The retiring partner must be compensated by the remaining partners by the amount of his share of goodwill by passing the following journal entry:

Remaining Partner’s Capital A/c (In gaining ratio)                              Dr.

To Retiring Partner’s Capital A/c

Existing goodwill, however, must be written off to all the partners’ capital accounts (including retiring partner) in the old profit sharing ratio.

All partners’ capital (including retiring partner) A/c (in old ratio)     Dr.

To Goodwill A/c

Hidden Goodwill:

There can be case of hidden goodwill in case of retirement also, that can be calculated the same way as in case of admission of a partner and should be shared by all the partners including the retiring partner.

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