Goodwill on retirement and death

The outgoing partner helped build the firm's goodwill, and he is giving up his future share of its profits. So he is compensated with his share of goodwill, paid by the partners who gain:

Gaining partners' capital A/cs Dr. To outgoing partner's capital A/c, in the gaining ratio.

If a continuing partner sacrifices (because the new ratio gives him less than before), he too is credited.

Example: Deepa, Neeru and Shilpa share 5:3:2; Neeru retires, and Deepa and Shilpa continue at 2:3. Goodwill is 1,20,000. Deepa: 2/5 − 5/10 = −1/10, a sacrifice. Shilpa: 3/5 − 2/10 = 4/10, a gain. So Shilpa is debited 48,000, and Neeru (3/10) is credited 36,000 and Deepa (1/10) 12,000.

Goodwill already in the books is first written off among all the partners, including the outgoing one, in their old ratio.

Hidden goodwill: if the outgoing partner is paid a lump sum more than the balance in his capital account (after all adjustments), the extra is his share of goodwill: amount paid − his adjusted capital.