The correct answer is option 1-
Gaining Partners Capital A/c Dr. (In Gaining Ratio)
To Retiring Partner"s Capital A/c
(Share in goodwill of retiring partner adjusted)
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, credit in given to the retiring partner for the share in goodwill by debiting the goodwill account to gaining partners capital accounts (individually) in their gaining ratio. The journal entry is :
Gaining Partners Capital A/c Dr. (Individually)
To Retiring Partners Capital A/c
(Share in goodwill of retiring partner adjusted)
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