANGES

CHANGES

• There are three main changes that can occur in the

ownership of a partnership:
•  A change in the profit sharing ratios
•  Admission of a new partner
•  A partner leaves the partnership.
• In each case, there is a need to revalue the business
so as to enter the appropriate entries into the
accounting records. The revaluation has two
phases:
• Goodwill
• Asset revaluations
 GOODWILL

• The excess amount that has to be paid to acquire a part

or the whole of a business as a going concern, over and
above the value of the net assets owned by the business.
• Goodwill is the value/price paid for a business over and
above the net value of the assets.
 REASONS FOR PAYMENT OF GOODWILL

• A large number of regular customers who will continue to deal

with the new owner.
• The business has a good reputation.
• It has experienced efficient and reliable employees.
• The business is situated in a good location.
• It has good contacts with suppliers.
• The possession of brand names and trademarks
TREATMENT OF GOODWILL IN THE BOOKS OF PARTNERSHIP

• (a) Existing partners decide to change profit and loss sharing ratios, or
sometimes the profit and loss sharing ratios have to be changed. Typical
reasons are:
• A partner may not work as much as he/she used to do, possibly because
of old age or ill-health.
• Skills and ability may have changed.
• Partner may be doing more for the business than he used to do.
 TREATMENT OF GOODWILL IN THE BOOKS OF
PARTNERSHIP

• (b) A new partner is introduced, or new partner may be

admitted, usually for one of two reasons:
• As an extra partner, either because the firm has grown or
someone is needed with different skills.
• To replace partners who are leaving the firm. This might be
because of retirement or death of a partner.
 TREATMENT OF GOODWILL IN THE BOOKS OF
PARTNERSHIP

• (b) A new partner is introduced, or new partner may be

admitted, usually for one of two reasons:
• As an extra partner, either because the firm has grown or
someone is needed with different skills.
• To replace partners who are leaving the firm. This might be
because of retirement or death of a partner.
 TREATMENT OF GOODWILL IN THE BOOKS OF
PARTNERSHIP

• (c) A partner retires or dies

 WHEN GOODWILL IS CREATED:

Date Details Debit £ Credit

£
  Goodwill account xxx  
  Partner capital account    
A   xxx
B xxx

  (Goodwill created in partners old profit sharing    

ratio)
 WHEN GOODWILL IS WRITTEN
Date Details
OFF:
Debit £ Credit
£
  Partner capital account    
A xxx
B xxx

  Goodwill account   xxx

  (Goodwill written off in existing partners new    

profit sharing ratio)