Adjustment Regarding Goodwill in terms of Retirement of a Partner
The concept of goodwill can be understood on the basis of its operational significance. The valuation of goodwill has been discussed in the admission of a partner. The retiring or deceased partner is entitled to his/her share of goodwill at the time of retirement/death. The same process should be followed here too. But during the time of retirement, the retiring partner has the right to get his share of the goodwill of the firm. Therefore, to give effect to the same, the following adjustment must be carried out. The retiring/ deceased partner gets his share of goodwill from the continuing partners in their gaining ratio. The basis of this adjustment is the profit sacrificing ratio.
The need for the valuation of goodwill in a firm arises in the following cases:
- When the profit-sharing ratio (PSR) of partners is changed;
- In case of a new partner is admitted;
- In case of death or retirement of a partner;
- When the entire business is sold.
The goodwill earned by the firm is the result of the efforts of all the existing partners in the past. Hence, as per agreement among the partners at the time of retirement/death of a partner, goodwill is valued. At the time of retirement of a partner, the continuing partners gain part of retiring partner’s share of profit. The goodwill account is debited with the proportionate amount and credited only to the retired/deceased partner’s capital account.