Ram, Karan and Shyam are partners. On retirement of Ram, the goodwill already appears in the Balance Sheet at Rs. 32,000. The goodwill will be written-off.
Ram, Karan and Shyam are partners. On retirement of Ram, the goodwill already appears in the Balance Sheet at Rs. 32,000. The goodwill will be written-off.
Solution
When goodwill already appears in the Balance Sheet and a partner retires, the existing goodwill must be written off before making any new goodwill adjustments.
The existing goodwill of Rs. 32,000 represents the value created by all partners during their partnership. Since all partners (Ram, Karan, and Shyam) contributed to building this goodwill while working together, the loss from writing it off must be borne by all of them.
The write-off is done in the old profit sharing ratio because this ratio represents how the partners were sharing profits and losses before retirement.
Journal entry for writing off goodwill:
| Particulars | Dr. (Rs.) | Cr. (Rs.) |
|---|---|---|
| Ram's Capital A/c ... Dr. | (in old ratio) | |
| Karan's Capital A/c ... Dr. | (in old ratio) | |
| Shyam's Capital A/c ... Dr. | (in old ratio) | |
| To Goodwill A/c | 32,000 |
After writing off the existing goodwill, any new goodwill arising on retirement (Ram's share of goodwill) will be adjusted separately by debiting the continuing partners' capital accounts in their gaining ratio.
The write-off in old ratio ensures that the retiring partner also bears their proportionate share of the reduction in goodwill value, since they benefited from it being recorded in the books earlier.
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