Himanshu, Gagan and Naman are partners sharing profits and losses in the ratio of 3:2:1. On March 31, 2019, Na

Numerical Questions · Q3

Himanshu, Gagan and Naman are partners sharing profits and losses in the ratio of 3:2:1. On March 31, 2019, Naman retires. The various assets and liabilities of the firm on the date were as follows:

Particulars	Amount (₹)
Cash	10,000
Building	1,00,000
Plant and Machinery	40,000
Stock	20,000
Debtors	20,000
Investments	30,000

The following was agreed upon between the partners on Naman's retirement: (i) Building to be appreciated by 20%. (ii) Plant and Machinery to be depreciated by 10%. (iii) A provision of 5% on debtors to be created for bad and doubtful debts. (iv) Stock was to be valued at ₹18,000 and Investment at ₹35,000. Record the necessary journal entries to the above effect and prepare the revaluation account.

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Concept understanding — Goodwill Adjustment on Retirement

Goodwill Adjustment on Retirement – A First Look

Think of a cricket team. Four friends start a team together. Over time, they build a reputation – people come to watch them, sponsors pay them, and their brand becomes valuable. Now one player retires. Should he walk away with nothing for the reputation the team built while he was part of it? Of course not. That reputation – the team's ability to earn more than just its raw assets – is goodwill.

In a partnership, goodwill is that same intangible value: the firm's name, its customer loyalty, its location advantage, its reputation for quality. When a partner retires, the remaining partners continue the business. They will enjoy the benefits of that goodwill going forward. The retiring partner, who helped build it, deserves a share of its value at the time of retirement.

The Precise Meaning

Goodwill on retirement is the compensation paid by the continuing partners to the retiring partner for his/her share of the firm's reputation and earning power. It is not a cash payment for a physical asset – it is an adjustment of the partners' capital accounts to reflect that the retiring partner's share of goodwill is being transferred to the remaining partners.

Important

Goodwill is not brought into the books as a new asset. It is adjusted through the partners' capital accounts. The retiring partner's capital account is credited with his/her share of goodwill, and the continuing partners' capital accounts are debited in their gaining ratio.

Why Does This Matter?

If goodwill were ignored, the retiring partner would be underpaid. The continuing partners would get a free benefit – the firm's reputation – without compensating the person who helped create it. The adjustment ensures fairness: the retiring partner gets his/her rightful share, and the continuing partners pay for the advantage they now exclusively enjoy.

The Accounting Treatment – Step by Step

The NCERT textbook gives a clear procedure. Here is the logic:

Calculate the firm's total goodwill at the time of retirement. This is usually given in the problem or valued using an agreed method (e.g., average profit method, super profit method).
Find the retiring partner's share of that goodwill.

Retiring partner's share = Total goodwill × Retiring partner's profit-sharing ratio.
Determine the gaining ratio of the continuing partners.

Gaining ratio = New ratio – Old ratio (for each continuing partner).

If the new ratio is not given, the continuing partners share the retiring partner's share in their old profit-sharing ratio.
Pass the journal entry:
```
Continuing Partners' Capital A/cs (individually)   Dr.   (in gaining ratio)
     To Retiring Partner's Capital A/c
```
This entry reduces the continuing partners' capital (they pay) and increases the retiring partner's capital (he receives).

Watch out

Do not debit the Goodwill account. The goodwill is not being recorded as an asset – it is an adjustment among partners. Only if the firm decides to raise goodwill as an asset and then write it off would you touch the Goodwill account, but that is a different treatment (usually for admission, not retirement).

Format: Partners' Capital Accounts (after adjustment)

Here is how the capital accounts look after the goodwill adjustment. Assume three partners: A, B, and C. C retires. A and B continue in the ratio 3:2. Total goodwill is ₹1,00,000. Old ratio was 2:2:1 (A:B:C). C's share = 1/5 × ₹1,00,000 = ₹20,000. Gaining ratio of A and B = New ratio – Old ratio = (3/5 – 2/5) : (2/5 – 2/5) = 1/5 : 0. So A gains fully. A's capital is debited ₹20,000; C's capital is credited ₹20,000.

Particulars	A (₹)	B (₹)	C (₹)
To C's Capital A/c (Goodwill)	20,000	–	–
By Balance b/d	(say) 1,00,000	(say) 80,000	(say) 60,000
By A's Capital A/c (Goodwill)	–	–	20,000

The final balances after adjustment: A = ₹80,000, B = ₹80,000, C = ₹80,000 (assuming no other adjustments).

