Q.On retirement of a partner, goodwill will be credited to Capital Account of
🔒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.
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/cThis entry reduces the continuing partners' capital (they pay) and increases the retiring partner's capital (he receives).
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 | – | – |
On retirement, the retiring partner is entitled to his share of goodwill, so goodwill is credited to the retiring partner's capital account. The correct option is (a). …
On retirement, goodwill is credited to the retiring partner's capital account - option (a).
When a partner retires, he gives up his share of future profits to the continuing partners, so he is compensated for his share of the firm's goodwill. The standard treatment is to credit the retiring partner's capital account with his share of goodwill a …
Showing the 12 most recent of 24 on this concept.
- CBSE 2026Set 67/5/11 markMCQQ.Raha, Naveen and Vandana were partners in a firm sharing profits and losses equally. Naveen retired on 31st March, 2025. The balance in his capital account after making the necessary adjustments on account of reserves and revaluation of assets and reassessment of liabilities was ₹ 1,27,000. Naveen was paid ₹ 1,50,000 in full settlement of his claim. The value of goodwill of the firm on the date of Naveen’s retirement was : (A) ₹ 1,50,000 (B) ₹ 23,000 (C) ₹ 69,000 (D) ₹ 4,50,000
›Reveal solutionSolution
The value of goodwill of the firm on the date of Naveen's retirement is ₹69,000.
When a partner retires from a firm, the continuing partners acquire the retiring partner's share of future profits. Since goodwill represents the firm's reputation and earning capacity, the retiring partner is entitled to be compensated for their share in the firm's goodwill, as they contributed to building it during their tenure. This compensation ensures fairness, as the continuing partners will benefit from the firm's established goodwill in the future.
The accounting treatment for goodwill on a partner's retirement involves adjusting the capital accounts of the partners. The retiring partner's capital account is credited with their share of goodwill, increasing their claim against the firm. This increase is borne by the continuing partners, whose capital accounts are debited in their gaining ratio. The gaining ratio is the ratio in which the continuing partners acquire the retiring partner's share of profits.
The general journal entry for goodwill adjustment on retirement is:
Gaining Partners' Capital A/c Dr. (in their gaining ratio)
To Retiring Partner's Capital A/c Cr. (with their share of goodwill)
In this specific problem, we are given the amount paid to the retiring partner and their capital balance after all other adjustments (reserves, revaluation). The difference between the amount paid and this adjusted capital balance represents the retiring partner's share of goodwill. This is because the payment in full settlement includes not only their capital balance but also their share of any unrecorded or unadjusted goodwill. We can then use the retiring partner's profit-sharing ratio to calculate the total goodwill of the firm.
Solution: Calculation of Firm's Goodwill
The problem provides Naveen's capital balance after all adjustments (excluding goodwill) and the final amount paid to him. The excess amount paid to Naveen over his adjusted capital balance represents his share of the firm's goodwill.
-
Calculate Naveen's Share of Goodwill:
The amount paid to Naveen in full settlement is ₹1,50,000.
His capital account balance after all other adjustments was ₹1,27,000.
The difference is the compensation for his share of goodwill.
-
Calculate the Firm's Total Goodwill: …
-
- CBSE 2026Set ANNUAL1 markMCQQ.In the case of death of a partner, which of the following item, will not be adjusted on the basis of time? A) Share in goodwill B) Interest on capital C) Interest on drawings D) Share in profits
›Reveal solutionSolution
Share in goodwill is NOT adjusted on a time basis, so option (A) is correct.
When a partner dies part-way through the year, the amount due to the deceased is built up from several items. The following are measured on a time basis (for the part of the year up to the date of death):
- Interest on capital (option B) - proportionate to the period.
- Interest on drawings (option C) - proportionate to the period.
- Share in profits (option D) - profit of the firm up to the date of death, shared time-wise. …
- CBSE 2026Set ANNUAL1 markMCQQ.On retirement of a partner, goodwill will be credited to Capital Account of(a) Retiring partner(b) Remaining partners(c) All partners(d) None of them
›Reveal solutionSolution
On retirement, goodwill is credited to the retiring partner's capital account - option (a).
When a partner retires, he gives up his share of future profits to the continuing partners, so he is compensated for his share of the firm's goodwill. The standard treatment is to credit the retiring partner's capital account with his share of goodwill a …
- CBSE 2026Set ANNUAL1 markQ.Answer in one word/sentence: On retirement of a partner, the existing partners will pay his share of goodwill to him in which ratio?
›Reveal solutionSolution
Answer: Gaining ratio.
