Pankaj, Naresh and Saurabh are partners sharing profits in the ratio of 3:2:1. Naresh retired from the firm due to his illness on September 30, 2017. On that date the Balance Sheet of the firm was as follows | Liabilities | Amount (₹) | Assets | Amount (₹) | |---|---:|---|---:| | General Reserve | 12,000 | Bank | 7,600 | | Sundry Creditors | 15,000 | Debtors 6,000 − Provision for Doubtful Debt 400 | 5,600 | | Bills Payable | 12,000 | Stock | 9,000 | | Outstanding Salary | 2,200 | Furniture | 41,000 | | Provision for Legal Damages | 6,000 | Premises | 80,000 | | Capitals: | | | | | Pankaj | 46,000 | | | | Naresh | 30,000 | | | | Saurabh | 20,000 | | | | **Total** | **1,43,200** | **Total** | **1,43,200** | Additional Information: (i) Premises have appreciated by 20%, stock depreciated by 10% and provision for doubtful debts was to be made 5% on debtors. Further, provision for legal damages is to be made for ₹1,200 and furniture to be brought up to ₹45,000. (ii) Goodwill of the firm be valued at ₹42,000. (iii) ₹26,000 from Naresh's Capital account be transferred to his loan account and balance be paid through bank; if required, necessary loan may be obtained from Bank. (iv) Naresh's share of profit till the date of retirement is to be calculated on the basis of last year's profit, i.e., ₹60,000. (v) New profit sharing ratio of Pankaj and Saurabh is decided to be 5:1. Give the necessary ledger accounts and balance sheet of the firm after Naresh's retirement.

Pankaj, Naresh and Saurabh are partners sharing profits in the ratio of 3:2:1. Naresh retired from the firm du

Numerical Questions · Q7

Pankaj, Naresh and Saurabh are partners sharing profits in the ratio of 3:2:1. Naresh retired from the firm due to his illness on September 30, 2017. On that date the Balance Sheet of the firm was as follows

Liabilities	Amount (₹)	Assets	Amount (₹)
General Reserve	12,000	Bank	7,600
Sundry Creditors	15,000	Debtors 6,000 − Provision for Doubtful Debt 400	5,600
Bills Payable	12,000	Stock	9,000
Outstanding Salary	2,200	Furniture	41,000
Provision for Legal Damages	6,000	Premises	80,000
Capitals:
Pankaj	46,000
Naresh	30,000
Saurabh	20,000
Total	1,43,200	Total	1,43,200

Additional Information:

Premises have appreciated by 20%, stock depreciated by 10% and provision for doubtful debts was to be made 5% on debtors. Further, provision for legal damages is to be made for ₹1,200 and furniture to be brought up to ₹45,000.
Goodwill of the firm be valued at ₹42,000.
₹26,000 from Naresh's Capital account be transferred to his loan account and balance be paid through bank; if required, necessary loan may be obtained from Bank.
Naresh's share of profit till the date of retirement is to be calculated on the basis of last year's profit, i.e., ₹60,000.
New profit sharing ratio of Pankaj and Saurabh is decided to be 5:1. Give the necessary ledger accounts and balance sheet of the firm after Naresh's retirement.

Rajasthan RbseTextbookSubjective· 5mImportance★★★★★

89% · 55/62 Questions

🔒 Locked · start free trial →

You're viewing a preview — the full solution, concept, methods & PYQ mapping are locked.

Start your 14-day free trial to unlock the full solution →

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	–	–

Start your 14-day free trial to unlock the full solution →

On Naresh's retirement the revaluation yields a profit of ₹18,000, the General Reserve is distributed, and Naresh's ₹14,000 share of goodwill is borne entirely by Pankaj (the only gaining partner). Pankaj's capital becomes ₹47,000 and Saurabh's ₹25,000. The amount at credit in Naresh's capital is ₹54,000 — ₹26,000 to his Loan Account and ₹28,000 paid through the bank (funded by a ₹20,400 bank loan). The Balance Sheet totals ₹1,54,800.

Concept

Pankaj, Naresh and Saurabh share profits 3:2:1; Naresh retires and the new ratio of Pankaj and Saurabh is 5:1. Revaluation profit/loss and the General Reserve go to all partners in the old ratio; Naresh's share of goodwill is charged to the gaining partners in their gaining ratio.

Working Note 1: Gaining ratio and goodwill

Gaining ratio = new − old. Pankaj: 5/6 − 3/6 = 2/6; Saurabh: 1/6 − 1/6 = 0. So Pankaj alone gains and bears Naresh's whole share of goodwill. Naresh's share = 2/6 × ₹42,000 = ₹14,000, debited to Pankaj and credited to Naresh.

Revaluation Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Stock A/c (9,000 − 8,100)	900	By Premises A/c (96,000 − 80,000)	16,000
To Provision for Legal Damages A/c (new)	1,200	By Provision for Doubtful Debts A/c (400 − 300)	100
To Profit trf. to Capitals — Pankaj 9,000, Naresh 6,000, Saurabh 3,000	18,000	By Furniture A/c (45,000 − 41,000)	4,000
Total	20,100	Total	20,100

The ₹1,200 provision for legal damages is a fresh charge; the existing ₹6,000 provision is unaffected and remains on the Balance Sheet (total ₹7,200). Premises appreciate 20% (₹16,000), stock falls 10% (₹900), the doubtful-debts provision falls from ₹400 to 5% of ₹6,000 = ₹300 (a ₹100 write-back), and furniture rises to ₹45,000.

Partners' Capital Accounts

Particulars	Pankaj (₹)	Naresh (₹)	Saurabh (₹)	Particulars	Pankaj (₹)	Naresh (₹)	Saurabh (₹)
To Naresh's Capital (goodwill)	14,000	—	—	By Balance b/d	46,000	30,000	20,000
To Naresh's Loan A/c	—	26,000	—	By General Reserve (3:2:1)	6,000	4,000	2,000
To Bank A/c	—	28,000	—	By Revaluation A/c (profit)	9,000	6,000	3,000
To Balance c/d	47,000	—	25,000	By Pankaj's Capital (goodwill)	—	14,000	—
Total	61,000	54,000	25,000	Total	61,000	54,000	25,000

Working Note 2: Bank Account

Opening bank ₹7,600 is not enough to pay Naresh the ₹28,000 due through the bank, so the firm raises a bank loan of ₹20,400 (₹28,000 − ₹7,600). Bank = ₹7,600 + ₹20,400 − ₹28,000 = nil.

Balance Sheet of Pankaj and Saurabh (after Naresh's retirement)

Liabilities	Amount (₹)	Assets	Amount (₹)
Sundry Creditors	15,000	Debtors 6,000 − Provision 300	5,700
Bills Payable	12,000	Stock	8,100
Outstanding Salary	2,200	Furniture	45,000

Start your 14-day free trial to unlock the full solution →

←Previous question · questions-for-practiceQ6 — Radha, Sheela and Meena were in partnership sharing profits and losses…→Next question · questions-for-practiceQ8 — Puneet, Pankaj and Pammy are partners in a business sharing profits an…

Concept

Working Note 1: Gaining ratio and goodwill

Revaluation Account

Partners' Capital Accounts

Working Note 2: Bank Account

Balance Sheet of Pankaj and Saurabh (after Naresh's retirement)

🎓Unlock everything free for 14 days

Unlock everything free for 14 days