Answer: The following adjustments are made at the time of retirement of a partner:
- Calculations of New Profit Sharing Ratio and Gaining Ratio of remaining partners.
- Distribution of Reserves and Undistributed Profits/Losses.
- Revaluation of Assets and Liabilities.
- Treatment of Goodwill.
- Calculation of amount payable to retiring partner.
- Adjustment of Capital.
Answer.
| Basis of Difference | Sacrificing Ratio | Gaining Ratio |
| 1. Meaning | Sacrificing Ratio is a ratio in which the old partners have agreed to surrender their share of profit in favour of new partner. | Gaining Ratio is a ratio in which remaining partners’ gain the retiring partner’s share. |
| 2. Objective | The main purpose to calculate the sacrificing ratio is to ascertain the compensation to be paid by incoming partner to the sacrificing partner’s in the form of goodwill. | The main purpose to calculate the gaining ratio is to find out the compensation to be paid by the gaining partner’s to the retiring partner. |
| 3. When to Calculate | Sacrificing Ratio is calculated at the time of admission of a new partner. | Gaining Ratio is calculated at the time of retirement of a partner. |
| 4. Method | Sacrificing Ratio = Old Ratio – New Ratio | Gaining Ratio = New Ratio – Old Ratio |
Answer: The accounting treatment of goodwill at the time of retirement is as follows:
- Calculate retiring partner’s share of Goodwill.
- Calculate gaining ratio of remaining partners.
- Pass an adjusting entry in the following manner:
To Retiring Partner’s Capital A/c
Condition: No goodwill should already appear in the books. In case goodwill already appears in the books it should be written off in old ratio. Entry will be:
All (Old) Partners Capital A/c Dr.
To Goodwill A/c
Example: A, B and C are partners sharing profits in the ratio of 4:3:2. B retires and Goodwill of the firm is valued on that date Rs. 27,000. Pass necessary journal entries when goodwill already appears in the books at Rs. 9,000.
Solution.
Journal
| Date | Particulars | L.F. |
Dr. Rs. |
Cr. Rs. |
|
|
A’s Capital A/c Dr. |
|
6,000 |
|
|
|
C’s Capital A/c Dr. |
|
3,000 |
|
|
|
To B’s Capital A/c |
|
|
9,000 |
|
|
(For B’s share of goodwill credited to him by A and C in gaining ratio of 2:1) |
|
|
|
|
|
A’s Capital A/c Dr. |
|
4,000 |
|
|
|
B’s Capital A/c Dr. |
|
3,000 |
|
|
|
C’s Capital A/c Dr. |
|
2,000 |
|
|
|
To Goodwill A/c |
|
|
9,000 |
|
|
(For existing goodwill in the books written off in old ratio) |
|
|
|
- B’s share of goodwill = 3/9 x Rs. 27,000 = Rs. 9,000.
- Gaining Ratio of A and C is 4:2 i.e. 2:1.