A LevelAccountingCambridge (CIE)Revision NotesFinancial AccountingPreparation of Financial Statements for PartnershipsGoodwill

Goodwill (Cambridge (CIE) A Level Accounting): Revision Note

Exam code: 9706

Written by: Dan Finlay

Reviewed by: Lucy Kirkham

Updated on 27 March 2026

Goodwill

What is goodwill?

Goodwill is an intangible non-current asset
It has no physical existence
It cannot be sold separately from the business

Why might a business have goodwill?

The following are reasons why a business might have goodwill
- A good reputation, well-known brand and strong image
- Having many loyal customers
- Having good relationships with suppliers
- Being in a good location
- Having experienced and efficient employees

What is the difference between inherent and purchased goodwill?

Inherent goodwill is internally generated
- A business gains this naturally over time by their continued efforts
Inherent goodwill is not included in the financial statements or maintained in the book of accounts because:
- its valuation is highly subjective as there is not an agreed formula to measure it
- the assets of a business should not be overstated according to the prudence concept
- the factors that create goodwill (like reputation) are difficult to measure in monetary terms

Purchased goodwill is gained when a business is purchased or taken over by another business
Purchased goodwill is calculated by subtracting the fair value of the net assets from the price paid
Purchased goodwill is included in the financial statements and maintained in the book of accounts

Why should I use a goodwill account for inherent goodwill?

Use a goodwill account when there is a change in a partnership
- change in the partners' profit-sharing ratio
- introduction of a new partner
- retirement of an existing partner
- dissolution of a partnership
The partners' capital accounts are adjusted so that the goodwill account can be immediately written off
- The value of the goodwill is added to the partners' capital accounts using the old profit-sharing ratio
  - These are credit entries to the capital accounts
- The goodwill is then eliminated by subtracting the value from the partners' capital accounts using the new profit-sharing ratio
  - These are debit entries to the capital accounts

What is the layout of a goodwill account?

Goodwill is raised by making entries on the debit side
- It is shared between the partners' capital accounts using the old ratio
- It is on the debit side as it represents an asset
Goodwill is written off by making entries on the credit side
- It is shared between the partners' capital accounts using the new ratio

Goodwill account table showing capital for Partner A and B with shares of raised and eliminated goodwill using old and new profit-sharing ratios. — **Layout of a goodwill account for inherent goodwill**

Examiner Tips and Tricks

You will not be asked to prepare a goodwill account for inherent goodwill. However, you can still use one if you find them helpful.

Worked Example

Tom and Jerry are in a partnership and they share profits and losses equally.

On 1 January 2026, they changed their partnership agreement so that the profit and loss sharing ratio would be Tom 40% and Jerry 60%.

The balances on the capital accounts at 31 December 2025 were:

	$
Tom	40 000
Jerry	50 000

Goodwill was valued at two times the average profits of the last three years.

The profits for the last three years were:

	$
2025	42 000
2024	38 000
2023	31 000

Calculate the capital account balance of each partner at 1 January 2026.

Answer:

Calculate the average profit of the last three years

$\frac{$ 42 000 + $ 38 000 + $ 31 000}{3} = $ 37 000$

Find the value of the goodwill

$2 \times $ 37 000 = $ 74 000$

Calculate the share of the goodwill using the old ratio

Tom: $$ 74 000 \div 2 = $ 37 000$

Jerry: $$ 74 000 \div 2 = $ 37 000$

Calculate the share of the goodwill using the new ratio

Tom: $$ 74 000 \times 40 % = $ 29 600$

Jerry: $$ 74 000 \times 60 % = $ 44 400$

Calculate the new capital balances

Add the share of goodwill using the old ratio
Subtract the share of goodwill using the new ratio

	Tom $	Jerry $
Balance at 31 December 2025	40 000	50 000
Goodwill	37 000	37 000
Goodwill eliminated	(29 600)	(44 400)
Capital account at 1 January 2026	47 400	42 600

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