Digvijay, Brijesh and Parakaram were partners in a firm sharing profits in the ratio of 2:2:1. Their Balance Sheet as on March 31, 2020 was as follows | Liabilities | Amount (₹) | Assets | Amount (₹) | |---|---:|---|---:| | Creditors | 49,000 | Cash | 8,000 | | Reserves | 18,500 | Debtors | 19,000 | | Digvijay's Capital | 82,000 | Stock | 42,000 | | Brijesh's Capital | 60,000 | Buildings | 2,07,000 | | Parakaram's Capital | 75,500 | Patents | 9,000 | | **Total** | **2,85,000** | **Total** | **2,85,000** | Brijesh retired on March 31, 2020 on the following terms: (i) Goodwill of the firm was valued at ₹70,000 and was not to appear in the books. (ii) Bad debts amounting to ₹2,000 were to be written off. (iii) Patents were considered as valueless. Prepare Revaluation Account, Partners' Capital Accounts and the Balance Sheet of Digvijay and Parakaram after Brijesh's retirement.

Digvijay, Brijesh and Parakaram were partners in a firm sharing profits in the ratio of 2:2:1. Their Balance S

Numerical Questions · Q5

Digvijay, Brijesh and Parakaram were partners in a firm sharing profits in the ratio of 2:2:1. Their Balance Sheet as on March 31, 2020 was as follows

Liabilities	Amount (₹)	Assets	Amount (₹)
Creditors	49,000	Cash	8,000
Reserves	18,500	Debtors	19,000
Digvijay's Capital	82,000	Stock	42,000
Brijesh's Capital	60,000	Buildings	2,07,000
Parakaram's Capital	75,500	Patents	9,000
Total	2,85,000	Total	2,85,000

Brijesh retired on March 31, 2020 on the following terms:

Goodwill of the firm was valued at ₹70,000 and was not to appear in the books.
Bad debts amounting to ₹2,000 were to be written off.
Patents were considered as valueless. Prepare Revaluation Account, Partners' Capital Accounts and the Balance Sheet of Digvijay and Parakaram after Brijesh's retirement.

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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 Brijesh's retirement from the firm of Digvijay, Brijesh and Parakaram (profit-sharing ratio 2:2:1), the assets and liabilities are revalued, reserves and goodwill are adjusted, and Brijesh's dues are transferred to his Loan Account. The continuing partners Digvijay and Parakaram share future profits 2:1.

Revaluation Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Bad Debts written off	2,000	By Loss transferred to:
To Patents written off	9,000	Digvijay's Capital (2/5)	4,400
		Brijesh's Capital (2/5)	4,400
		Parakaram's Capital (1/5)	2,200
Total	11,000	Total	11,000

Goodwill Adjustment

Goodwill of the firm = ₹70,000. Brijesh's share = ₹70,000 × 2/5 = ₹28,000. This is borne by the continuing partners in their gaining ratio:

Digvijay's gain = 2/3 − 2/5 = 4/15
Parakaram's gain = 1/3 − 1/5 = 2/15
Gaining ratio = 4 : 2 = 2 : 1

So Digvijay is debited ₹28,000 × 2/3 = ₹18,667 and Parakaram ₹28,000 × 1/3 = ₹9,333.

Particulars	Debit (₹)	Credit (₹)
Digvijay's Capital A/c Dr.	18,667
Parakaram's Capital A/c Dr.	9,333
To Brijesh's Capital A/c		28,000
(Brijesh's share of goodwill adjusted in the gaining ratio 2:1)

Partners' Capital Accounts

Particulars	Digvijay (₹)	Brijesh (₹)	Parakaram (₹)	Particulars	Digvijay (₹)	Brijesh (₹)	Parakaram (₹)
To Revaluation A/c (Loss)	4,400	4,400	2,200	By Balance b/d	82,000	60,000	75,500
To Brijesh's Capital (Goodwill)	18,667	—	9,333	By Reserves A/c	7,400	7,400	3,700
To Brijesh's Loan A/c	—	91,000	—	By Digvijay's Capital (Goodwill)	—	18,667	—

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Brijesh retires; goodwill is adjusted without appearing in the books, assets are revalued, and the continuing partners' capitals are settled. The final Balance Sheet total is ₹2,74,000, with Digvijay's capital at ₹66,333 and Parakaram's at ₹67,667.

