AccountancyCBSE Class 12 · Reconstitution of a Partnership Firm – Retirement/Death of a Partner

Goodwill on Retirement or Death of a Partner: Class 12 Treatment and Entries

Updated 15 October 2026 · Fact-checked

On retirement or death, the outgoing partner is paid his share of goodwill by the partners who gain his share. Under AS 26 no goodwill account is raised: his share is credited to his capital account and debited to the gaining partners in their gaining ratio. Any goodwill already in the books is first written off in the old ratio.

Gaining partners pay the outgoing partner his goodwill share through capital accounts in the gaining ratio, after old goodwill is written off.

Illustration drawn for QuestionBuddy.

Understand Goodwill on Retirement or Death of a Partner

Why compensate the outgoing partner? The goodwill of the firm was built while the retiring or deceased partner was a member. After he leaves, the continuing partners will enjoy the profits that this goodwill earns, including the share that used to be his. So they must pay him for his share of goodwill.

AS 26 treatment. Goodwill is not raised in the books. Instead:

Step 1: write off existing goodwill (if any). All partners, including the outgoing one, in the old ratio: All Partners' Capital A/cs Dr; To Goodwill A/c.

Step 2: value the firm's goodwill (average profit, super profit or capitalisation; see the topic Valuation of Goodwill).

Step 3: outgoing partner's share = Firm's goodwill × his old share.

Step 4: adjust through capital accounts in the gaining ratio.

Gaining Partners' Capital A/cs Dr (gaining ratio); To Retiring/Deceased Partner's Capital A/c.
If a continuing partner sacrifices under the new ratio, he is credited too, and the gaining partner pays both.

Death of a partner. The treatment is the same; the deceased partner's share is credited to his capital account, and the balance is later transferred to his Executor's Account.

Hidden goodwill on retirement. If the retiring partner is paid more than the balance in his capital account (after revaluation, reserves and all adjustments) and nothing else explains the excess, the excess is his share of goodwill. Firm's goodwill = excess ÷ his share. The excess is debited to the continuing partners in the gaining ratio.

Which ratio where? Existing goodwill: old ratio (all partners). Outgoing partner's share: gaining ratio (continuing partners). Mixing these up is the single most common error in this topic.

Goodwill on Retirement or Death of a Partner: key facts

Outgoing partner's share of goodwill: Firm's goodwill × his old share
Each gainer's debit: Firm's goodwill × (new share − old share); Equivalently, the outgoing share split in the gaining ratio.
Hidden goodwill: Amount paid − adjusted capital balance = his share of goodwill; Firm's goodwill = that excess ÷ his share.
Existing goodwill: Written off among all partners in the old ratio; Including the outgoing partner.

How to answer Goodwill on Retirement or Death of a Partner questions

Goodwill on retirement or death is usually part of a 6-mark question with revaluation and capital accounts. Settle goodwill in this order.

1Write off any goodwill in the books among all partners in the old ratio.
2Value the firm's goodwill by the method asked.
3Find the outgoing partner's share: goodwill × his old share.
4Compute the gaining ratio (new − old); watch for a continuing partner who sacrifices.
5Pass the entry: gaining partners' capitals Dr, outgoing (and any sacrificing) partner's capital Cr.
6For hidden goodwill, compare the amount paid with his adjusted capital first.

Goodwill on Retirement or Death of a Partner in real life

The idea, met in an everyday situation. Answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

Goodwill on death of a partner

Suppose Rhea, Sunil and Tanvi run a design studio sharing profits 2 : 2 : 1. Tanvi dies suddenly. Rhea and Sunil continue and agree to share profits equally. The studio's goodwill is valued at ₹2,50,000, and Tanvi's family will receive what is due to her.

How much goodwill is due to Tanvi's estate and who pays it?

Try it first, then show the solutionSolution

Tanvi's share = 2,50,000 × 1/5 = ₹50,000.
Gains: Rhea 1/2 − 2/5 = 1/10; Sunil 1/2 − 2/5 = 1/10; ratio 1 : 1.
Rhea's Capital A/c Dr 25,000; Sunil's Capital A/c Dr 25,000; To Tanvi's Capital A/c 50,000.

Answer: ₹50,000 is credited to Tanvi's capital account, paid by Rhea and Sunil ₹25,000 each in their gaining ratio. The amount then flows to Tanvi's Executor's Account for her family.

Memory hook: The goodwill share follows the profit share: whoever takes her profits pays for them.

Tricks to remember Goodwill on Retirement or Death of a Partner

Short memory aids. Say each one aloud once, then use it on a question the same day.

