GOODWILL
This is defined as “the difference between the value of a business as a whole and the fair value of its net separable assets”.
Goodwill in practical sense is the advantage that an existing business may have over a newly established business. This advantage may be in the form of profits or revenue that the business generates and customer loyalty. Goodwill may arise due to several factors including:
- The location of the business
- The quality of products, services or employees and
- The marketing
In practice, it is normally agreed that many established businesses have created goodwill but unfortunately it is difficult to determine the actual value of goodwill. Therefore, unless goodwill arises from the acquisition of another company, it is normally excluded from the accounts. For the purpose of accounting for partnerships, goodwill is important in the following three main areas.
- When there is a change in the profit sharing ratio
- On admission of a new partner
- On retirement of a partner