On a partner's retirement, the remaining (continuing) partners acquire his share of profit and therefore compensate him for his share of goodwill. They bear this in …
- CBSE 2025Set 67/4/11 markMCQQ.(a) Tavish, Umesh and Varun were partners in a firm sharing profits and losses in the ratio of 4 : 3 : 2. Tavish retired. Umesh and Varun decided to share profits and losses in future in the ratio of 5 : 3. The gaining share of Umesh will be : (A) 21/72 (B) 11/72 (C) 45/72 (D) 32/72(OR)(b) Asit, Sonu and Hina were partners in a firm sharing profits and losses in the ratio of 3 : 2 : 1. Asit retired and the balance in his capital account after making necessary adjustments on account of reserves and revaluation of assets and liabilities was ₹ 40,00,000. Sonu and Hina agreed to pay him ₹ 45,00,000 in full settlement of his claim. The value of goodwill of the firm was : (A) ₹ 5,00,000 (B) ₹ 20,00,000 (C) ₹ 15,00,000 (D) ₹ 10,00,000
›Reveal solutionSolution
Part (a): Umesh's gaining share = 21/72 — option (A).
Part (b): Firm's goodwill = ₹10,00,000 — option (D).
Part (a)
Gaining share = New share − Old share. Umesh's old share = 3/9, new share = 5/8. …
- CBSE 2025Set MARCH1 markQ.Who gives the share in goodwill to the retiring or deceased partner?
›Reveal solutionSolution
The remaining/continuing partners (the gaining partners) pay the retiring or deceased partner's share of goodwill, in their gaining ratio.
In GSEB Class-12 Commerce Accountancy (retirement/death of a partner):
- On retirement/death, the outgoing partner is entitled to their share of the firm's goodwill. …
- CBSE 2025Set ANNUAL1 markMCQQ.On the death of a partner, the deceased partner's Capital A/c will be credited with(a) his/her share of goodwill(b) goodwill of the firm(c) share of goodwill of remaining partners(d) None of the above
›Reveal solutionSolution
Goodwill compensation on death works exactly like it does on retirement — the outgoing (here, deceased) partner is credited only with their own proportionate share of goodwill.
When a partner dies, the reconstituted firm continues with the surviving partners, who gain from the deceased partner's share of future profits. In return, the deceased partner's share of the firm's existing goodwill must be compensated — this is credited to the deceased partner's own Capital Account, and debited to the continuing (gaining) partners' capital accounts in their gaining ratio.
- It is not the whole firm's goodwill — that would over-credit the deceased partner for value built partly by the surviving partners too. …
- CBSE 2024Set 67/3/11 markMCQQ.Manu, Sonu and Rahul were partners in a firm sharing profits and losses in the ratio of 4 : 3 : 2. With effect from 1st April, 2023, they decided to share profits and losses in the future in the ratio of 3 : 2 : 1. Their Balance Sheet showed Workmen Compensation Reserve of ₹84,000. The claim on account of Workmen Compensation is estimated at ₹75,000. The journal entry to give effect to the above transaction will be : (A) Workmen Compensation Reserve A/c Dr. ₹84,000; To Workmen Compensation Claim A/c ₹75,000; To Manu's Capital A/c ₹4,000; To Sonu's Capital A/c ₹3,000; To Rahul's Capital A/c ₹2,000 (B) Workmen Compensation Reserve A/c Dr. ₹84,000; To Workmen Compensation Claim A/c ₹75,000; To Manu's Capital A/c ₹4,500; To Sonu's Capital A/c ₹3,000; To Rahul's Capital A/c ₹1,500 (C) Manu's Capital A/c Dr. ₹500; To Rahul's Capital A/c ₹500 (D) Workmen Compensation Reserve A/c Dr. ₹84,000; To Workmen Compensation Claim A/c ₹75,000; To Manu's Capital A/c ₹3,000; To Sonu's Capital A/c ₹3,000; To Rahul's Capital A/c ₹3,000
›Reveal solutionSolution
The correct journal entry is (A): Workmen Compensation Reserve A/c Dr. ₹84,000; To Workmen Compensation Claim A/c ₹75,000; To Manu's Capital A/c ₹4,000; To Sonu's Capital A/c ₹3,000; To Rahul's Capital A/c ₹2,000.
Concept and Accounting Treatment
When partners change their profit-sharing ratio, any accumulated reserves or accumulated profits/losses must be distributed among the partners in their old profit-sharing ratio. This is because these reserves were built up during the period when the old ratio was in force. The Workmen Compensation Reserve is a statutory reserve created out of profits. It is not a liability — it is a part of the partners' equity.
The key rule: Any reserve or accumulated profit is credited to the partners' capital accounts in the old ratio. Any actual liability (like the estimated claim) is debited to the reserve account. The balance remaining in the reserve after providing for the claim is then distributed.
