Q.A firm's Balance Sheet already shows Goodwill at Rs 40,000 (raised when an earlier partner had joined). On the retirement of a partner now, how should this existing goodwill be dealt with, and why is it not simply left unchanged in the books?

Goodwill already appearing in the Balance Sheet reflects value estimated at some earlier date and is not automatically correct going forward, so accounting convention requires writing it off before working out the fresh goodwill adjustment for the current retirement.

Why it cannot simply be left unchanged. Goodwill is not a depreciating fixed asset with a definite useful life — it is a valuation of the firm's earning reputation at a point in time, and this value changes as the business, its customer relationships and its profitability change. Carrying an old, stale goodwill figure indefinitely would misstate the Balance Sheet and would also double-count value when a fresh goodwill valuation is done for the current retirement.

Step 1 — Write off the existing goodwill. The Rs 40,000 already shown in the books is written off by debiting ALL partners (including the retiring partner, since the firm as it stood before this event owned that goodwill jointly) in their OLD profit-sharing ratio, and crediting the Goodwill account to reduce it to nil: All Partners' Capital A/cs Dr (in old ratio) Rs 40,000; To Goodwill A/c Rs 40,000. …

Students often forget this write-off step entirely and jump straight to adjusting the retiring partner's share of the newly valued goodwill, leaving a stale Goodwill account balance in the books. Others write off the old goodwill in the NEW or gaining ratio instead …