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The retiring or deceased partner is entitled to his share of goodwill at the time of retirement or death because the goodwill earned by the firm is the result of the efforts of all the existing partners in the past. Since a part of the future profits will be accruing because of the present goodwill and the retiring or deceased partner will not be sharing future profits, it will be fair to compensate the retiring or deceased partner for the same. At the time of retirement or death of a partner, the goodwill is evaluated on the basis of agreement among the partners.

As already discussed, goodwill can be recorded in the books only when some consideration in money or money’s worth has been paid for it. Hence, Goodwill Account cannot be raised.

The adjustment for goodwill will be made through partner’s capital accounts. The following journal entry will be recorded :

Continuing Partner’s Capital A/cs                    
        Dr.   (in the gaining ratio)

To Retiring / Deceased Partner’s Capital A/c. (with his share of goodwill)


When The Goodwill Account Is Already Appearing In The Books

If, at the time of retirement or death of a partner, it appears in the balance sheet of a firm, it will be written off by debiting all the partner’s capital accounts in their old profit sharing ratio and crediting the goodwill account. In such a case, the following journal entry is recorded:

All Partner’s Capital A/cs.

Dr.   (in old ratio)

To Goodwill A/c.

(goodwill existing in the books)

 (For Goodwill existing in the books written off)

On the death of a partner, the amount payable to him is to be paid to his legal representatives.


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