Accounting Methods For Goodwill The three qualitative characteristics most directly concerned with goodwill are reliability,

prudence (not deliberate understatement) and consistency. Although much has been written on the problem of accounting for goodwill during the past century, a solution remains elusive. The treatment of goodwill has changed over the years. The four different methods of accounting for goodwill are discussed in the following paragraphs. 1. Write-off Under this method, goodwill is immediately written off against an account in the stockholders' equity section, generally retained earnings. Advocates of this method argue that goodwill is not measurable and has no true future value. Thus, it should be written off against stockholders' equity. Another rationale for this method is that overpayment for the assets of an acquired company represents the expectation of superior future earnings. Since these earnings eventually endup in the stockholders' equity, they can be offset against the excess acquisition payment. Writing off goodwill immediately can lead to distorted results when tangible assets are undervalued allowing goodwill to be overstated. Even though there are some good arguments for write-off method, it appears that it was used because it was the easiest and most widely used and not because it was conceptually correct. 2. Capitalization This approach's proponents argue that if goodwill is as important as asset as many beleive, it belongs on the balance sheet. One problem with capitalization of goodwill is determining the proper amount to capitalize. Current practice follows the residuum approach. One way of correcting the misuse of goodwill is through the hidden assets approach. Under this approach, the excess purchase price that companies pay over fair market value of the assets is for assets that are hidden from the balance sheet. Hidden assets should be identified and recorded on the balance sheet, then amortized over their useful life. If they were, goodwill account would probably be much smaller than in current practice and financial statements would probably be more useful. 3. Non-Amortization Capitalization of goodwill without amortization allows the most advantageous financial reporting figures. A company gets to record an asset instead of a decrease in stockholders' equity and net income is not periodically reduced. However, it probably would result in more abuse than any other method. The rationale for non-amortization is premised on the notion that goodwill does not decrease in value. High managerial ability, good name and reputation, and excellent staff generally do not decrease in value but they increase in value. Goodwill could be viewed as an investment and should stay on the balance sheet unamortized. But, without amortization, abuse may occur, and the goodwill account will lose what limited significance it has now. 4. Amortization Amortization enables companies to match the cost of intangible assets over the period deemed to benefit from their acquisition. Main arguments for amortization are the abuse of non-amortization and the unreliability of earnings without some attempt to recognize the impact. When amortization became required, the period for write-off became the focus. If the life of the asset is non determinable, which is normally the case with goodwill, amortization over a maximum of forty years should be used. This lengthy period was set to allow a minimum impact to the net income.

Concept Of Retirement Of A Partner And Adjustments Needed To Be Done At The Time Of Retirement Of A Partner Concept Of Retirement Of A Partner A partner or partners may retire from the firm due to the various reasons like old age, better opportunity, ill health, conflict between the partners and so on. The retirement of partner can took place in any of the following grounds: i. In accordance with the constant or consensus among all the members. ii. In accordance with the partnership agreement which has already been signed. iii. In accordance with the written notice, if the partnership is at will. Adjustments The adjustments that need to be done at the time of retirement of a partner are as follows: 1. Calculation of new profit sharing ratio 2. Revaluation of assets and liabilities 3. Adjustment regarding undistributed profits and losses 4. Adjustment regarding goodwill 5. Adjustment of capital 6. Ascertainment of due amount to retiring partner 7. Mode of payment to the outgoing partners. 1. Calculation Of New Profit Sharing Ratio When somebody left the firm, his share which left to the firm is gain to remaining partners. After retirement of someone, if the new profit sharing ratio is not given, then it has to be understand that they will continue old ratio. The new profit sharing ratio of the remaining partners is determined in the following way: Suppose, three partners A,B and C are sharing profits and losses in the ratio of 2:3:1, as there is no fresh or new agreement between between A and B, the new profit sharing ratio between A and B will be 2:3 by eliminating the share of C. In the above calculation, gaining ratio of A and B will be: A= 2/5-2/6 = 1/15 B = 3/5-3/6 = 1/10 Thus, gaining ratio is calculated by deducting old ratio from new ratio i.e. Gaining ratio = New profit sharing ratio - Old profit sharing ratio In the case of new ratio between the remaining partners are given, the gaining ratio calculation will be the same. However, it should not be confused with the sacrificing ratio which is calculated at the time of admission of a new partner and change in profit sharing ratio. Sacrificing ratio is calculated by deducting new ratio from old one. On the other hand, gaining ratio is computed by subtracting old ratio from new one. 2. Revaluation Of Assets And Liabilities The retiring partner has the right to share the increase or decrease in value of assets and liabilities of the firm during the retirement period. To find out the profit or loss, a revaluation account is opened as in the case of admission of a partner. If there is an increase in the value of any assets then concerned asset account will be debited and revaluation account will be credited. In the same way, if there is decrease in the value of any asset then concerned asset will be credited and revaluation account will be debited. Similarly, if there is an increase in the value of liabilities, revaluation account is debited and concerned liability account is credited and vice versa. The profit or loss on revaluation is to be divided among all the remaining and outgoing partners in their old profit sharing

