What is the correct journal entry to record Goodwill?

The correct journal entry to record Goodwill involves recognizing the assets acquired during an acquisition, any liabilities assumed, and the payment made, often in cash. Goodwill represents the excess of the purchase price over the fair market value of the net identifiable assets acquired in a business combination.

When a company acquires another company, it will typically pay a certain amount in cash or other consideration. The assets taken over may be listed separately, and any liabilities associated with those assets will also be assumed. The difference between the total consideration paid (such as cash) and the net identifiable assets (total assets minus total liabilities) is recognized as Goodwill.

In this entry, debiting Goodwill indicates that the company has recognized an intangible asset that exceeds the fair value of identifiable net assets. The debits to assets and credit to liabilities reflect the acquisition of those assets and assumption of liabilities from the seller, while the credit to cash shows the outflow of cash for the purchase. This accurately describes the accounting for business combinations under generally accepted accounting principles (GAAP), where Goodwill is recorded as the excess amount paid in a transaction. Thus, this entry captures the full impact of the acquisition transaction effectively.