Financial Accounting · Retirement of Partner

Valuation and Treatment of Goodwill on Retirement of a Partner

Updated 10 October 2026 · Fact-checked

On retirement, the firm's goodwill is valued and the retiring partner's share is credited to his capital account. Gaining partners pay for it, so their capital accounts are debited in the gaining ratio. If goodwill already appears in the books, it is first written off to all partners in the old ratio.

Understand Valuation and Treatment of Goodwill on Retirement

Goodwill is the extra value a firm earns because of its name, location and customers. When a partner retires, he leaves behind a share of this value. He has helped build it, so he must be paid for it. The firm's books may not show it.

The remaining partners continue the business and take over his share of profit. So they gain, and they should compensate him. The ones who gain more pay more. Their payment is shared in the gaining ratio = new ratio − old ratio.

There is no need to bring cash in. The usual method is a journal entry: debit the gaining partners' capital accounts and credit the retiring partner's capital account with his share of goodwill. The firm's total goodwill is not recorded as an asset in this method.

Two situations need care. First, goodwill may already be in the balance sheet. Then you write it off to all partners (including the retiring one) in the old ratio, and then raise the new goodwill value by the method above. Second, the question may give no goodwill value but hints at it, such as the value of the whole firm. This gives hidden goodwill, which you must calculate yourself.

Key rules to remember

Gaining ratio: Gaining ratio = New ratio − Old ratio (for each continuing partner); Gains add up to the retiring partner's old share. If you get a different total, recheck.
Retiring partner's share of goodwill: Share = Total goodwill × Retiring partner's old profit share; Use the old ratio. This is the amount credited to his capital account.
Goodwill by average profit: Goodwill = Average profit × Number of years' purchase; Use normal, adjusted profits. Remove abnormal items before averaging.
Goodwill by super profit: Super profit = Average profit − Normal profit; Goodwill = Super profit × Years' purchase; Normal profit = Capital employed × Normal rate of return ÷ 100.
Hidden goodwill: Hidden goodwill = Total value of firm − Net assets (capital) excluding existing goodwill; Total value of firm = Retiring partner's capital ÷ his share, or as given.
Entry for goodwill not in books: Gaining partners' Capital A/cs Dr (in gaining ratio) To Retiring partner's Capital A/c; No goodwill account is opened in this method.
Entry to write off existing goodwill: All partners' Capital A/cs Dr (in old ratio) To Goodwill A/c; Do this first, then pass the entry for new goodwill.

How to solve Valuation and Treatment of Goodwill on Retirement questions

Follow these steps in order for any retirement goodwill question. Keep the old, new and gaining ratios written out at the top of your answer.

1Write the old ratio and the new ratio. Work out the gaining ratio for each continuing partner as new minus old. Check that the gains add up to the retiring partner's old share.
2Find the value of goodwill. Use the figure given, or calculate it by average profit, super profit or hidden goodwill as the question directs.
3Check whether goodwill already appears in the balance sheet. If yes, write it off to all partners' capital accounts in the old ratio.
4Compute the retiring partner's share of goodwill as total goodwill × his old share.
5Pass the entry: debit the gaining partners' capital accounts in the gaining ratio and credit the retiring partner's capital account.
6Post the entries to the capital accounts. Add other items such as reserves and revaluation as the question needs.
7Show your workings for each ratio and amount, because marks are given for steps, and present the entries with narrations.

Quickest way: Gaining ratio shortcut for goodwill

When to use it: Use it when the goodwill value is given and no goodwill is in the books. It saves time in MCQs and in the first part of a long question.

Find each gainer's gain. Multiply it by total goodwill to get what that partner pays.
Credit the retiring partner with his old share of goodwill. The total of the debits must equal this credit.
If goodwill is in the books, first charge its book value to all partners in the old ratio. Then do the steps above for the new value.

