Q.3. Discuss the accounting treatment of Goodwill at the time
of retirement of a partner.
Answer: The accounting treatment of goodwill at the time
of retirement is as follows:
 Calculate retiring partner’s share of Goodwill.
 Calculate gaining ratio of remaining partners.
 Pass an adjusting entry in the following manner:
Remaining Partner’s Capital A/c Dr.
To Retiring Partner’s Capital A/c
Condition: No goodwill should already appear in the
books. In case goodwill already appears in the books it should be
written off in old ratio. Entry will be:
All (Old) Partners Capital A/c Dr.
To Goodwill A/c
Example: A, B and C are partners sharing profits in the
ratio of 4:3:2. B retires and Goodwill of the firm is valued on
that date Rs. 27,000. Pass necessary journal entries when goodwill
already appears in the books at Rs. 9,000.
Solution.
Journal
Date

Particulars

L.F.

Dr.
Rs.

Cr.
Rs.


A’s Capital A/c Dr.


6,000



C’s Capital A/c Dr.


3,000



To B’s Capital A/c



9,000


(For B’s share of goodwill credited to him by A and C in
gaining ratio of 2:1)





A’s Capital A/c Dr.


4,000



B’s Capital A/c Dr.


3,000



C’s Capital A/c Dr.


2,000



To Goodwill A/c



9,000


(For existing goodwill in the books written off in old ratio)




Workings:
 B’s share of goodwill = 3/9 x Rs. 27,000 = Rs. 9,000.
 Gaining Ratio of A and C is 4:2 i.e. 2:1.