Old goodwill, old ratio, everyone
Existing goodwill is written off among all partners, the leaver included, in the old ratio.
Use it when: Step 1.
Leaver's goodwill, gaining ratio, stayers
The leaver's share is paid by the stayers in their gaining ratio.
Use it when: Step 4.
Paid more? That's goodwill
Excess paid over adjusted capital = his hidden share of goodwill.
Use it when: Hidden goodwill questions.

Goodwill on Retirement or Death of a Partner: solved examples

Ordered from board level to HOTS. Try each one before you open the solution.

Example 1: Retiring partner's share · 1 mark · MCQBoard level

A, B and C share profits 3 : 2 : 1. C retires and the firm's goodwill is valued at ₹1,20,000. A and B continue in the ratio 3 : 2. The entry for goodwill is:
(a) A's Capital Dr 12,000; B's Capital Dr 8,000; To C's Capital 20,000
(b) Goodwill Dr 1,20,000 To all partners' capitals
(c) A's Capital Dr 10,000; B's Capital Dr 10,000; To C's Capital 20,000
(d) C's Capital Dr 20,000; To A's Capital 12,000; To B's Capital 8,000

Try it first, then show the solutionSolution

C's share = 1,20,000 × 1/6 = ₹20,000.
Gaining ratio = old ratio of A and B = 3 : 2: 12,000 and 8,000.

Answer: (a) A's Capital Dr 12,000; B's Capital Dr 8,000; To C's Capital 20,000

Example 2: Existing goodwill and the new valuation · 3 marks · Short answerBoard level

P, Q and R share profits 2 : 2 : 1. Goodwill appears in the books at ₹50,000. R retires; the firm's goodwill is valued at ₹1,00,000, and P and Q continue equally. Pass the journal entries. (3 marks)

Try it first, then show the solutionSolution

Write off: P's Capital Dr 20,000; Q's Capital Dr 20,000; R's Capital Dr 10,000; To Goodwill A/c 50,000.
R's share = 1,00,000 × 1/5 = ₹20,000; gains P 1/10, Q 1/10.
P's Capital A/c Dr 10,000; Q's Capital A/c Dr 10,000; To R's Capital A/c 20,000.

Answer: Two entries: write-off of ₹50,000 in 2 : 2 : 1, and R's goodwill of ₹20,000 debited to P and Q ₹10,000 each.

Example 3: Valuation plus a new ratio · 4 marks · Short answerHarder board level

A, B and C share profits 5 : 3 : 2. C retires. Goodwill is to be valued at 2 years' purchase of the average profit of the last three years: ₹80,000, ₹1,00,000 and ₹1,20,000. A and B will share future profits 3 : 2. Pass the entry for goodwill. (4 marks)

Try it first, then show the solutionSolution

Average = 1,00,000; goodwill = ₹2,00,000; C's share = 2/10 × 2,00,000 = ₹40,000.
Gains: A 6/10 − 5/10 = 1/10; B 4/10 − 3/10 = 1/10; ratio 1 : 1.
A's Capital A/c Dr 20,000; B's Capital A/c Dr 20,000; To C's Capital A/c 40,000.

Answer: C is credited ₹40,000; A and B are debited ₹20,000 each.

Example 4: Death with super profit valuation · 4 marks · Short answerHarder board level

M, N and O share profits 3 : 2 : 1. O dies. Goodwill is valued at 3 years' purchase of super profit; average profit is ₹1,10,000, capital employed ₹8,00,000 and the normal rate of return 10%. M and N continue in their old ratio. Pass the entry for O's share of goodwill. (4 marks)

Try it first, then show the solutionSolution

Normal profit = 80,000; super profit = 30,000; goodwill = ₹90,000.
O's share = 90,000 × 1/6 = ₹15,000.
Gaining ratio = 3 : 2: M's Capital A/c Dr 9,000; N's Capital A/c Dr 6,000; To O's Capital A/c 15,000.

Answer: O's capital is credited ₹15,000; M and N are debited ₹9,000 and ₹6,000.

Example 5: Hidden goodwill · 4 marks · Short answerHOTS / competency

X, Y and Z share profits 3 : 2 : 1. Y retires. After revaluation and the transfer of reserves, his capital account shows ₹1,60,000. X and Z pay him ₹1,90,000 in full settlement and continue in their old ratio. Calculate the firm's goodwill and pass the entry for Y's share. (4 marks)

Try it first, then show the solutionSolution

Excess paid = 1,90,000 − 1,60,000 = ₹30,000 = Y's share of goodwill.
Firm's goodwill = 30,000 ÷ 2/6 = ₹90,000.
Gaining ratio = 3 : 1: X's Capital A/c Dr 22,500; Z's Capital A/c Dr 7,500; To Y's Capital A/c 30,000.

