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Hidden Goodwill in case of Retirement of a Partner
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Accounting Treatment of Goodwill in case of Retirement of a Partner

Last Updated : 21 Apr, 2025
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What is Goodwill?

Goodwill is an intangible asset that is either self-generated or purchased. It is the value of benefits that a business has because of the factors that help in increasing its profitability, say its location, favourable contracts, access to supplies and customer loyalty, etc. Goodwill is the reputation earned by the business through hard work, honesty and quality, and satisfactory services to customers. The efforts and hard work done by the existing partners frame the goodwill of the firm.

At the time of retirement or decease of partner has rightful authority and ownership in the share of goodwill. On the retirement or death of a partner, the share in the firm's goodwill is paid by the remaining partner as compensation for their endeavour in the firm. Hence, at the time of retirement/death of a partner, goodwill is valued as per agreement among the partners. Gaining partners compensate the retiring partner for acquiring his/her share of profit after the retirement/death of a partner in their gaining ratio. If the remaining partner sacrifice along with the retiring/death of a partner, he/she shall be compensated along with the retiring/deceased partner with a share of the sacrifice made by him/her. The accounting treatment for goodwill in such a situation depends upon whether or, not goodwill already appears in the books of the firm.

Retiring Partner Share of Goodwill = Value of Goodwill on the date of retirement x Retiring partner's share in the firm

Goodwill is adjusted by taking the following steps:

Step 1: Calculate the gaining ratio of the remaining partners.

Gaining Ratio = New Ratio - Old Ratio

Step 2: Calculate the goodwill of the firm or what is stated in the question.

Step 3: Calculate the share of goodwill of the retiring partner.

Case 1: When goodwill does not appear in the books:

The value of the firm's goodwill is calculated, and then the share of the retiring partner in the goodwill is determined. The remaining partner's capital account is debited in the gaining ratio, and the retiring partner's capital a/c is credited with the share of goodwill. The following journal entry is passed:

 

Illustration 1: 

Meena, Reena, Seema and Leena are partners sharing profit and loss in the ratio of 4:3:2:1. Leena retires from the firm. The goodwill of the firm is valued at ₹40,500 at the time of retirement of Leena. Meena, Reena, and Seema decided their future profit-sharing ratio to be 3:2:1. Pass the necessary journal entry.

Solution:  

Retiring Partner Share of Goodwill = Value of Goodwill on the date of retirement x Retiring partner's share in the firm

Leena's Share of Goodwill = ₹40,500\times\frac{1}{10}

= ₹4,050

 

Working Notes:

1. Calculation of Gaining Ratio:

 

2. Calculation of Seema's sacrifice on Leena's Retirement:

Remaining partner's sacrifice on Retirement of a partner = Value of Goodwill x Sacrificing share

Seema's sacrifice on Leena's retirement = ₹40,500\times\frac{2}{60}

= ₹1,350  

Illustration 2: 

G, H, and K are partners sharing profit and loss of the firm in the ratio of 5:4:3.H retires from the firm on 31st March, 2022. On the date of retirement of H, the firm's goodwill is valued ₹3,72,000. G and K decided their future profit-sharing ratio to be 7:5. Pass the necessary journal entry.

Solution: 

Retiring Partner Share of Goodwill = Value of Goodwill on the date of retirement x Retiring partner's share in the firm

H's Share of Goodwill =  ₹3,72,000\times\frac{4}{12}

= ₹1,24,000

 

Working Notes:

Calculation of Gaining Ratio:

 

Case 2: When Goodwill Account appears in the books:

When goodwill already appears in the books (i.e., it appears in the asset side of the Balance Sheet) at the time of retirement of the partner, it is written off among all the partners in the old profit-sharing ratio. The following journal entry is passed:

 

Illustration 1: 

X, Y and Z are partners sharing profit and loss of the firm in the ratio of 2:1:1. Z retires from the firm. On the date of retirement of Z, Goodwill already appears in the book of the firm at value of ₹32,000 and Goodwill is valued at ₹96,400. X and Y decided their future profit-sharing ratio to be equal. Pass necessary journal entry.