Here, the Workmen Compensation Reserve is ₹84,000. The estimated claim is ₹75,000. So the surplus (excess of reserve over claim) is ₹84,000 – ₹75,000 = ₹9,000. This surplus belongs to the partners and must be transferred to their capital accounts in the old ratio of 4:3:2.
The journal entry will:
- Debit the Workmen Compensation Reserve A/c with the full amount (₹84,000) to close it.
- Credit the Workmen Compensation Claim A/c with the estimated liability (₹75,000).
- Credit the partners' capital accounts with their share of the surplus (₹9,000) in the old ratio.
Let's verify each option:
Option (A): Surplus distributed as ₹4,000 : ₹3,000 : ₹2,000. Total = ₹9,000. Ratio = 4:3:2. Correct.
Option (B): Surplus distributed as ₹4,500 : ₹3,000 : ₹1,500. Total = ₹9,000. Ratio = 4.5:3:1.5 = 9:6:3 = 3:2:1. This is the new ratio, not the old ratio. Wrong.
Option (C): This entry shows a transfer between Manu and Rahul's capital accounts (₹500). This would be relevant only if the surplus had already been distributed in the old ratio and then partners wanted to adjust for the change in ratio. But the question asks for the entry to give effect to the reserve distribution, not the subsequent adjustment. Wrong.
Option (D): Surplus distributed equally (₹3,000 each). Total = ₹9,000. Ratio = 1:1:1. Wrong.
Watch outA common mistake is to distribute the surplus in the new ratio (3:2:1) instead of the old ratio (4:3:2). Remember: reserves belong to the period when they were created, so they are shared in the old ratio. The new ratio applies only to future profits.
TipTo quickly check: the old ratio 4:3:2 means Manu gets 4/9, Sonu gets 3/9, Rahul gets 2/9 of the surplus. 4/9 of ₹9,000 = ₹4,000; 3/9 = ₹3,000; 2/9 = ₹2,000. This matches option (A) instantly.
Journal Entry
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|------|-------------|------|-----------|------------| …
- CBSE 2024Set MARCH1 markQ.Who gives the share in goodwill to the retiring or deceased partner?
›Reveal solutionSolution
The continuing (gaining) partners compensate the retiring/deceased partner for his share of goodwill, in their gaining ratio.
In this GSEB Class-12 Commerce retirement/death topic, when a partner retires or dies, his share of profit passes to the remaining partners who continue the firm. Since they gain that share, they must pay for the outgoing partner's share of goodwill, in their gaining ratio.
…
- CBSE 2024Set ANNUAL1 markMCQQ.On retirement of a partner, goodwill will be credited to the capital account of:(a) Retiring partner(b) Remaining partners(c) All partners(d) None of these
›Reveal solutionSolution
On retirement, goodwill is credited to the retiring partner's capital account - option (a).
When a partner retires, he gives up his share of future profits to the continuing partners, so he must be compensated for his share of the firm's goodwill. The accepted treatment is to credit the retiring partner's capital account with his share of goodwill and debit th …
- CBSE 2024Set ANNUAL1 markMCQQ.On retirement/death of a partner, his capital account will be credited with -(a) goodwill of the firm(b) remaining partners' share of goodwill(c) his share of goodwill(d) old goodwill
›Reveal solutionSolution
Correct option: (c) his share of goodwill.
Goodwill belongs to all partners. When a partner retires or dies, the continuing (gaining) partners compensate him for the share of goodwill he surrenders. Therefore his Capital Account is credited with his share of the firm's g …
- CBSE 2024Set ANNUAL1 markMCQQ.On the death of a partner, the deceased partner's capital account will be credited with -(a) his/her share of goodwill.(b) goodwill of the firm.(c) remaining partners' share of goodwill.(d) None of these.
›Reveal solutionSolution
On death (just like on retirement), only the deceased partner's own share of the firm's goodwill is credited to their capital account; the gaining partners are debited in their gaining ratio.
Goodwill represents the firm's earning reputation built up through the combined efforts of all partners. When a partner dies, that partner (through their legal representative) is entitled to be compensated only for the share of goodwill attributable to them — their own share, calculated as (firm's goodwill × their profit-sharing share).
The accounting entry raises this goodwill share without opening a separate Goodwill account on the books (since goodwill is not usually shown unless purchased):
Gaining Partners' Capital A/cs Dr (in gaining ratio)
To Deceased Partner's Capital A/c (his/her share of goodwill)
…
🎓Unlock everything free for 14 days
- ✓Full step-by-step solutions
- ✓Concept-first explanations
- ✓Methods, shortcuts & mistakes
- ✓PYQ mapping + timed mock tests
Full access for 14 days. No credit card required.