Question

Explain the treatment of goodwill at the time of retirement or on the event of death of a partner.

Answer 1

At the time of retirement or is the event of death of a partner the goodwill of the firm is adjusted among the partners in their gaining ratio with the share of goodwill of the retiring or the deceased partner. At the time retirement or on the event of death of a partner, goodwill account is not opened hence only two situations are left for treating the goodwill first when goodwill account is already there in the book or it appear in the books and second when the amount of goodwill is not appearing in the books.

The treatment of goodwill will be as follows in the above tow situations

First Situation When Goodwill Already Appears in the Books of the Firm

Step 1 Write -off the Existing Goodwill

When goodwill account already exist in the book of the firm or mentioned in the book first of all, it will be written off and should be distributed among all the partners of the firm including the retiring or the deceased partner in their old profit sharing ratio. In that case, the journal enrty will be as follows

$\begin{array}{ccccc}\text{Date}& \text{Particulars}& \text{JF}& \text{Amt. (Rs)}& \text{Amt.(Cr)}\\ & \text{All Partner's Capital A/c}\text{Dr}& & & \\ & \text{To Goodwill A/c}& & & \\ & \text{(Goodwill written off among all}& & & \\ & \text{in their profit sharing ratio)}& & & \end{array}$

Step 2 Adjusting Goodwill Through Partners' Capital Account

After writing off the old goodwill, the amount of goodwill now needs to be adjusted through the partner's capital acocunt with the share of the goodwill of the retiring or the deceased partner. The following journal entry is passed.

$\begin{array}{ccccc}\text{Date}& \text{Particulars}& \text{JF}& \text{Amt. (Rs)}& \text{Amt.(Cr)}\\ & \text{Remaining Partner's Capital A/c}\text{Dr}& & & \\ & \text{To Retiring/ Deceased Partner's Capital A/c}& & & \\ & \text{(Exisiting partner's capital account is}& & & \\ & \text{debited in their gaining ratio and}& & & \\ & \text{retiring/deceased partner's capital account is credited)}& & & \end{array}$

Second Situation When No Goodwill Appears in the Books of the Firm

In second case, when no goodwill appears in the books of the firm, the amount of goodwill will be adjusted through the partner's capital account with the share of the goodwill of the retiring or the deceased partner. The following journal entry is passed.

$\begin{array}{ccccc}\text{Date}& \text{Particulars}& \text{JF}& \text{Amt. (Rs)}& \text{Amt.(Cr)}\\ & \text{Remaining Partner's Capital A/c}\text{Dr}& & & \\ & \text{To Retiring/ Deceased Partner's Capital A/c}& & & \\ & \text{(Exisiting partner's capital account is}& & & \\ & \text{debited in their gaining ratio and}& & & \\ & \text{retiring/deceased partner's capital account is credited)}& & & \end{array}$