Explanation
(a) Goodwill is an intangible asset which enables a business to earn returns in excess of what is expected under normal conditions. It is the excess of purchase price/consideration over the net assets value of a business.
Goodwill is an intangible asset that arises as a result of the quality of a firm’s products, good reputation, location, etc, which enables it to earn extra profits.
(b) Conditions under which Goodwill is valued in a Partnership;
(i) On the admission of a new partner: On the admission of a new partner, the old partner will value goodwill and share in the old profit sharing ratio before the new partner is admitted.
(ii) Change in the profit and loss sharing ratio: If there is a change in the profit and loss sharing ratio the partners will value goodwill and share in the old profit sharing ratio before the change.
(iii) On the retirement of a partner: On the retirement of a partner, goodwill will be valued and shared among the partners including the retiring partner.
(iv) On amalgamation of partnerships: On amalgamation of partnerships, the partners in each firm will value goodwill and credit their respective capital accounts before the amalgamation.
(v) On dissolution of a partnership: On dissolution of a partnership, the partners will value goodwill and share it among the existing partners in the old profit sharing ratio.
(vi) On the death of a partner: When a partner dies, Goodwill is valued in order to dissolve the old partnership.
(vii) Takeover of a partnership by another business/Purchase of a partnership by another business: On the purchase of a partnership by another business, goodwill is valued and shared by the partners.
(viii) On the resignation of a partner: When a partner gives notice of his resignation, goodwill will be valued and shared by the partners.
(c) Contents of a partnership agreement
Names of partners
Addresses of partners
Name and address of the firm (Business)
Amount of capital contribution by each partner
Interest on capital (if any)
Interest on drawings (if any)
Ratio of sharing profits or losses
Duration of partnership / Provision for resignation/retirement of partners
Salaries of partners (if any)
Rules regarding admission of partners
Nature of business
How disputes are to be settled
Effective date of commencement of business
Procedures for dissolution
Restrictions of partners (if any)
Distribution of assets on dissolution
Rights and duties of partners
Extent of drawings (if any)
Method for the valuation of assets
Name and address of bankers
Signatories to the firm’s accounts
Types of partners