Note

The format above is a simplified version. In your exam, you will show all adjustments (revaluation, reserves, etc.) in a single capital account column for each partner. The goodwill adjustment is just one line.

Key Formula (for reference)

Retiring partner's share of goodwill = Total goodwill of the firm × Retiring partner's profit share.

Gaining ratio = New ratio – Old ratio (for each continuing partner). If new ratio is not given, use the old ratio among continuing partners.

A Common Mistake to Avoid

Students often debit the Goodwill account and credit the retiring partner's capital. That is wrong unless the firm decides to record goodwill as an asset. In retirement, the standard treatment is to adjust through partners' capital accounts only. The Goodwill account remains untouched (unless the problem explicitly says "goodwill is to be raised and written off").

Final Takeaway

Goodwill adjustment on retirement is a fairness mechanism. It transfers the retiring partner's share of the firm's reputation to the continuing partners, who pay for it by reducing their own capital. The journal entry is simple: debit continuing partners in gaining ratio, credit retiring partner. No new asset appears – it is an internal reallocation of capital.

When you see a retirement problem, first find the gaining ratio, then the retiring partner's share of goodwill, and then pass the entry. The rest of the adjustments (revaluation, reserves, etc.) follow the same pattern as in admission.

Step 1: Calculate the Revaluation Profit/Loss

We first compute the net effect of revaluing assets and liabilities.

Item	Old Value (₹)	New Value (₹)	Change (₹)
Building	1,00,000	1,20,000 (appreciated by 20%)	+20,000
Plant & Machinery	40,000	36,000 (depreciated by 10%)	–4,000
Stock	20,000	18,000	–2,000
Investments	30,000	35,000	+5,000
Debtors	20,000	19,000 (after 5% provision)	–1,000

Net Revaluation Profit = 20,000 – 4,000 – 2,000 + 5,000 – 1,000 = ₹18,000

This profit is credited to the old partners in their old profit-sharing ratio (3:2:1).

Step 2: Journal Entries

Date	Particulars	Debit (₹)	Credit (₹)
2019 Mar 31	Building A/c Dr.	20,000
	To Revaluation A/c		20,000
	(Being building appreciated by 20%)
	Revaluation A/c Dr.	4,000
	To Plant & Machinery A/c		4,000
	(Being plant & machinery depreciated by 10%)
	Revaluation A/c Dr.	2,000
	To Stock A/c		2,000
	(Being stock revalued to ₹18,000)
	Investments A/c Dr.	5,000
	To Revaluation A/c		5,000
	(Being investments revalued to ₹35,000)
	Revaluation A/c Dr.	1,000
	To Provision for Doubtful Debts A/c		1,000
	(Being 5% provision created on debtors)
	Revaluation A/c Dr.	18,000
	To Himanshu’s Capital A/c (3/6)		9,000
	To Gagan’s Capital A/c (2/6)		6,000
	To Naman’s Capital A/c (1/6)		3,000
	(Being revaluation profit transferred to partners’ capital accounts in old ratio 3:2:1)

Step 3: Revaluation Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Plant & Machinery A/c	4,000	By Building A/c	20,000
To Stock A/c	2,000	By Investments A/c	5,000
To Provision for Doubtful Debts A/c	1,000
To Partners’ Capital A/cs:
— Himanshu	9,000
— Gagan	6,000
— Naman	3,000
Total	25,000	Total	25,000

✓Final answer

The revaluation profit of ₹18,000 is credited to Himanshu (₹9,000), Gagan (₹6,000), and Naman (₹3,000) in their old ratio 3:2:1.

Building is appreciated by 20%, Plant and Machinery depreciated by 10%, a 5% provision for doubtful debts is created on debtors, Stock is revalued to ₹18,000, and Investments are revalued to ₹35,000. The net revaluation profit of ₹18,000 is credited to the old partners (Himanshu, Gagan, Naman) in their profit-sharing ratio 3:2:1.

When a partner retires, the firm’s assets and liabilities are revalued to reflect their current worth. This is because the retiring partner is entitled to a share of any hidden gain or loss that has accumulated in the assets up to the date of retirement. The revaluation account (also called the profit and loss adjustment account) is a nominal account that captures all changes in asset values and liability provisions. Any profit or loss from revaluation is transferred to the old partners’ capital accounts in their old profit-sharing ratio — here, 3:2:1 for Himanshu, Gagan, and Naman.

The logic is simple: if an asset’s value increases, we debit the asset (increase it) and credit the revaluation account (gain). If it decreases, we credit the asset (reduce it) and debit the revaluation account (loss). Provisions for liabilities (like doubtful debts) are treated as losses — they reduce the value of debtors, so we debit revaluation and create a provision account.