Solution: 

Retiring Partner Share of Goodwill = Value of Goodwill on the date of retirement x Retiring partner's share in the firm

Z's Share of Goodwill = ₹96,400\times\frac{1}{4}

= ₹24,100

 

Working Notes:

Calculation of Gaining Ratio:

 

Illustration 2: 

Ram, Mohan and Krishna are partners sharing profit and loss of the firm in the ratio of 1:2:3. Ram retires from the firm on 31st March, 2022. On the date of retirement of Ram, Goodwill already appears in the book of the firm at value of ₹48,000 and Goodwill is valued at ₹1,80,000. Mohan and Krishna decided their future profit-sharing ratio to be 3:2. Pass the necessary journal entry.

Solution: 

Retiring Partner Share of Goodwill = Value of Goodwill on the date of retirement x Retiring partner's share in the firm

Ram's Share of Goodwill =  ₹1,80,000\times\frac{1}{6}

= ₹30,000

 

Working Notes:

1. Calculation of Gaining Ratio:

 

2. Calculation of Krishna's sacrifice on Ram's Retirement:

Remaining partner's sacrifice on Retirement of a partner = Value of Goodwill x Sacrificing share

Krishna's sacrifice on Ram's retirement =  ₹1,80,000\times\frac{3}{30}

= ₹18,000


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Hidden Goodwill in case of Retirement of a Partner

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  • Accountancy
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    Accumulated profit refers to a part of the firm's net profit that is preserved by the firm for future growth. It is also known as retained earnings or undistributed income. Accumulated profits and reserves show the financial position of the company in the long run in terms of earning, saving, and in
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    Dissolution of Firm: Partner's Capital Account
    What is Dissolution of a Firm?Dissolution of the firm is the discontinuation of the business and closure of all the books of accounts of the firm. Dissolution of the partnership means a change in the profit-sharing ratio of the existing partners in the firm and the business or the firm continues its
    4 min read
    Dissolution of Partnership Firm: Meaning and Example
    What is Dissolution of a Partnership Firm?Dissolution of the firm means dissolution of the partnership among the partners of the firm. The business is closed, and an end comes to the business relationship among partners on the dissolution of the firm. The firm is dissolved either by a court order or
    2 min read
    Accounting Treatment of Goodwill in case of Dissolution of Firm
    Goodwill is nothing but a monetary value of a reputation of a business firm in the market, earned by the firm by serving its customers. In a Partnership firm, Goodwill is treated like an asset; every partner has a right over the firm's goodwill up to his/her share in the business.In case of the Diss
    2 min read
    Accounting Treatment of Joint Life Policy in case of Dissolution of a Firm
    What is Joint Life Policy?Joint Life Policy is a life policy that gives coverage against the death of the policyholder, under which the coverage is of a minimum of two persons and the pay-out is on a first-death basis. Since the Partnership firm is a business run by at least two people, the partners
    3 min read
    Accounting Treatment of Contingent Assets and Contingent Liabilities in case of Dissolution of a firm
    Contingent Assets: A Contingent Asset is an economic gain that may come into existence in near future as a result of some past action. The existence of such assets is completely uncertain and beyond the control of the entity. Example: Any property of a firm under some legal suit, and warranty receiv
    3 min read

