What type of adjustment is goodwill settlement on retirement?

Correct answer: Adjustment of capital accounts

On retirement, the outgoing partner is entitled to receive his or her share of the firm’s goodwill because that partner helped create the firm’s reputation and earning capacity. The continuing partners bear this amount in proportion to their gaining ratio. Therefore, the accounting entry normally debits the gaining partners’ capital or current accounts and credits the retiring partner’s capital account. This directly changes partners’ balances, so it is an adjustment of capital accounts. Stock, bank loan, and tax accounts are not the governing accounts for this settlement; they may be affected in other transactions but do not explain the goodwill adjustment here. Hence option A is correct.