When a partner retires, the firm must revalue its assets and liabilities to reflect their current worth. Any gain or loss from revaluation is shared among all partners in their old profit-sharing ratio. Goodwill, though valued, is not brought into the books — instead, the retiring partner's share of goodwill is compensated by the continuing partners in their gaining ratio. Here, Brijesh retires on March 31, 2020, and the terms require us to write off bad debts, eliminate patents, and adjust goodwill.

The revaluation account captures the changes in asset values. Bad debts of ₹2,000 reduce debtors, and patents being valueless means a loss of ₹9,000. These are losses, so they appear on the debit side of the revaluation account. The total loss on revaluation is ₹11,000, which is shared by Digvijay, Brijesh, and Parakaram in their profit-sharing ratio of 2:2:1.

Goodwill is valued at ₹70,000. Since it is not to appear in the books, we do not open a goodwill account. Instead, the retiring partner's share of goodwill is debited to the continuing partners' capital accounts in their gaining ratio and credited to the retiring partner's capital account. The gaining ratio is the same as the old ratio because the continuing partners share future profits equally (implied by the absence of a new ratio — they continue in the old ratio among themselves, which is 2:1 for Digvijay and Parakaram). Brijesh's share of goodwill is 2/5 of ₹70,000 = ₹28,000. This is borne by Digvijay and Parakaram in their gaining ratio of 2:1, so Digvijay contributes ₹18,667 and Parakaram contributes ₹9,333.

After revaluation and goodwill adjustment, the partners' capital accounts are prepared. Brijesh's capital account is credited with his share of reserves (₹18,500 × 2/5 = ₹7,400), his share of revaluation loss (₹11,000 × 2/5 = ₹4,400), and goodwill (₹28,000). His final balance is transferred to his loan account (or paid, but here it's a balance). The continuing partners' capitals are adjusted accordingly.

Finally, the Balance Sheet of Digvijay and Parakaram is prepared. Assets are updated: cash remains ₹8,000, debtors become ₹17,000 (after writing off ₹2,000), stock ₹42,000, buildings ₹2,07,000, and patents are zero. Liabilities include creditors ₹49,000 and Brijesh's loan (the amount due to him). The total of the new Balance Sheet is ₹2,74,000.

Let's now prepare the required accounts step by step.

Revaluation Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Bad Debts A/c	2,000	By Loss on Revaluation transferred to:
To Patents A/c	9,000	Digvijay's Capital A/c (2/5)	4,400
		Brijesh's Capital A/c (2/5)	4,400
		Parakaram's Capital A/c (1/5)	2,200
Total	11,000	Total	11,000

Partners' Capital Accounts

Particulars	Digvijay (₹)	Brijesh (₹)	Parakaram (₹)	Particulars	Digvijay (₹)	Brijesh (₹)	Parakaram (₹)
To Revaluation A/c (Loss)	4,400	4,400	2,200	By Balance b/d	82,000	60,000	75,500
To Goodwill A/c (Brijesh's share)	18,667	—	9,333	By Reserves A/c	7,400	7,400	3,700
To Brijesh's Loan A/c	—	91,000	—	By Goodwill A/c (from continuing partners)	—	28,000	—
To Balance c/d	66,333	—	67,667
Total	89,400	95,400	79,200	Total	89,400	95,400	79,200

Balance Sheet of Digvijay and Parakaram as on March 31, 2020 (after Brijesh's retirement)

Liabilities	Amount (₹)	Assets	Amount (₹)
Creditors	49,000	Cash	8,000
Brijesh's Loan	91,000	Debtors (19,000 - 2,000)	17,000
Capital Accounts:		Stock	42,000
Digvijay	66,333	Buildings	2,07,000
Parakaram	67,667	Patents	0
Total	2,74,000	Total	2,74,000

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Revaluation Account

Partners' Capital Accounts

Balance Sheet of Digvijay and Parakaram as on March 31, 2020 (after Brijesh's retirement)

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