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

1. Names of partners
2. Addresses of partners
3. Name and address of the firm (Business)
4. Amount of capital contribution by each partner
5. Interest on capital (if any)
6. Interest on drawings (if any)
7. Ratio of sharing profits or losses
8. Duration of partnership / Provision for resignation/retirement of partners
9. Salaries of partners (if any)
10. Rules regarding admission of partners
11. Nature of business
12. How disputes are to be settled
13. Effective date of commencement of business
14. Procedures for dissolution
15. Restrictions of partners (if any)
16. Distribution of assets on dissolution
17. Rights and duties of partners
18. Extent of drawings (if any)
19. Method for the valuation of assets
20. Name and address of bankers
21. Signatories to the firm’s accounts
22. Types of partners

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