Common mistakes in Valuation and Treatment of Goodwill on Retirement

Using the old ratio instead of the gaining ratio to debit the continuing partners.
Students mix up the entries for admission and retirement, or use the ratio they already have in front of them.
Fix: Ask who benefits. The gainers pay, in the proportion of their gain. Write the gaining ratio before you pass any entry.
Crediting the retiring partner with the wrong share, such as using the new ratio or the gaining ratio.
Students think any ratio will do.
Fix: His share is always his old profit share of the total goodwill.
Ignoring goodwill already in the books.
It sits quietly on the balance sheet and the question does not draw attention to it.
Fix: Scan the balance sheet first. If goodwill appears, write it off to all partners in the old ratio before the new entry.
Calculating hidden goodwill with the wrong net assets figure.
Students forget to remove the existing goodwill, reserves or revaluation effects from the net assets.
Fix: Take the total value of the firm, subtract the actual net assets, and show the net assets in your workings.
Using the same ratio for all gaining partners without calculating each gain.
Students assume gains are equal or that the new ratio is the gaining ratio.
Fix: Subtract old share from new share for every partner. The gaining ratio is generally different from the new ratio. They coincide only when the continuing partners acquire the retiring partner's share in their existing old ratio, so that their ratio is unchanged.
Opening a goodwill account when the question says goodwill is not to appear in the books.
Students copy the admission method for a revaluation-type entry.
Fix: Read the instruction. If goodwill is not to be raised, use only the adjusting entry between the partners' capital accounts.

Worked examples

Example 1

Asha, Bala and Chitra share profits in the ratio 5:3:2. Chitra retires. Asha and Bala will share future profits in the ratio 3:2. Goodwill of the firm is valued at ₹2,00,000 and does not appear in the books. Pass the journal entry.

Show the solution

Old ratio = 5:3:2 and new ratio of Asha and Bala = 3:2, that is 3/5 and 2/5.
Asha's old share = 5/10 = 1/2 and her new share = 3/5. Gain = 3/5 − 1/2 = 6/10 − 5/10 = 1/10.
Bala's old share = 3/10 and his new share = 2/5 = 4/10. Gain = 4/10 − 3/10 = 1/10.
Gaining ratio = 1/10 : 1/10 = 1:1. The gains add up to 2/10, which is Chitra's old share.
Chitra's share of goodwill = ₹2,00,000 × 2/10 = ₹40,000.
Asha pays ₹20,000 and Bala pays ₹20,000.

Answer: Asha's Capital A/c Dr ₹20,000; Bala's Capital A/c Dr ₹20,000; To Chitra's Capital A/c ₹40,000 (being Chitra's share of goodwill adjusted in the gaining ratio 1:1).

Example 2

Dev, Esha and Farid share profits in the ratio 4:3:3. The balance sheet shows goodwill at ₹60,000. Farid retires. Dev and Esha will share future profits equally. Goodwill of the firm is valued at ₹1,50,000. Pass the journal entries.

Show the solution

Write off the existing goodwill of ₹60,000 in the old ratio 4:3:3: Dev ₹24,000, Esha ₹18,000, Farid ₹18,000.
Old ratio is 4:3:3, that is 4/10, 3/10, 3/10. The new ratio is 1/2 each = 5/10.
Dev's gain = 5/10 − 4/10 = 1/10 and Esha's gain = 5/10 − 3/10 = 2/10. Gaining ratio = 1:2.
Farid's share of new goodwill = ₹1,50,000 × 3/10 = ₹45,000.
Dev bears 1/3 of ₹45,000 = ₹15,000 and Esha bears 2/3 = ₹30,000.

Answer: Entry 1: Dev's Capital A/c Dr ₹24,000; Esha's Capital A/c Dr ₹18,000; Farid's Capital A/c Dr ₹18,000; To Goodwill A/c ₹60,000. Entry 2: Dev's Capital A/c Dr ₹15,000; Esha's Capital A/c Dr ₹30,000; To Farid's Capital A/c ₹45,000.

Exam tips

Write the old, new and gaining ratios at the top. Examiners give step marks for each, even if the final entry is wrong.
Look at the balance sheet for goodwill before you start. This is the most common trap in long questions.
In MCQs, work out the retiring partner's share first. It is often the only figure the options differ on.
For hidden goodwill, show the formula and the net assets calculation in separate lines.
Give a narration for each entry, naming the ratio used.

Practice questions from Retirement of Partner

Valuation and Treatment of Goodwill on Retirement in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Valuation and Treatment of Goodwill on Retirement: frequently asked questions

Who pays for goodwill when a partner retires?

The continuing partners who gain share of profit pay for it. Each pays in the proportion of his gain, which is the gaining ratio. The retiring partner's capital account is credited with his share.

What is hidden goodwill on retirement?

It is goodwill that the question does not state but you can find. Take the value of the whole firm implied by the retiring partner's capital or the stated terms. Subtract the actual net assets. The difference is goodwill.

What if goodwill is already shown in the books?

Write it off first by debiting all partners' capital accounts in the old ratio and crediting goodwill. Then pass the entry for the new goodwill value between the gaining and retiring partners.

Does the retiring partner's share use the old or gaining ratio?

It uses his old profit-sharing share of the total goodwill. The gaining ratio is used only to split the cost among the continuing partners.