Answer: Firm's goodwill ₹90,000; X and Z are debited ₹22,500 and ₹7,500, and Y is credited ₹30,000.

Example 6: Unequal gains · 3 marks · Short answerHOTS / competency

A, B and C share profits equally. A retires; B and C agree to share future profits 3 : 2. The firm's goodwill is ₹1,50,000. Pass the entry for A's share of goodwill. (3 marks)

Try it first, then show the solutionSolution

A's share = 1,50,000 × 1/3 = ₹50,000.
Gains: B 3/5 − 1/3 = 4/15; C 2/5 − 1/3 = 1/15; ratio 4 : 1.
B's Capital A/c Dr 40,000; C's Capital A/c Dr 10,000; To A's Capital A/c 50,000.

Answer: B's Capital A/c Dr ₹40,000; C's Capital A/c Dr ₹10,000; To A's Capital A/c ₹50,000.

Where students lose marks in Goodwill on Retirement or Death of a Partner

The slips examiners see most often, and what to write instead.

Mistake: Debiting goodwill to continuing partners in their new ratio
Gaining ratio confused with new ratio.
Wrong working
B : C debited 3 : 2 for A's ₹50,000.
Right working
Gains are 4/15 and 1/15: 4 : 1.
Do this: Always compute new − old.
Usually costs: 1-2 marks.
Mistake: Leaving the retiring partner out of the write-off
Thinking he no longer belongs to the firm.
Wrong working
Existing goodwill written off between P and Q only.
Right working
P, Q and R in 2 : 2 : 1.
Do this: The old goodwill was owned by all old partners.
Usually costs: 1 mark.
Mistake: Raising the full goodwill in the books
Old practice.
Wrong working
Goodwill A/c Dr 1,00,000 To all partners' capitals.
Right working
Only the adjustment entry through capital accounts.
Do this: AS 26: no self-generated goodwill in the books.
Usually costs: Full marks of the entry.
Mistake: Taking the excess payment as the firm's goodwill
Skipping the last step of hidden goodwill.
Wrong working
Firm's goodwill = ₹30,000.
Right working
Firm's goodwill = 30,000 ÷ 1/3 = ₹90,000.
Do this: Excess is only his share; divide by his share.
Usually costs: 1 mark.

Exam tips

Write the gaining ratio working beside the entry; examiners award it separately.
In 6-mark questions, record goodwill before balancing the retiring partner's capital account.
For death, show the share of goodwill in the deceased partner's capital account, then transfer the balance to the executor.
Goodwill on retirement or death appears in 1-mark MCQs and in 4- and 6-mark questions.

