Radha, Sheela and Meena were in partnership sharing profits and losses in the proportion of 3:2:1. On April 1, 2019, Sheela retires from the firm. On that date, their Balance Sheet was as follows | Liabilities | Amount (₹) | Assets | Amount (₹) | |---|---:|---|---:| | Trade Creditors | 3,000 | Cash-in-Hand | 1,500 | | Bills Payable | 4,500 | Cash at Bank | 7,500 | | Expenses Owing | 4,500 | Debtors | 15,000 | | General Reserve | 13,500 | Stock | 12,000 | | Capitals: | | Factory Premises | 22,500 | | Radha | 15,000 | Machinery | 8,000 | | Sheela | 15,000 | Loose Tools | 4,000 | | Meena | 15,000 | | | | **Total** | **70,500** | **Total** | **70,500** | The terms were: (a) Goodwill of the firm was valued at ₹13,500. (b) Expenses owing to be brought down to ₹3,750. (c) Machinery and Loose Tools are to be valued at 10% less than their book value. (d) Factory premises are to be revalued at ₹24,300. Prepare: 1. Revaluation account, 2. Partners' capital accounts and 3. Balance sheet of the firm after retirement of Sheela.

Radha, Sheela and Meena were in partnership sharing profits and losses in the proportion of 3:2:1. On April 1,

Numerical Questions · Q6

Radha, Sheela and Meena were in partnership sharing profits and losses in the proportion of 3:2:1. On April 1, 2019, Sheela retires from the firm. On that date, their Balance Sheet was as follows

Liabilities	Amount (₹)	Assets	Amount (₹)
Trade Creditors	3,000	Cash-in-Hand	1,500
Bills Payable	4,500	Cash at Bank	7,500
Expenses Owing	4,500	Debtors	15,000
General Reserve	13,500	Stock	12,000
Capitals:		Factory Premises	22,500
Radha	15,000	Machinery	8,000
Sheela	15,000	Loose Tools	4,000
Meena	15,000
Total	70,500	Total	70,500

The terms were:

Goodwill of the firm was valued at ₹13,500.
Expenses owing to be brought down to ₹3,750.
Machinery and Loose Tools are to be valued at 10% less than their book value.
Factory premises are to be revalued at ₹24,300. Prepare: 1. Revaluation account, 2. Partners' capital accounts and 3. Balance sheet of the firm after retirement of Sheela.

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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	–	–

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On Sheela's retirement the firm revalues its assets and liabilities (profit ₹1,350), distributes the General Reserve, and compensates Sheela for her ₹4,500 share of goodwill through the gaining partners' capitals. Sheela's dues of ₹24,450 are carried to her Loan Account. Radha's capital becomes ₹19,050 and Meena's ₹16,350, and the reconstituted Balance Sheet totals ₹71,100.

Concept and order of adjustments

Radha, Sheela and Meena share profits 3:2:1. When Sheela retires, four adjustments are made in order: (1) revalue assets and liabilities, sharing the gain/loss among all partners in the old ratio; (2) distribute the accumulated General Reserve in the old ratio; (3) compensate Sheela for her share of goodwill by debiting the gaining partners in their gaining ratio; and (4) close Sheela's capital and carry the balance to her Loan Account (no cash payment is mentioned).

Working Note 1: Gaining ratio and goodwill

No new ratio is given, so Radha and Meena continue in their old mutual ratio 3:1 — this is also their gaining ratio. Sheela's share of goodwill = 2/6 × ₹13,500 = ₹4,500, borne by Radha (3/4 × ₹4,500 = ₹3,375) and Meena (1/4 × ₹4,500 = ₹1,125).

Revaluation Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Machinery A/c (8,000 − 7,200)	800	By Expenses Owing A/c (4,500 − 3,750)	750
To Loose Tools A/c (4,000 − 3,600)	400	By Factory Premises A/c (24,300 − 22,500)	1,800
To Profit trf. to Capitals — Radha 675, Sheela 450, Meena 225	1,350
Total	2,550	Total	2,550

Partners' Capital Accounts

Particulars	Radha (₹)	Sheela (₹)	Meena (₹)	Particulars	Radha (₹)	Sheela (₹)	Meena (₹)
To Sheela's Capital (goodwill)	3,375	—	1,125	By Balance b/d	15,000	15,000	15,000
To Sheela's Loan A/c	—	24,450	—	By General Reserve (3:2:1)	6,750	4,500	2,250
To Balance c/d	19,050	—	16,350	By Revaluation A/c (profit)	675	450	225
				By Radha & Meena (goodwill)	—	4,500	—
Total	22,425	24,450	17,475	Total	22,425	24,450	17,475

Balance Sheet of Radha and Meena (after Sheela's retirement)

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Concept and order of adjustments

Working Note 1: Gaining ratio and goodwill

Revaluation Account

Partners' Capital Accounts

Balance Sheet of Radha and Meena (after Sheela's retirement)

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