Explain the treatment of goodwill at the time of retirement or on the event of death of a partner?
The retiring or deceased partner is entitled to their share of goodwill at the time of retirement or death because the goodwill has been earned by the firm with the efforts of all existing partners. Hence, the retiring or deceased partner is compensated for their share of goodwill by the continuing partners in their gaining ratio.
When goodwill does not appear in the books of the firm, credit is given to the retiring partner for their share in goodwill. The gaining partners' capital accounts are debited individually in their gaining ratio. The journal entry passed is: Gaining Partners' Capital A/c Dr. To Retiring Partners' Capital A/c.
However, if goodwill already appears in the books of the firm, it is written off. In such a case, all partners' capital accounts are debited in their old profit sharing ratio to write off the existing goodwill balance.
For example, if partner B retires and the firm's goodwill is valued at Rs. 60,000, B's share is adjusted by debiting the remaining partners' capital accounts in their gaining ratio and crediting B's capital account. This ensures the retiring partner receives their due compensation for the loss of their share in the firm's reputation.
Explanation
The answer explains that the retiring partner is entitled to goodwill because it was earned by all partners. It distinguishes between the two scenarios mentioned in the text: when goodwill is not in the books (adjusted via gaining ratio) and when it is already in the books (written off in old ratio). It uses the example provided in the context to illustrate the adjustment process.