Treatment of Goodwill

The retiring partner is entitled to his/her share of goodwill at the time of retirement because the goodwill is the result of the efforts of all partners including the retiring one in the past. The retiring partner is compensated for his/her share of goodwill. As per Accounting Standard 10 (AS-10), goodwill is recorded in the books only when some consideration in money is paid for it. Therefore, goodwill is recorded in the books only when it is purchased and the goodwill account cannot be raised on its own.

Therefore, in case of retirement of a partner, the goodwill is adjusted through partner’s capital accounts. The retiring partner’s capital account is credited with. His/her share of goodwill and remaining partner’s capital account is debited in their gaining ratio. The journal entry is made as under:Remaining Partners’ Capital A/c Dr. (individually)To Retiring Partner’s Capital A/c (Retiring partner’s share of goodwill adjusted toremaining partners in the gaining ratio)

Illustration

Raju, Salman and Akshay are partners sharing profit equally. Akshay retires and the goodwill of the firm is valued at Rs 54,000. No goodwill account appears in the books of the firm. Raju and Salman share future profit in the ratio of 3: 2. Make necessary journal entry for goodwill.

Solution:

Journal

Date              Particulars                                           LF         Debit               Credit

                Raju’s Capital A/c                                        Dr         14,400

               Salman’s Capital A/c                                    Dr.          3,600

          To Akshay’s Capital A/c                                                  18,000

(Akshay’s share of goodwill adjusted

to remaining partners in their gaining

ratio 4 : 1]

Note :

Akshay’s share of goodwill = Rs.54,000 × 1/3 = Rs.18,000

Gaining Ratio = New Ratio – Existing Ratio

Raju Gains = 3/5 – 1/3 = 9 – 5/15 = 4/15

Salman Gains = 2/5 - 1/3 = 6 – 5/ 15 = 1/15

Gaining Ratio between Raju and Salman = 4: 1.