    Part-B

    Chapter 1: Accounting for Share Capital

    Company and its Types
    A company is one of the most important and prominent forms of business organization. It can be described as a voluntary association of individuals, having a common purpose, who agree to pool their funds and unite to achieve the said goals. It can be called an artificial person created under the juri
    7 min read
    Shares : Meaning, Nature and Types
    What are Shares?When the total capital of the company is divided into units of small denominations, it is known as shares. For example, if the total capital of the company is ₹ 5,00,000, divided into 10,000 units of ₹50 each, each unit of ₹50 will be called a share (of ₹ 10 each). Thus, in the above
    5 min read
    Difference between Preference Shares and Equity Shares
    Life-blood of any business is finance. Sufficient finance for the company helps to grow and expand the company. The financial needs of any business are concerned with the acquisition and utilisation of funds. It is done through planning, acquiring, utilising, managing, and controlling funds in conne
    5 min read
    Share Capital: Meaning, Kinds, and Presentation of Share Capital in Company's Balance Sheet
    What are Shares?When the total capital of the company is divided into units of small denominations, it is known as shares. For example, if the total capital of the company is ₹ 5,00,000, divided into 10,000 units of ₹50 each, each unit of ₹50 will be called a share (of ₹ 10 each). Thus, in the above
    5 min read
    Difference between Capital Reserve and Reserve Capital
    Capital Reserve and Reserve Capital are most often confused same. However, the former is a reserve created out of the Capital Profits of a firm; whereas, the latter is a part of the increased nominal capital or uncalled share capital of an organisation which shall not be called up, except in the eve
    3 min read
    Accounting for Share Capital: Issues of Shares for Cash
    A unit of capital or an equal portion of the share capital of an organisation divided, whose ownership is evidenced by a share certificate is known as a Share. Simply put, shares are the denominations of the share capital of an organisation. For example, if the total capital of ABC Ltd. is ₹10,00,00
    9 min read
    Issue of Shares At Par: Accounting Entries
    A unit of capital or an equal portion of the share capital of an organisation divided, whose ownership is evidenced by a share certificate is known as a Share. Simply put, shares are the denominations of the share capital of an organisation. For example, if the total capital of ABC Ltd. is ₹10,00,00
    3 min read
    Issue of Shares at Premium: Accounting Entries
    A unit of capital or an equal portion of the share capital of an organisation divided, whose ownership is evidenced by a share certificate is known as a Share. Simply put, shares are the denominations of the share capital of an organisation. For example, if the total capital of ABC Ltd. is ₹10,00,00
    4 min read
    Issue of Share for Consideration other than Cash: Accounting for Share Capital
    A unit of capital or an equal portion of the share capital of an organisation divided, whose ownership is evidenced by a share certificate is known as a Share. Simply put, shares are the denominations of the share capital of an organisation. For example, if the total capital of ABC Ltd. is ₹10,00,00
    5 min read
    Issue of Shares: Accounting Entries on Full Subscription with Share Application
    A unit of capital or an equal portion of the share capital of an organisation divided, whose ownership is evidenced by a share certificate is known as a Share. Simply put, shares are the denominations of the share capital of an organisation. For example, if the total capital of ABC Ltd. is ₹10,00,00
    2 min read
    Calls in Arrear: Accounting Entries with Examples on Issue of Shares
    Calls in Arrear refer to the amount of money that a shareholder has not yet paid to a company on shares they have agreed to purchase. In the context of a company issuing shares, the payment for these shares is often requested in installments, known as "calls." If a shareholder does not pay an instal
    4 min read
    Calls in Advance: Accounting Entries with Examples on Issue of Shares
    Calls in Advance is the amount of future calls which is received by the company in advance. Calls in Advance is just opposite to Calls in Arrear. It is a situation when the shareholders of a company pay the amount not yet called upon their shares. Section 50 of the Companies Act, 2013 says that the
    4 min read
    Oversubscription of Shares: Accounting Treatment
    A unit of capital or an equal portion of the share capital of an organisation divided, whose ownership is evidenced by a share certificate is known as a Share. Simply put, shares are the denominations of the share capital of an organisation. For example, if the total capital of ABC Ltd. is ₹10,00,00
    4 min read
    Oversubscription of Shares: Pro-rata Allotment
    A unit of capital or an equal portion of the share capital of an organisation divided, whose ownership is evidenced by a share certificate is known as a Share. Simply put, shares are the denominations of the share capital of an organisation. For example, if the total capital of ABC Ltd. is ₹10,00,00
    4 min read
    Oversubscription of Shares: Pro-rata Allotment with Calls in Arrear
    A unit of capital or an equal portion of the share capital of an organisation divided, whose ownership is evidenced by a share certificate is known as a Share. Simply put, shares are the denominations of the share capital of an organisation. For example, if the total capital of ABC Ltd. is ₹10,00,00
    5 min read
    Forfeiture of Shares : Accounting Entries on Issue of Shares
    What is Forfeiture of Shares?Cancellation of shares of a shareholder who fails to pay the amount due on allotment or on any call within the specific time period is known as Forfeiture of Shares. A company or its directors can forfeit the shares only if its Articles of Association allow for the same.
    5 min read
    Accounting Entries on Re-issue of Forfeited Shares
    A unit of capital or an equal portion of the share capital of an organisation divided, whose ownership is evidenced by a share certificate is known as a Share. Simply put, shares are the denominations of the share capital of an organisation. For example, if the total capital of ABC Ltd. is ₹10,00,00
    7 min read
    Disclosure of Share Capital in the Balance Sheet: Accounting Entries on Issue of Shares
    A unit of capital or an equal portion of the share capital of an organisation divided, whose ownership is evidenced by a share certificate is known as a Share. Simply put, shares are the denominations of the share capital of an organisation. For example, if the total capital of ABC Ltd. is ₹10,00,00
    3 min read