Practice questions on Goodwill on Retirement or Death of a Partner

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

Q1 · 1 mark · MCQBoard level
On retirement, the retiring partner's share of goodwill is debited to:
(a) all partners in the old ratio
(b) continuing partners in the gaining ratio
(c) continuing partners in the new ratio
(d) the Goodwill Account
Hint
Who gains?
Answer
(b) continuing partners in the gaining ratio
Q2 · 1 mark · MCQBoard level
Goodwill already appearing in the books at the time of retirement is written off:
(a) among continuing partners in the gaining ratio
(b) among all partners in the old ratio
(c) among continuing partners in the new ratio
(d) against the retiring partner only
Hint
Old goodwill, old ratio.
Answer
(b) among all partners in the old ratio
Q3 · 3 marks · Short answerBoard level
A, B and C share profits 3 : 1 : 1. C retires; the firm's goodwill is ₹80,000 and A and B continue in their old ratio. Pass the journal entry. (3 marks)
Hint
C's share is 1/5.
Answer
C's share = ₹16,000; gaining ratio 3 : 1. A's Capital A/c Dr 12,000; B's Capital A/c Dr 4,000; To C's Capital A/c 16,000.
Q4 · 3 marks · Short answerHarder board level
P, Q and D share profits 2 : 2 : 1. D dies. Goodwill is valued at twice the average profit of the last three years (₹60,000, ₹90,000, ₹1,20,000). Pass the entry for D's share of goodwill. (3 marks)
Hint
Average 90,000.
Answer
Goodwill = ₹1,80,000; D's share = ₹36,000. P's Capital A/c Dr 18,000; Q's Capital A/c Dr 18,000; To D's Capital A/c 36,000.
Q5 · 4 marks · Short answerHarder board level
X, Y and Z share profits 3 : 2 : 1. Goodwill appears in the books at ₹60,000. Z retires and the firm's goodwill is valued at ₹1,80,000; X and Y continue 3 : 2. Pass the journal entries. (4 marks)
Hint
Write off first.
Answer
(1) X's Capital Dr 30,000; Y's Capital Dr 20,000; Z's Capital Dr 10,000; To Goodwill A/c 60,000. (2) Z's share = 1,80,000 × 1/6 = 30,000: X's Capital A/c Dr 18,000; Y's Capital A/c Dr 12,000; To Z's Capital A/c 30,000.
Q6 · 3 marks · Short answerHarder board level
A, B and C share profits 5 : 3 : 2. B retires; A and C will share future profits equally. The firm's goodwill is ₹1,00,000. Pass the goodwill entry. (3 marks)
Hint
A's share does not change.
Answer
Gains: A 5/10 − 5/10 = nil; C 5/10 − 2/10 = 3/10. B's share = ₹30,000. C's Capital A/c Dr 30,000 To B's Capital A/c 30,000.
Q7 · 4 marks · Short answerHarder board level
A firm earns an average profit of ₹1,00,000 on capital employed of ₹8,00,000; the normal rate of return is 10%. P, Q and R share profits 2 : 2 : 1 and R retires; P and Q continue equally. Value goodwill by capitalisation of average profit and pass the entry. (4 marks)
Hint
10,00,000 − 8,00,000.
Answer
Goodwill = 1,00,000 × 100/10 − 8,00,000 = ₹2,00,000; R's share = ₹40,000. P's Capital A/c Dr 20,000; Q's Capital A/c Dr 20,000; To R's Capital A/c 40,000.
Q8 · 1 mark · Assertion-reasonHarder board level
Assertion (A): A retiring partner is entitled to his share of goodwill only if goodwill appears in the balance sheet.
Reason (R): Under AS 26, goodwill is adjusted through partners' capital accounts without being raised in the books.
(a) Both A and R are true, and R is the correct explanation of A.
(b) Both A and R are true, but R is not the correct explanation of A.
(c) A is true, but R is false.
(d) A is false, but R is true.
Hint
Does goodwill need to be in the books to exist?
Answer
(d) A is false, but R is true.
Q9 · 3 marks · Short answerHOTS / competency
A partner with a 1/4 share retires. His capital, after all adjustments, is ₹1,10,000, and the two continuing partners, who share equally, pay him ₹1,30,000 in full settlement. Calculate the firm's goodwill and pass the entry. (3 marks)
Hint
Excess ÷ share.
Answer
Excess = ₹20,000 = his share of goodwill; firm's goodwill = 20,000 × 4 = ₹80,000. Continuing partners' Capital A/cs Dr 10,000 each; To Retiring Partner's Capital A/c 20,000.
Q10 · 4 marks · Short answerHOTS / competency
A, B and C share profits 4 : 3 : 3. C retires; A and B agree to share future profits equally. Goodwill is valued at ₹2,10,000. Pass the journal entry for goodwill. (4 marks)
Hint
Gains 1/10 and 2/10.
Answer
C's share = ₹63,000. Gains: A 5/10 − 4/10 = 1/10; B 5/10 − 3/10 = 2/10; ratio 1 : 2. A's Capital A/c Dr 21,000; B's Capital A/c Dr 42,000; To C's Capital A/c 63,000.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1.Which partners bear the write-off of existing goodwill on retirement?Show answer
All partners, including the retiring one, in the old ratio.
2.Goodwill ₹60,000; retiring share 1/4. His share of goodwill?Show answer
₹15,000.
3.Which standard governs this treatment?Show answer
AS 26.
4.Retiring partner paid ₹25,000 more than his adjusted capital; share 1/5. Firm's goodwill?Show answer
₹1,25,000.
5.Where does the deceased partner's goodwill share finally go?Show answer
To his capital account and then to his Executor's Account.

Goodwill on Retirement or Death of a Partner: frequently asked questions

How is goodwill treated on retirement of a partner in Class 12?

His share (goodwill × his share) is credited to his capital account and debited to the continuing partners in their gaining ratio; existing goodwill is first written off in the old ratio.

Is the treatment different on death?

No. The deceased partner's share is credited to his capital account in the same way, and the balance is transferred to his executor.

What is hidden goodwill on retirement?

The excess of the amount paid to the retiring partner over his adjusted capital balance; it is his share of goodwill.

Can a continuing partner be credited for goodwill on retirement?

Yes, if his new share is lower than his old share; he has sacrificed and is compensated by the gaining partner.