Goodwill given in the balance sheet is debited to the partners at the time of retirement in:a)Gain Ratiob)Sacrificing Ratioc)New Ratiod)Old RatioCorrect answer is option 'D'. Can you explain this answer?

Question

Answer

At the time of retirement, goodwill given in the balance sheet should be debited to the partners in their old profit sharing ratio (including the outgoing partner).

Answer

As business do earn profit on the basis of goodwill also ( people see it more preferable to do dealings with the business having more goodwill in market )this is because of the efforts of partners so when  any of them is retiering it is given in old ratio (as they have conributed in it they must be paid back ) .....

Answer

Goodwill in the Balance Sheet
Goodwill is an intangible asset that represents the reputation, brand value, customer loyalty, and other non-physical factors that contribute to the success of a business. It is recorded in the balance sheet as an asset and is subject to certain accounting treatments, especially during retirement or dissolution of a partnership.

Partnership Retirement
When a partner retires from a partnership, the partnership firm undergoes certain adjustments to distribute the retiring partner's share of assets and liabilities among the remaining partners. Goodwill is one such asset that needs to be accounted for during retirement.

Debiting Goodwill to the Partners
In the retirement of a partner, the retiring partner is entitled to receive his/her share of the firm's assets, including the goodwill. The value of goodwill is determined based on the agreed upon terms and conditions mentioned in the partnership agreement.

The correct option in this case, option 'D' (Old Ratio), implies that the retiring partner's share of goodwill will be debited to the remaining partners in the same proportion as their old profit-sharing ratio.

This means that the goodwill will be transferred to the remaining partners in the same ratio as their original profit sharing ratio. By debiting the goodwill to the partners, the retiring partner is effectively compensated for his/her share of the goodwill, and the remaining partners take over the ownership and responsibility of the goodwill.

The reason for debiting the goodwill to the partners is to adjust the balance sheet and reflect the true financial position of the partnership firm after the retirement. It ensures that the remaining partners recognize and account for the value and ownership of the goodwill in their books.

This treatment is in line with the principles of partnership accounting, which aim to distribute the assets and liabilities of the partnership in a fair and equitable manner among the partners.

Overall, by debiting the goodwill to the partners at the time of retirement, the partnership firm ensures a smooth transition and proper allocation of the retiring partner's share of goodwill to the remaining partners.

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