Section 5 of 8
Goodwill is an intangible non-current asset representing the difference between the value of the business as a going concern and the fair value of its net identifiable assets. It reflects:
Goodwill is typically valued at an average of the partnership's profits over the previous years.
When a new partner joins, the goodwill adjustment compensates the existing partners for the reputation and customer base they have built up over time. The new partner effectively pays for a share of that goodwill through the adjustment to their capital account.
Goodwill is introduced and then immediately written off so it does not appear on the final statement of financial position.
Step 1 — Bring goodwill IN (old ratio):
Step 2 — Write goodwill OUT (new ratio):
The net impact on each partner's capital account:
| Partner | Goodwill in (old ratio) | Goodwill out (new ratio) | Net effect |
|---|---|---|---|
| Green | +£7,500 | −£4,000 | +£3,500 |
| Brown | +£2,500 | −£4,000 | −£1,500 |
| White (new) | — | −£2,000 | −£2,000 |
| Total | +£10,000 | −£10,000 | 0 |
Example: Green and Brown (old ratio 3:1); new ratio 2:2:1; goodwill £10,000.
Existing partners who hold a larger share in the old ratio than the new ratio gain from the adjustment. Those whose share is larger in the new ratio lose. The new partner always pays for their new share of goodwill.
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