When a partner retires or dies, the firm does not dissolve — it is reconstituted. The old partnership deed comes to an end and a new one is framed, and the first accounting job is to compute exactly what is due to the outgoing partner, or to the legal heirs of a deceased partner.
That single computation drives the whole chapter: new profit sharing ratio, gaining ratio, goodwill, revaluation, reserves, interim profit, capital adjustment and settlement.
These retirement death of a partner class 12 notes compress the NCERT chapter into one revision page — every formula with its symbols, the journal-entry pattern for each adjustment, comparison tables, and two fully worked problems with original numbers, all shorter than the textbook chapter. These notes follow the 2026-27 CBSE session.
Use the page as a roadmap: read the eight accounting steps first, then jump through the table of contents to the section you need. The full chapter text is available in the official NCERT PDF for verification.
Retirement or Death: The Eight Accounting Steps
Retirement normally happens at the end of an accounting period; death can occur at any time — which is why death cases always include calculations up to the date of death (NCERT, p. 140). Either way, eight accounting aspects must be handled:
- Ascertain the new profit sharing ratio and the gaining ratio.
- Treat goodwill.
- Revalue assets and liabilities.
- Adjust unrecorded assets and liabilities.
- Distribute accumulated profits and losses.
- Compute the outgoing partner’s share of profit or loss up to the date of exit.
- Adjust the capitals of the continuing partners, if required.
- Settle the amount due to the retired or deceased partner.
The outgoing partner’s claim is built from two lists — everything the firm owes the partner and everything the partner owes the firm (NCERT, p. 108). This skeleton reappears in every problem in the chapter:
| Additions to the amount due | Deductions from the amount due |
|---|---|
| Credit balance of capital account | Debit balance of current account |
| Credit balance of current account | Share of goodwill to be written off |
| Share of goodwill | Share of accumulated losses |
| Share of accumulated profits (reserves) | Share of loss on revaluation |
| Share of gain on revaluation | Share of loss up to the date of retirement/death |
| Share of profits up to the date of retirement/death | Drawings up to the date of retirement/death |
| Interest on capital up to the date | Interest on drawings up to the date |
| Salary/commission due up to the date |
Remember the sequence with Nana’s Grand Gift Recovers Papa’s Cash Share — New ratio, Gaining ratio, Goodwill, Revaluation, Reserves and Profit (both belong to the outgoing partner), Capital adjustment, Settlement.
New Profit Sharing Ratio after Retirement
New profit sharing ratio is the ratio in which the remaining partners will share future profits after the retirement or death of a partner (NCERT, p. 108). Each continuing partner’s new share = old share + the share acquired from the outgoing partner:
\[ \text{New Share} = \text{Old Share} + \text{Acquired Share} \]
Three situations decide how the acquired share is found:
- (a) No information given about acquisition — assume the continuing partners acquire the outgoing share in their old ratio. Example: Asha, Deepti and Nisha share 3:2:1; if Deepti retires, Asha and Nisha continue in 3:1. No computation needed (p. 108).
- (b) Acquisition in a stated proportion — multiply the fraction by the retiring partner’s share, then add to old shares. Naveen, Suresh and Tarun share 5:3:2; Suresh retires and his 3/10 share is taken by Naveen and Tarun in 2:1 (p. 109):
\[ \text{Naveen’s acquired share} = \frac{2}{3} \times \frac{3}{10} = \frac{2}{10} \]
\[ \text{Tarun’s acquired share} = \frac{1}{3} \times \frac{3}{10} = \frac{1}{10} \]
\[ \text{Naveen’s new share} = \frac{5}{10} + \frac{2}{10} = \frac{7}{10} \]
\[ \text{Tarun’s new share} = \frac{2}{10} + \frac{1}{10} = \frac{3}{10} \]
New ratio = 7:3. - (c) Specified new ratio — use the ratio the partners agree on directly (p. 109).
In situation (b) the acquisition fraction applies to the retiring partner’s share, never to the firm’s total profit — 2/3 of 3/10 is 2/10, not 2/3 of everything. Illustration 1 (p. 110) is a good self-check: with Madhu, Neha and Tina at 5:3:2, retiring any one partner leaves the other two in their old ratio.
