Principles of Accounting: Goodwill upon death or retirement of a partner

• Death is an inevitable part of life
• Sometimes a partner might die
• Also in other instances a partner might choose to leave the business i.e. retire
• In all the cases above the affected partner ends up leaving the business
• Technically speaking this leads to the dissolution of the partnership in question
• Often however the remaining partners might will choose to remain in business
• This technically means they are forming a new partnership which will likely have a different profit/loss sharing ratio
• Goodwill entries need to be made to account for such a change

Entries to be made in the books

• First the partners have to agree on the valuation of Goodwill i.e. determine the value of Goodwill
• Generally the following entries are required:
  1. Establish the value of Goodwill usually its the partners who determine this and the value of goodwill is given in the exam
  2. Establish the goodwill that belongs to the old partners before death/retirement and record this in the books via the following entries:
     1. Dr Goodwill to the Goodwill Account
     2. Cr The old partner’s Capital Account with their share of goodwill using the old profit/loss sharing ratio
  3. Write off the Goodwill Account in the partnership using the following entries:
     1. Dr Goodwill to the remaining partner’s Capital Account using the new profit/loss ratio
     2. Cr the Goodwill Account to goodwill account
  4. Alternatively the Goodwill Account can be ignored and the following entries are made:
     1. Cr Capital Accounts of those partners who are losing Goodwill in the new partnership with the amount of Goodwill they are losing
     2. Dr Goodwill the partner’s capital accounts for those partners who are gaining Goodwill with the amount of Goodwill they are gaining in the new partnership
• An example concerning Goodwill when a partner dies or retires can be found here

To access more topics go to the Principles of Accounts Notes.