Let’s work through each adjustment step by step.

Step 1: Building appreciation by 20%

Original value: ₹1,00,000

Increase: 20% of 1,00,000 = ₹20,000

Journal entry: Debit Building A/c ₹20,000, Credit Revaluation A/c ₹20,000.

Step 2: Plant and Machinery depreciation by 10%

Original value: ₹40,000

Decrease: 10% of 40,000 = ₹4,000

Journal entry: Debit Revaluation A/c ₹4,000, Credit Plant and Machinery A/c ₹4,000.

Step 3: Provision for doubtful debts at 5% on debtors

Debtors: ₹20,000

Provision: 5% of 20,000 = ₹1,000

Journal entry: Debit Revaluation A/c ₹1,000, Credit Provision for Doubtful Debts A/c ₹1,000.

Step 4: Stock revalued to ₹18,000

Original value: ₹20,000

New value: ₹18,000

Decrease: ₹2,000

Journal entry: Debit Revaluation A/c ₹2,000, Credit Stock A/c ₹2,000.

Step 5: Investments revalued to ₹35,000

Original value: ₹30,000

New value: ₹35,000

Increase: ₹5,000

Journal entry: Debit Investments A/c ₹5,000, Credit Revaluation A/c ₹5,000.

Now, let’s total the revaluation account to find the net gain or loss.

Revaluation Account (T-format)

Particulars	Amount (₹)	Particulars	Amount (₹)
To Plant and Machinery A/c	4,000	By Building A/c	20,000
To Provision for Doubtful Debts A/c	1,000	By Investments A/c	5,000
To Stock A/c	2,000
To Profit transferred to:
Himanshu’s Capital A/c (3/6)	9,000
Gagan’s Capital A/c (2/6)	6,000
Naman’s Capital A/c (1/6)	3,000
Total	25,000	Total	25,000

Note

The net profit works out to ₹18,000: total gains (Building ₹20,000 + Investments ₹5,000) = ₹25,000, less total losses (Plant and Machinery ₹4,000 + Provision for Doubtful Debts ₹1,000 + Stock ₹2,000) = ₹7,000, giving ₹25,000 – ₹7,000 = ₹18,000. This is distributed among the three old partners in their profit-sharing ratio 3:2:1: Himanshu (3/6) = ₹9,000; Gagan (2/6) = ₹6,000; Naman (1/6) = ₹3,000.

Watch out

A common mistake is to forget that the revaluation profit is shared among all old partners, including the retiring partner. Naman gets his share because the revaluation reflects gains/losses that occurred during his partnership tenure.

Now, the journal entries in proper format:

Journal

Date	Particulars	Debit (₹)	Credit (₹)
2019 Mar 31	Building A/c Dr.	20,000
	To Revaluation A/c		20,000
	(Being building appreciated by 20%)

Mar 31	Revaluation A/c Dr.	4,000
	To Plant and Machinery A/c		4,000
	(Being plant and machinery depreciated by 10%)

Mar 31	Revaluation A/c Dr.	1,000
	To Provision for Doubtful Debts A/c		1,000
	(Being provision created at 5% on debtors)

Mar 31	Revaluation A/c Dr.	2,000
	To Stock A/c		2,000
	(Being stock revalued to ₹18,000)

Mar 31	Investments A/c Dr.	5,000
	To Revaluation A/c		5,000
	(Being investments revalued to ₹35,000)

Mar 31	Revaluation A/c Dr.	18,000
	To Himanshu’s Capital A/c		9,000
	To Gagan’s Capital A/c		6,000
	To Naman’s Capital A/c		3,000
	(Being revaluation profit transferred to old partners’ capital accounts in ratio 3:2:1)

Tip

You can combine the first five entries into one compound entry if you prefer, but separate entries are clearer for exam purposes. Always show the narration for each.

Revaluation Account (vertical format, as often required)

Particulars	Amount (₹)	Particulars	Amount (₹)
To Plant and Machinery A/c	4,000	By Building A/c	20,000
To Provision for Doubtful Debts A/c	1,000	By Investments A/c	5,000
To Stock A/c	2,000
To Profit transferred to:
Himanshu’s Capital A/c	9,000
Gagan’s Capital A/c	6,000
Naman’s Capital A/c	3,000
Total	25,000	Total	25,000

✓Final answer

The revaluation account shows a net profit of ₹18,000, which is credited to Himanshu (₹9,000), Gagan (₹6,000), and Naman (₹3,000) in their profit-sharing ratio 3:2:1. The journal entries record the asset revaluations and the provision for doubtful debts as shown above.

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