TREATMENT OF GOODWILL AND REVALUATION OF ASSETS IN THE DISSOLUTION OF PARTNERSHIP

In the context of a partnership dissolution, the treatment of goodwill and the revaluation of assets are critical components that need to be addressed systematically. Below is a detailed explanation of how these elements are handled during the dissolution process.

1. Treatment of Goodwill

Goodwill represents the intangible value associated with a business’s reputation, customer relationships, and overall brand strength. In a partnership, goodwill is treated as an asset that must be accounted for during dissolution.

A. When Goodwill Appears on the Balance Sheet

If goodwill is recorded on the balance sheet at the time of dissolution, it must be transferred to the Realisation Account. The following journal entries are typically made:

• Transfer to Realisation Account:
  • Debit: Realisation Account
  • Credit: Goodwill Account
• Realisation of Goodwill:
  • If goodwill is realised in cash:
    • Debit: Cash/Bank Account
    • Credit: Realisation Account
  • If a partner takes over goodwill:
    • Debit: Partner’s Capital Account (for the partner taking over)
    • Credit: Realisation Account

B. When Goodwill Does Not Appear on the Balance Sheet

If goodwill has not been recorded in the books, it does not need to be transferred to the Realisation Account since there is no asset to realise. The treatment would be as follows:

• No Entry for Transfer: Since goodwill does not exist in the books, there is no entry required.
• Realisation of Goodwill:
  • If goodwill is realised in cash:
    • Debit: Cash/Bank Account
    • Credit: Realisation Account (if applicable)
  • If any partner takes over goodwill:
    • Debit: Partner’s Capital Account (for that partner)
    • Credit: Realisation Account

2. Revaluation of Assets

During dissolution, all assets must be revalued to determine their current market value before they are sold or distributed among partners.

A. Process for Revaluation

The revaluation process involves assessing each asset’s fair market value and adjusting it accordingly in the accounts:

1. Identify All Assets: List all tangible and intangible assets owned by the partnership.
2. Determine Fair Value: Assess each asset’s current market value based on recent sales or appraisals.
3. Adjust Accounts: Make necessary adjustments in accounting records to reflect these values.

B. Journal Entries for Revaluation

When assets are revalued, journal entries should reflect any gains or losses from this revaluation:

• If an asset appreciates:
  • Debit: Asset account (to increase its value)
  • Credit: Revaluation Surplus/Partner’s Capital Accounts (to distribute gains)
• If an asset depreciates:
  • Debit: Loss on Revaluation/Partner’s Capital Accounts (to reflect loss)
  • Credit: Asset account (to decrease its value)

3. Final Steps After Goodwill Treatment and Asset Revaluation

After addressing goodwill and revaluing assets, partners will proceed with closing accounts:

1. Prepare a Realisation Account summarising all transactions related to asset realisations and liabilities settled.
2. Distribute any profits or losses from realisations among partners according to their profit-sharing ratio.
3. Settle any outstanding liabilities before distributing remaining cash or assets among partners.

This structured approach ensures that both goodwill and asset valuations are accurately reflected during a partnership’s dissolution process.