Accounting Treatment Of Goodwill At The Time Of Retirement Of A Partner (Class 12)

The retiring partner is entitled to his/her share of goodwill at the time of retirement because the goodwill is the result of the efforts of all partners including the retiring one in the past. The retiring partner is compensated for his/her share of goodwill.

TREATMENT OF GOODWILL

In case of retirement of a partner, the goodwill is adjusted through partner’s capital accounts.

The retiring partner’s capital account is credited with his/her share of goodwill and remaining partner’s capital account is debited in their gaining ratio. The journal entry is made as under:

Remaining Partners’ Capital A/c Dr.

To Retiring Partner’s Capital A/c

(Retiring partner’s share of goodwill adjusted to remaining partners in the gaining ratio)

Gaining Ratio- Gaining ratio is the ratio in which the remaining partners acquire the outgoing partner’s share of profit. Gaining ratio is calculated at the time of retirement of a partner.

Gaining Ratio = New Ratio – Old Ratio

The existing goodwill (if any) will be written off by debiting all partners’ capital account in their old ratio and crediting the goodwill account.

ALL partners’ Capital A/c/Current A/c Dr

To Goodwill a/c

( Existing goodwill written off in old ratio)

Note: – Goodwill cannot be shown in books unless and until it is purchased by paying some consideration. (AS-26)

ALSO READ: ACCOUNTING TREATMENT OF GOODWILL AT THE TIME OF ADMISSION OF A NEW PARTNER

FOR EXAMPLE–

A, B and C are partners in a firm sharing profits in the ratio of 5:3:2. A retires and New ratio of B and C 11:9 . Goodwill of the firm is Rs. 80,000. Pass necessary journal entry.

B’ Capital A/c Dr 20,000

C’ Capital A/c Dr 20,000

To A’s Capital a/c 40,000

(A’s share of goodwill adjusted to B&C in the gaining ratio)

Working Note: – Old Ratio is 5:3:2,

New Ratio 11:9

Gaining Ratio = New Ratio – Old Ratio

B- 11/20 -3/10 = 5/20

C- 9/20 -2/10 = 5/20

gaining ratio is 1:1.

A’s share of goodwill =80,000 x 5/10=40000

Adjusted by B&C in the gaining Ratio 1:1

B– 40,000x ½ = 20,000

C– 40,000x ½ = 20,000

FOR EXAMPLE-

P, Q and R are partners in a firm sharing profits in the ratio of 5:3:2. R retires and New ratio of A and B 5:3 . Goodwill of the firm is Rs. 1,50,000. Pass necessary journal entry.

P’ Capital A/c Dr 18,750

Q’ Capital A/c Dr 11,250

To R’s Capital a/c 30,000

(R’s share of goodwill adjusted to P&Q in the gaining ratio)

Working Note: – Old Ratio is 5:3:2,

New Ratio 5:3

Gaining Ratio = New Ratio – Old Ratio

P- 5/8 – 5/10 = 10/80

Q- 3/8 -3/10 = 6/80

gaining ratio is 5:3.

R’s share of goodwill =1,50,000 x 2/10

=30000

Adjusted by P&Q in the gaining Ratio 5:3

P– 30,000x 5/8 = 18,750

Q– 30,000x 3/8 = 11,250

FOR EXAMPLE-

T, P and M are partners’ sharing profit in the ratio of 3 : 2 : 1 . P retires and on the date of P’s retirement goodwill is valued at Rs.1,80,000. Goodwill already appears in the books at a value of Rs. 96,000. New ratio of T and M is 3 : 2. Make the necessary journal entries.

T’s Capital A/c Dr. 48,000
P’s Capital A/c Dr. 32,000
M’s Capital A/c Dr. 16,000
To Goodwill A/c 96,000
(Existing goodwill written-off from the books)
T’s Capital A/c Dr. 18,000
M’s Capital A/c Dr. 42,000
To P’s Capital A/c 60,000
(P’s share of goodwill adjusted to remaining partners in their gaining ratio 3 : 7)

Priya’s share of goodwill = Rs 1,80,000 × 2/6 = Rs 60,000
Gaining of a Partner’s = New Ratio – Old Ratio

T’s Gain = 3/5 – 3/6 = 18/30 – 15/30 = 3/30
M’s Gain = 2/5 – 1/6 = 12/30 – 5/30 = 7/30
Gaining Ratio between T and M = 3 : 7

QUESTIONS FOR PRACTICE-

Jay, Vijay and Sanjay are partners’ sharing profit in the ratio of 3 : 2 : 1 . Sanjay retires and on the date of Sanjay retirement goodwill is valued at Rs. 90,000. Pass the necessary journal entries in the books of firms.
Jay, Vijay and Sanjay are partners’ sharing profit in the ratio of 3 : 2 : 1 . Sanjay retires and on the date of Sanjay retirement goodwill is valued at Rs. 60,000. Goodwill already appears in the books at a value of Rs. 48,000.Pass the necessary journal entries in the books of firms.

Accounting Treatment Of Goodwill At The Time Of Retirement Of A Partner (Class 12)