    Chapter 2: Issue and Redemption of Debentures

    Issue of Debentures: Meaning, Characteristics, Purpose of Issuing Debentures and Example
    A debenture can be described as a debt instrument issued by a company to the public in order to raise funds for medium or long-term usage. It is just like a bank loan, with debt obligation and liability for interest payment, but instead of borrowing from a bank, these are issued and traded in the ca
    5 min read
    Types of Debentures
    What is Debenture?A debenture can be described as a debt instrument issued by a company to the public in order to raise funds for medium or long-term usage. It is just like a bank loan, with debt obligation and liability for interest payment, but instead of borrowing from a bank, these are issued an
    4 min read
    Difference between Shares and Debentures
    Issuing of Shares and Debentures are two of the most prominent source of finance for any business. By issuing shares and debentures, any public company can generate finance from the market. Finance required by the business to establish and run its operations is known as Business Finance. No business
    4 min read
    Issue of Debentures: Accounting Treatment of Issue of Debenture and Presentation of debentures in balance sheet (with format)
    What is a Debenture?A written instrument or document which is issued by the company acknowledging the borrowings is known as Debenture. In this document, the terms of repayment of principal and payment of interest at a specific rate are stated. According to Section 2(30) of the Companies Act, 2013,"
    2 min read
    Issue of Debenture at Par and Premium
    What is a Debenture?A written instrument or document which is issued by the company acknowledging the borrowings is known as Debenture. In this document, the terms of repayment of principal and payment of interest at a specific rate are stated. According to Section 2(30) of the Companies Act, 2013,"
    3 min read
    Issue of Debentures for Consideration other than Cash
    Issue of Debentures for consideration other than cash means that the company has not received amount (in cash or by cheque) against the debentures issued. Debentures may be issued for consideration other than cash in the following situations:To promoters of the company for rendering services for inc
    4 min read
    Issue of Debenture as Collateral Security
    What is Issue of Debentures as Collateral Security?A company may have to issue debentures as a subsidiary or secondary security in addition to the principal security when it takes a loan from a bank or from other party, this is known as Issue of Debentures as Collateral Security. Collateral security
    3 min read
    Interest on Debentures
    A debenture can be described as a debt instrument issued by a company to the public in order to raise funds for medium or long-term usage. It is just like a bank loan, with debt obligation and liability for interest payment, but instead of borrowing from a bank, these are issued and traded in the ca
    3 min read
    Redemption of Debentures
    What is Redemption of Debentures?Repayment of debentures to the debenture holders or discharge of the liability on account of debentures is known as the redemption of debentures. They are normally redeemed at the expiry of the period for which they were originally issued. The company may also redeem
    4 min read
    Redemption of Debentures: Meaning, Sources and Rules regarding Redemption
    What is Redemption of Debentures?Repayment of debentures to the debenture holders or discharge of the liability on account of debentures is known as the redemption of debentures. They are normally redeemed at the expiry of the period for which they were originally issued. The company may also redeem
    5 min read
    Redemption of Debentures in case of Lump-Sum
    What is Redemption of Debentures?Repayment of debentures to the debenture holders or discharge of the liability on account of debentures is known as the redemption of debentures. They are normally redeemed at the expiry of the period for which they were originally issued. The company may also redeem
    3 min read
    Redemption of Debentures in case of Installment
    What is Redemption of Debentures?Repayment of debentures to the debenture holders or discharge of the liability on account of debentures is known as the redemption of debentures. They are normally redeemed at the expiry of the period for which they were originally issued. The company may also redeem
    2 min read
    Redemption of Debentures in case of Purchase of Own Debentures
    What is Redemption of Debentures?Repayment of debentures to the debenture holders or discharge of the liability on account of debentures is known as the redemption of debentures. They are normally redeemed at the expiry of the period for which they were originally issued. The company may also redeem
    4 min read
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