On retirement of a partner, the retiring Partner's Capital Account will be credited with:
Answer & explanation
Correct answer: option 1
The correct answer is option 1- His/her share of goodwill.
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. The journal entry is :
Gaining Partners Capital A/c Dr. (Individually)
To Retiring Partners Capital A/c
(Share in goodwill of retiring partner adjusted)
The sum due to the retiring partner (in case of retirement) and to the legal representatives/ executors (in case of death) includes:
(i) credit balance of his capital account;
(ii) credit balance of his current account (if any);
(iii) his share of goodwill;
(iv) his share of accumulated profits (reserves);
(v) his share in the gain of revaluation of assets and liabilities
(vi) his share of profits up to the date of retirement/death;
(vii) interest on his capital, if involved, up to the date of retirement/death; and
(viii) salary/commission, if any, due to him up to the date of retirement/death.