Short Introduction

Retirement or death of a partner leads to the reconstitution of a partnership firm. The remaining partners continue the business with a new profit-sharing arrangement. Important accounting adjustments include goodwill, revaluation of assets and liabilities, reserves, and settlement of the retiring/deceased partner’s claim.

Quick Information Box

Particulars	Details
Chapter	Reconstitution of Partnership Firm – Retirement/Death of a Partner
Class	12
Subject	Accountancy
Main Topics	New Ratio, Gaining Ratio, Goodwill, Retirement, Death
Difficulty Level	Medium to Advanced
Exam Importance	Very High

Concepts Used (Topics Covered)

• Retirement of a Partner
• New Profit Sharing Ratio
• Gaining Ratio
• Goodwill Adjustment
• Sacrificing Ratio
• Capital Account Adjustment
• Journal Entries on Retirement

Important Formulas

1. Gaining Share

$$\text{Gaining Share} = \text{New Share} – \text{Old Share}$$

2. Gaining Ratio

$$\text{Gaining Ratio} = \text{Gain of Partner A} : \text{Gain of Partner B}$$

3. Retiring Partner’s Share of Goodwill

$$\text{Retiring Partner’s Share} = \text{Goodwill of Firm} \times \text{Old Share}$$

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Illustration 7

Question

Jaya, Kirti, Ekta and Shweta are partners sharing profits in the ratio 2:1:2:1.

Jaya retires.

Goodwill of the firm = Rs. 36,000.

Kirti, Ekta and Shweta decide to share future profits equally.

Pass journal entry for goodwill adjustment without opening Goodwill Account.

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Step 1: Calculate Jaya’s Share of Goodwill

Old Share of Jaya:$$\frac{2}{6}$$62​

Goodwill Share:$$36000 \times \frac{2}{6}$$36000×62​ $$= 12000$$=12000

Jaya is entitled to Rs. 12,000.

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Step 2: Calculate Gaining Ratio

Kirti

Old Share:$$\frac{1}{6}$$61​

New Share:$$\frac{1}{3}$$31​

Gain:$$\frac{1}{3}-\frac{1}{6} = \frac{1}{6}$$31​−61​=61​

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Ekta

Old Share:$$\frac{2}{6}$$62​

New Share:$$\frac{1}{3} = \frac{2}{6}$$31​=62​

Gain = 0

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Shweta

Old Share:$$\frac{1}{6}$$61​

New Share:$$\frac{1}{3}$$31​

Gain:$$\frac{1}{6}$$61​

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Gaining Ratio

$$\frac{1}{6}:\frac{1}{6}$$61​:61​ $$1:1$$1:1

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Step 3: Journal Entry

Particulars	Debit (Rs.)	Credit (Rs.)
Kirti’s Capital A/c Dr.	6,000
Shweta’s Capital A/c Dr.	6,000
To Jaya’s Capital A/c		12,000

Being Jaya’s share of goodwill adjusted in gaining ratio.

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Final Answer

Jaya’s Share of Goodwill = Rs. 12,000

Gaining Ratio = 1 : 1

Journal Entry:

Kirti Capital A/c Dr. Rs. 6,000

Shweta Capital A/c Dr. Rs. 6,000

To Jaya Capital A/c Rs. 12,000

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Illustration 8

Question

Deepa, Neeru and Shilpa share profits in the ratio 5:3:2.

Neeru retires.

New ratio between Deepa and Shilpa = 2:3.

Goodwill = Rs. 1,20,000.

Pass necessary journal entry.

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Step 1: Calculate Neeru’s Goodwill Share

Old Share of Neeru:$$\frac{3}{10}$$103​

Goodwill Share:$$120000 \times \frac{3}{10}$$120000×103​ $$= 36000$$=36000

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Step 2: Calculate Gain/Sacrifice

Deepa

Old Share:$$\frac{5}{10}$$105​

New Share:$$\frac{2}{5} = \frac{4}{10}$$52​=104​

Sacrifice:$$\frac{5}{10}-\frac{4}{10} = \frac{1}{10}$$105​−104​=101​

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Shilpa

Old Share:$$\frac{2}{10}$$102​

New Share:$$\frac{3}{5} = \frac{6}{10}$$53​=106​

Gain:$$\frac{6}{10}-\frac{2}{10} = \frac{4}{10}$$106​−102​=104​

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Net Effect

Shilpa compensates:

• Neeru for retirement
• Deepa for sacrifice

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Step 3: Journal Entry

Particulars	Debit (Rs.)	Credit (Rs.)
Shilpa’s Capital A/c Dr.	48,000
To Neeru’s Capital A/c		36,000
To Deepa’s Capital A/c		12,000

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Final Answer

Neeru’s Share of Goodwill = Rs. 36,000

Journal Entry:

Shilpa Capital A/c Dr. Rs. 48,000

To Neeru Capital A/c Rs. 36,000

To Deepa Capital A/c Rs. 12,000

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Common Mistakes

1. Gaining Ratio incorrectly calculated.
2. Using New Ratio instead of Gaining Ratio for goodwill adjustment.
3. Forgetting compensation for sacrifice.
4. Wrong calculation of retiring partner’s goodwill share.
5. Mixing sacrifice and gain concepts.

Exam Tips

• Always calculate old and new shares first.
• Find gain or sacrifice separately.
• Goodwill adjustment is generally done in gaining ratio.
• Show all working notes.
• Mention narration in journal entries.

Practice MCQs

Q1

Retiring partner’s goodwill is adjusted through:

A. Cash Account

B. Capital Accounts

C. Drawings Account

D. Reserve Account

Answer: B

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Q2

Gaining Ratio is calculated as:

A. Old Share − New Share

B. New Share − Old Share

C. Capital − Drawings

D. Profit − Loss

Answer: B

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Q3

A partner who gains more profit share should:

A. Receive compensation

B. Pay compensation

C. Close firm

D. None

Answer: B

FAQ Section

Q1. What is Gaining Ratio?

It is the ratio in which continuing partners acquire the retiring partner’s share.

Q2. Why is goodwill adjusted?

Because the retiring partner deserves compensation for the firm’s reputation and earning capacity.

Q3. Is Goodwill Account always opened?

No. Generally adjustment is made directly through capital accounts.

Q4. What happens after retirement?

A new partnership agreement is formed among continuing partners.

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