Gaining Ratio: Who Gains What from the Retiring Share
Gaining ratio is the ratio in which the continuing partners acquire the outgoing partner’s share (NCERT, p. 109). It is computed as:
\[ \text{Gaining Share} = \text{New Share} – \text{Old Share} \]
No computation is needed in two situations: acquisition in the old ratio (the gaining ratio simply equals the old ratio), or a directly specified acquisition proportion. Computation is needed when the new ratio is specified. Amit, Dinesh and Gagan share 5:3:2; Dinesh retires and the new ratio is 3:2 (p. 110):
\[ \text{Amit’s gain} = \frac{3}{5} – \frac{5}{10} = \frac{1}{10} \]
\[ \text{Gagan’s gain} = \frac{2}{5} – \frac{2}{10} = \frac{2}{10} \]
Gaining ratio = 1:2, so Amit gains 1/3 and Gagan gains 2/3 of Dinesh’s share.
This table answers the textbook’s own ‘Do it Yourself’ prompt on page 110:
| Aspect | Gaining Ratio | Sacrificing Ratio |
|---|---|---|
| Meaning | Ratio in which continuing partners acquire the outgoing partner’s share | Ratio in which existing partners give up part of their own share |
| Effect on partner’s share of profit | Increases the partner’s future share | Decreases the partner’s share |
| Mode of calculation | New share − Old share | Old share − New share |
| When to calculate | At retirement/death, when the new ratio is specified | At admission of a new partner |
A gain can be zero — Naresh in Illustration 4 (p. 112) and Ekta in Illustration 7 (p. 115) neither gain nor sacrifice. It can even be negative, meaning the partner actually sacrifices — Deepa in Illustration 8 (p. 116). Zero-gain partners take no part in goodwill entries; a sacrificing partner is compensated.
Treatment of Goodwill: Who Compensates the Retiring Partner
The outgoing partner is entitled to a share of goodwill because the firm’s goodwill was built by the efforts of all partners (NCERT, p. 113). The rule in one line: gaining partners compensate sacrificing partners to the extent of their gain.
Think of goodwill as the money value of the reputation the firm carries — the trust a customer shows by continuing to buy from the business. The departing partner helped build that reputation; the continuing partners keep its benefit, so they buy out the departing partner’s share of it.
Case 1: Goodwill Not Shown in the Books
When no goodwill appears in the books, the retiring partner’s share is credited to their capital account and the gaining partners’ capital accounts are debited individually in the gaining ratio (p. 113):
Gaining Partners’ Capital A/c Dr (individually, in gaining ratio) → To Retiring Partner’s Capital A/c The retiring partner’s share = value of goodwill × his old share. In Illustration 6 (p. 114), Nirmal’s share is 3/9 of ₹72,000 = ₹24,000; with a gaining ratio of 13:11, Keshav pays ₹13,000 and Pankaj ₹11,000.
Case 2: Goodwill Already Appears in the Books
Two steps (p. 117):
- Write off the existing goodwill in the OLD ratio — All Partners’ Capital A/cs Dr → Goodwill A/c.
- Adjust the retiring partner’s share of the current value in the gaining ratio, exactly as in Case 1.
Why step 1? The goodwill already on the balance sheet was recorded under the old agreement, so it belongs to all partners in the old ratio. Skipping it would count the same goodwill twice. In Illustration 9 (pp. 117–118), the existing ₹60,000 is written off in 3:2:1, then Pammy’s 1/3 of ₹84,000 = ₹28,000 is debited to Hanny and Sunny in their 1:1 gaining ratio.
Case 3: Hidden Goodwill from a Lump Sum Settlement
If the firm settles by a lump sum and the lump sum exceeds the amount otherwise due, the excess is treated as the outgoing partner’s share of goodwill — hidden goodwill (p. 118):
\[ \text{Hidden goodwill} = \text{Lump sum paid} – \text{Amount otherwise due} \]
The entry debits the gaining partners’ capital accounts in the gaining ratio and credits the retiring partner’s capital account. In the textbook’s P, Q and R case (pp. 118–119): R’s balance after adjustments is ₹60,000, the agreed payment is ₹75,000, so hidden goodwill is ₹15,000 — debited to P (₹9,000) and Q (₹6,000) in their 3:2 gaining ratio.
