1. Goodwill
Goodwill is an intangible asset. It can only exist if the business was purchased and the amount paid was greater than the value of the net assets.
Purchased goodwill = Total Price less value of net identifiable assets

2. Reasons for payment of goodwill
A large number of regular customers who will continue to deal with the new owner.
The business has a good reputation.
It has experienced, efficient and reliable employees.
The business is situated in a good location.
It has good contacts with suppliers.
It has well-known brand names that have not been valued and included as assets.

3. Methods of calculating goodwill
There is no single way of calculating goodwill on which everyone can agree. The following methods are used:
Average weekly sales multiplied by a given figure.
Gross annual fees multiplied by a given number.
Average net annual profit multiplied by an agreed number.
Super-profits method.

4. Changes in profit sharing ratios of existing partners
Typical reasons would include:
A partner may not work as much as in the past.
A partner's skills and ability may have changed.
A partner may now be doing much more for the business than in the past.

5. Accounting entries for goodwill adjustments
Goodwill account
is opened
Debit Goodwill
Credit Partners’ capital in old profit sharing ratios
Goodwill account
not opened
Debit Goodwill
Credit Partners’ capital in old profit sharing ratio
Then:
Debit Partners’ capital in new profit sharing ratio
Credit Goodwill (to close account)