Accountancy · Ch 6 — Retirement and Death of a Partner
Treatment of Goodwill on Retirement or Death of a Partner
Treatment of Goodwill on Retirement or Death of a Partner
Goodwill built up by a firm belongs to all the partners who worked to create it, in their existing profit-sharing ratio. When a partner retires or dies, he or she is giving up a right to a share of that goodwill, and must be compensated for it by the partners who now gain a bigger share of future profits.
As a matter of accounting practice, a firm's self-generated goodwill is not raised as an asset in the books (goodwill can be recorded only when it has actually been purchased/paid for). Instead, the outgoing partner's share of goodwill is adjusted directly through the partners' Capital Accounts:
Journal entry for treatment of goodwill
Gaining Partners' Capital A/cs Dr. (in gaining ratio)
To Retiring/Deceased Partner's Capital A/c (with his/her share of goodwill)
The amount used is: Outgoing partner's share of goodwill = Firm's valued goodwill × his/her profit share.
Worked illustration (continuing the P, Q, R example from Section 2, where Q retires and the gaining ratio of P : R is 3 : 2). The firm's goodwill is valued at ₹1,00,000 on the date of Q's retirement.
Q's share of goodwill = 1,00,000 × 3/10 = ₹30,000.
This ₹30,000 is debited to the gaining partners in their gaining ratio (3 : 2):
- P's Capital A/c Dr. = 30,000 × 3/5 = ₹18,000
- R's Capital A/c Dr. = 30,000 × 2/5 = ₹12,000
- Q's Capital A/c Cr. = ₹30,000 …
A remaining partner whose share of future profit increases as a result of another partner's ret …
The outgoing partner's proportionate entitlement to the firm's valued goodwill, computed as the firm's goodwill multiplied by his or her …