The retiring or deceased partner is entitled to his share of goodwill at the time of retirement/ death because the goodwill has been earned by the firm with the efforts of all the existing partners. Hence, at the time of retirement/death of a partner, goodwill is valued as per agreement among the partners the retiring/ deceased partner compensated for his share of goodwill by the continuing partners (who have gained due to acquisition of share of profit from the retiring/ deceased partner) in their gaining ratio.
When goodwill does not appear in the books of the firm there are four ways in which the retiring partner can be given the necessary credit for loss of his share of goodwill, these are as follows:
(a) Goodwill is raised at its full value and retained in the books as such: In this case, Goodwill Account is debited will its full value and all the partner’s (including the retired/deceased partner) capital accounts are credited in the old profit sharing ratio. The full value of goodwill will appear in the balance sheet of the reconstituted firm.
(b) Goodwill is raised at it’s full value and written off immediately: If it decided that goodwill should not be refrained and shown in the balance sheet of the reconstituted firm then, after raising goodwill at its value by crediting all the partners’ capital accounts (including that of the retired/ deceased partners, it should be written off by debiting the remaining partners in their new profit sharing ratio and crediting the goodwill account with its full value.
(c) Goodwill is raised to the extent of retired/deceased partner’s share and written off immediately: In this case goodwill account is raised only to the extent of retired/ deceased partner’s share by debiting goodwill account with the proportionate amount and credited only to the retired/deceased partner’s capital account. Thereafter, the remaining partners capital accounts are debited in their gaining ratio and goodwill account/credited to write it off.
(d) No goodwill account is raised at all in firm’s books: If it is decided that the goodwill account should not appear in firm’s books at all, in that case it is adjusted discretely, through partners capital accounts.
If value of goodwill already appearing in the books of the firm equals with the current value of goodwill, normally no adjustment is required because goodwill stands credited in the accounts of all the partners including the retiring one.
It may be noted that in all the above situations, goodwill appears in the balance sheet at its full value. In case it is decided by the partners that it should be written-off, fully or partially.
Hidden Goodwill: If the firm has agreed to settle the retiring or deceased partner by paying him a lump sum amount, then the amount paid to him in excess of what is due to him based on the balance in his capital account after making necessary adjustments in respect of accumulated profits and losses and revaluation of assets and liabilities, etc. shall be treated as his share of goodwill (known as hidden goodwill).