ratio. After the revaluation, the assets and liabilities will appear in the balance sheet either at original value (book value) or at revised value. If assets and liabilities are to be recorded at unchanged value then a memorandum revaluation account will have to prepared. 3. Adjustment Regarding undistributed Profits And Losses At the time of retirement of a partner, there may be some accumulated profits or losses in the forms of any reserve or credit balance of profit and loss account or debit balance of profit and loss account etc. All such amount should be distributed among all the partners, outgoing or remaining, in their old profit sharing ratio. Sometimes, only the share of outgoing partners may transfer to his capital account and balance is shown in the balance sheet. Such can be done only when the remaining partners agreed for it. 4. Adjustment Regarding Goodwill The valuation of goodwill has been discussed in admission of a partner. The same process should be followed here too. But during the time of retirement, the retiring partner has the right to get his share of goodwill of the firm. Therefore, to give effect to the same, the following adjustment must be carried out. Dissolution of Partnership firm
The Indian Partnership Act makes a distinction between dissolution of firm and dissolution of partnership. Section 39 provides that the dissolution of partnership between all the partners of a firm is called the dissolution of the firm. Therefore, dissolution of the firm denotes complete breakdown of the contractual relationship between all the partners or termination of the partnership business. But when the existing contractual relationship is terminated and the business continues, it is a case of dissolution of partnership. Therefore, in dissolution of partnership the change in contractual relation of the partners may arise because of admission of new partners, retirement of partners, expulsion or insolvency or death of a partner etc. Dissolution of the firm involves dissolution of partnership but dissolution of partnership may not imply dissolution of firm. Modes of Dissolution of a Firm: A partnership firm may be dissolved under the following circumstances: 1. Dissolution by Agreement: Partnership arises from contract and can come to an end by contract. Therefore, the firm may be dissolved with the consent of all the partners or in accordance with a contract between the partners. 2. Dissolution by Notice: Where the partnership is at will, the firm may be dissolved by any partner giving notice in writing of his intention to dissolve the firm. The firm is dissolved from the date mentioned in the notice as the date of dissolution. An individual partner is empowered to bring an end to the firm. 3. Dissolution on the happening of certain contingencies: Subject to contract between the partners, a firm can be dissolved on the happening of following circumstances : i. Expiry of the term when constituted for a fixed term. ii. Completion of the venture or undertaking when the firm constituted to carry on a venture or undertaking. iii. Death of a partner. iv. Adjudication of a partner as an insolvent.

The partnership agreement may provide that the firm will not be dissolved in any of the above circumstances. 4. Compulsory Dissolution: A firm is compulsorily dissolved under any of the following circumstances : i. When all the partners or all but one are adjudged insolvent. ii. When the business of the firm becomes unlawful because of happening of some event. 5. Dissolution by the Court: When the partners are having difference of opinion regarding dissolution of the firm on certain grounds, a suit can be filed by any partner in the court to dissolve the firm. Depending upon the merits of the matter, the court may order for dissolution of the firm. Under Section 44 of the Act, the court may dissolve the firm on the following grounds : i. Insanity: When.a partner becomes insane, the court may order to dissolve the firm. The suit can be filed by any of the other partners or even by any friend of the insane partner. ii. Permanent incapacity: When a partner becomes permanently incapable of doing his duties as a partner, the court may dissolve the firm. The suit for dissolution must be filed by a partner other than the incapacitated partner. iii. Misconduct: When a partner, other than the partner suing is guilty of misconduct and such misconduct is likely to affect the carrying on of the business, the court may dissolve the firm. The misconduct may be outside the business (punishment for an offence, adultery of a partner etc. iv. Persistent breach of agreement: When a partner persistently or willfully commits breach of agreement or conducts himself in such a manner that it is impossible on the part of other partners to carry on the business with him, the court may dissolve the firm. Maintaining wrong accounts, taking away the books of accounts, continuous quarreling with other partners are good grounds. v. Transfer of interest: When a partner transfers his whole interest in the firm to a third party or all his shares are sold or attached by the court under a decree, the court may dissolve the firm. vi. Continuous losses: When the business cannot be carried on except at a loss, the court may dissolve the firm. vii. Any other ground: The court may dissolve the firm on any other ground where the court considers it just and equitable to wind up the business.