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
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.