Q.P, Q and R are partners sharing profits in the ratio 5:3:2. Q retires, and the continuing partners P and R agree to share future profits in their gaining ratio of 3:2. The goodwill of the firm on the date of Q's retirement is valued at Rs 90,000. Pass the necessary journal entry to adjust goodwill through the partners' capital accounts, without raising a Goodwill account in the books.

The retiring partner is compensated for the value the firm's goodwill has already built up during their time in the firm, and this compensation is charged only to the partners who actually gain from the retirement, in their gaining ratio.

Step 1 — Q's share of goodwill. Q's share in the firm was 3/10 (from the ratio 5:3:2, total 10 parts). Q's share of goodwill = 3/10 × Rs 90,000 = Rs 27,000.

Step 2 — Charge this to the gaining partners in their gaining ratio. P and R gain from Q's retirement in the ratio 3:2 (given). Total parts = 5.

Step 3 — Journal entry.

Step 4 — Dual-solve check. The two debits must add back exactly to Q's share of goodwill: Rs 16,200 + Rs 10,800 = Rs 27,000, which matches Step 1. This confirms no arithmetic slip in splitting the amount.

No Goodwill account appears anywhere in the books under this method — only the capital accounts of the gaining and outgoing partners are adjusted, which is why it is the most commonly followed approach.

Alternative: if the firm instead chooses to raise goodwill in the books at its full value of Rs 90,000 (debiting a Goodwill account and crediting all partners, including Q, in the old ratio 5:3:2), then written off among the continuing partners P and R in their new ratio — the net effect on P's, R's and Q's capital accounts works out to be identical to the direct gaining-ratio adjustment above.

A frequent error is charging goodwill to P and R in the OLD ratio (5:2, after removing Q) instead of the GAINING ratio — the two are different whenever the continuing partners change their mutual ratio on retirement. Students also sometimes credit Q's full goodwill valuation of Rs 90,000 instead of only Q's own SHARE of it.