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[ Adjustment With Regards To Goodwill

Retirement of a Partner ]
[On retirement, a partner is entitled a share in the goodwill as mentioned in the partnership
deed. If there is no word about the share of goodwill, it must be according to the profit
sharing ratio.]
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Article on Adjustment With Regards To Goodwill Retirement of a Partner

On retirement, a partner is entitled a share in the goodwill as mentioned in the
partnership deed. If there is no word about the share of goodwill, it must be according to the
profit sharing ratio.
Important Points To Be Noted Regarding Goodwill
Goodwill should be accounted in the books of accounts only if some
compensation in the form of money or equivalent is paid for it.
The excess of the value of net assets of business that is been acquired for a price,
the excess is treated as goodwill.
Consequence of the above notes is that, only when goodwill is purchased for cash
or cash equivalent, it has to be recorded in the account books. Otherwise, if
goodwill has been generated internally in the partnership firm, it has to be
segregated among the partners through Capital Accounts of the partners. In this
case, goodwill cannot be shown in the Partnership Balance Sheet.
As given in the above point no.3, the treatment of non-purchased goodwill will be based on
the below circumstances. Students must note the difference in treating goodwill under
various situations.
Circumstance No.1 Goodwill is generated in the partnership firms account books at
full-value however it is written off instantly.
In this condition, the below journal entry has to be recorded:
(i)

Goodwill Account
To All Partners Capital Account
(Being goodwill generated in the retirement books of accounts)

(ii)

Continuing Partners Capital Account

To Goodwill Account
(Being goodwill written off after retirement of partner or partners)

Circumstance No.2 Only the ratio of the allocation of the retiring partners goodwill is
brought into books of accounts and then written off.
In this condition, the below journal entry has to be recorded:
(i)

Goodwill Account
To Retiring Partners Capital Account
(Being only the retiring partners share of goodwill is recorded in the books)

(ii)

Continuing Partners Capital Account

To Goodwill Account
(Being goodwill written off in the gaining ratio to the existing partners)

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Alternatively the below entry can be substituted.

Continuing Partners Capital Account
To Retiring Partners Capital Account
(Being goodwill of retiring partner has been synchronised)
Calculation of Gaining Ratio
New Profit Sharing Ratio
Less: Existing Profit Sharing Ratio
Gaining Ratio

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An example will give a clear idea about the treatment of goodwill under various
circumstances mentioned above.
Illustration
A, B and C are partners with a profit sharing ratio of 4:3:2. B retires and the goodwill is
valued at $10,800. Goodwill is yet to be accounted in the books of the firm. Presuming A and
C will share prospective profits of 5:3. Necessary entries to be recorded under the following
circumstances: (a) When goodwill account is generated but written off; (b) When only Bs
goodwill account is generated and written off and (c) When only Bs share of goodwill is
synchronised through the Capital Account of A and C.
Solution
Books of A, B and C
Date
(a) (i)

(a) (ii)

(b) (i)

(b) (ii)

Particulars
$
Goodwill A/c
10,800
To As Capital A/c
To Bs Capital A/c
To Cs Capital A/c
(Being Goodwill generated in the books at full value giving
credit to partners in their existing sharing ratio 4:3:2)

4,800
3,600
2,400

As Capital A/c
6,750
Cs Capital A/c
4,050
To Goodwill A/c
(Being goodwill written off in the books by giving debit to
the existing partners in the new ratio 5:3)

10,800

Goodwill A/c
To Bs Capital A/c
(Being Bs share of goodwill generated)

3,600*

3,600*

As Capital A/c
1,950*
Cs Capital A/c
1,650*
To Goodwill A/c
(Being Bs share of goodwill written off by giving debit to

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3,600*

the existing partners in the gaming ratio 13:11)

(c)

As Capital A/c
1,950
Cs Capital A/c
1,650
To Bs Capital A/c
(Being Bs share of goodwill synchronised through the
Capital Account of A and C)

3,600

Working Notes:
* Bs share of goodwill is equal to $10,800 x 1/3 = $3,600; Gaining Ratio of A and C is
13:11.
* Calculation of Gaining Ratio
Partners
Existing Ratio (4:3:2)
New Ratio (5:3)
New Ratio less Existing Ratio)
Gain

A
4/9
5/8
(5/8 less 4/9)
13/72

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B
3/9
Nil
Nil
Nil

C
2/9
3/8
(3/8 less 2/9)
11/72