Q.On retirement of a partner, his share of goodwill is credited to:

The retiring partner is the one who is compensated for the goodwill he helped build, so it is his own account that receives the credit.

Since the retiring partner will no longer share in the firm's future profits (which include a return on the goodwill he helped create), his share of goodwill is credited to his own Capital Account. The continuing partners, who will enjoy that extra future profit, bear the cost by having their Capital Accounts debited in the gaining ratio.

The correct option is (b) The retiring partner's Capital Account.

Goodwill represents the value of the firm's reputation, built up over the years by all the partners together, including the one now retiring. Once he retires, he will no longer share in the profits the firm earns from that goodwill in the future — so he must be compensated NOW, at the point he leaves, for his share of it. This is done by crediting his Capital Account with his share of the firm's goodwill (his old profit-sharing share × the firm's total goodwill), and debiting the continuing partners' Capital Accounts, in their Gaining Ratio, for the same amount.

Why the other options are wrong:

• (a) is wrong because crediting ALL partners (including the continuing ones) would mean the continuing partners are, in effect, compensating themselves — the whole point of the adjustment is that only the partner who is LEAVING, and losing his future share, is credited.
• (c) is wrong for the same reason as (a), but the other way round — the continuing partners' accounts are DEBITED (they pay), never credited, for this adjustment.
• (d) is wrong because the MSBSHSE-taught treatment does not keep a permanent Goodwill Account open in the books at all; the whole adjustment is passed through the partners' own Capital Accounts.

Students sometimes think goodwill must be credited to ALL partners, confusing this with the treatment of General Reserve or revaluation profit (which ARE shared by all partners including the retiring one) — goodwill specifically is credited only to the retiring partner, and debited only to the continuing (gaining) partners.