Account for changes in partnership: retirement of a partner, admission of a new partner
When a partner leaves or joins a partnership, the accounts must be adjusted to reflect the change. This involves revaluing assets, dealing with goodwill, and updating each partner's capital account.
Formula
Goodwill adjustment per partner = Goodwill value × Old profit-sharing ratio (debit), then Goodwill value × New profit-sharing ratio (credit)
Real World
When a senior partner retired from accountancy firm Deloitte's predecessor practice, the remaining partners had to revalue the office building and create a goodwill entry so the retiring partner received a fair payout reflecting the firm's true worth.
Exam Focus
Show goodwill created then immediately eliminated — examiners penalise students who leave goodwill sitting in the statement of financial position.
Essay Framework
Use PEEL to structure every paragraph. Tap each step for guidance and an example.
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