Goodwill
The extra price paid when buying another business above the value of its net assets, on the Balance Sheet. Tested for impairment, not amortised under NFRS.
In detail
Goodwill is the amount paid to buy another business over and above the fair value of its identifiable net assets: the premium for its name, customers, staff and location. It arises only on an acquisition, never from the company's own trading, so a small business that has not bought another never has a balance here. Under NFRS goodwill is not amortised; instead it is tested each year for impairment, and any loss is charged to Impairment Losses. The purchase is recorded by one Journal Entry that brings in each asset and liability of the acquired business at fair value, with goodwill as the balancing debit. Recording a self-generated brand value here is not allowed and would mislead a lender.
Formula
Goodwill = Price paid - Fair value of net assets acquired (assets taken over - liabilities taken over).
Accounting entry
| Account | Debit | Credit |
|---|---|---|
| Goodwill | Rs 5,00,000 | |
| Furniture and Fixtures | Rs 10,00,000 | |
| Bank Account (rename me) | Rs 15,00,000 |
How to record it in BRAccount
- 01Agree the purchase price and a fair value list of the assets and liabilities taken over with the auditor.
- 02Go to Invoicing > Journal Entry > New dated the acquisition.
- 03Debit each asset taken over at fair value, credit each liability taken over and the bank for the price paid.
- 04Add Goodwill as the debit that makes the entry balance, then Submit; the entry above posts.
- 05Each year end, review Goodwill for impairment and post any loss to Impairment Losses by Journal Entry.
When to use it
Post by Journal Entry only when acquiring a business. Rare for a small company.
Example from the demo books
Dr Goodwill Rs 5,00,000, Dr Furniture and Fixtures Rs 10,00,000, Cr Bank Account Rs 15,00,000 for buying a trekking agency in Pokhara.