The assumption, unless stated otherwise, is that the continuing partners’ mutual ratio does not change.
Revaluation of Assets and Liabilities on Retirement
Assets may be carried below their current value, liabilities may differ from the actual obligation, and some items may be unrecorded — so a Revaluation Account is prepared, exactly as in the admission of a partner chapter (NCERT, p. 120). The six standard entries:
| Adjustment | Journal entry |
|---|---|
| Increase in an asset | Asset A/c Dr; To Revaluation A/c |
| Decrease in an asset | Revaluation A/c Dr; To Asset A/c |
| Increase in a liability | Revaluation A/c Dr; To Liability A/c |
| Decrease in a liability | Liability A/c Dr; To Revaluation A/c |
| Unrecorded asset | Asset A/c Dr; To Revaluation A/c |
| Unrecorded liability | Revaluation A/c Dr; To Liability A/c |
Then the net result is transferred: profit — Revaluation A/c Dr → all partners’ capital accounts Cr; loss — the reverse (pp. 120–121). The transfer is always in the OLD ratio, never the gaining ratio, because revaluation relates to the period before retirement — the outgoing partner was still a partner when the values changed. The Revaluation Account format is demonstrated in Illustration 10 (pp. 121–122).
Accumulated Profits and Losses: Transfer in the Old Ratio
Accumulated profits (General Reserve and similar) and accumulated losses (Profit and Loss Account debit balance) belong to all partners, so they are transferred to the capital accounts in the old ratio (NCERT, p. 122):
- Reserves: Reserves A/c Dr → All Partners’ Capital A/cs Cr (old ratio).
- Accumulated losses: All Partners’ Capital A/cs Dr → Profit and Loss A/c (old ratio).
In the Inder, Gajender and Harinder case (pp. 122–123), a ₹90,000 reserve is split 3:2:1 — ₹45,000, ₹30,000 and ₹15,000. Do these entries change with the new ratio? Never — the reserves were earned before retirement, so the outgoing partner takes a share in the old ratio.
Profit for the Intervening Period: Mid-Year Retirement or Death
A partner may leave mid-year, so the claim must include profit or loss from the date of the last balance sheet to the exit date, without closing the books (NCERT, p. 123). Three sanctioned methods:
| Method | Formula | Source |
|---|---|---|
| Last year’s profit | \( \text{Last year’s profit} \times \frac{\text{months}}{12} \times \text{old share} \) | pp. 123, 141 |
| Average profit | \( \text{Average profit} \times \frac{\text{months}}{12} \times \text{old share} \), where Average = Total profit ÷ number of years | pp. 124, 141 |
| Sales basis | \( \frac{\text{Last year’s profit}}{\text{Last year’s sales}} \times \text{period sales} \times \text{old share} \) | pp. 124, 142 |
The mechanism uses a Profit & Loss Suspense Account: P&L Suspense A/c Dr → Retiring/Deceased Partner’s Capital A/c. Later the suspense account is closed by debiting the gaining partners’ capital accounts in the gaining ratio. A single alternative entry works too: Gaining Partners’ Capital A/cs Dr → Retiring/Deceased Partner’s Capital A/c (p. 125).
Notice that the old ratio is used for the outgoing partner’s share even though the new ratio is already known — the profit belongs to the period before the change.
Settlement of the Retiring Partner’s Claim
Modes of payment (NCERT, p. 125): a lump sum immediately, instalments with or without interest, or part cash and part instalments. In the absence of any agreement, Section 37 of the Indian Partnership Act, 1932 applies: the outgoing partner may choose either interest at 6% per annum until payment, or a share of the profits earned with his money.
Four disposal entries (pp. 125–126):
- Full cash payment: Retiring Partner’s Capital A/c Dr → Cash/Bank A/c.
- Whole amount as loan: Retiring Partner’s Capital A/c Dr → Retiring Partner’s Loan A/c.
- Part cash, part loan: Retiring Partner’s Capital A/c Dr → Cash/Bank A/c + Retiring Partner’s Loan A/c.
- Instalments with interest: (a) Interest A/c Dr → Retiring Partner’s Loan A/c; (b) Retiring Partner’s Loan A/c Dr → Cash/Bank A/c — repeat (a) and (b) until the loan is cleared.
The loan balance is shown on the liabilities side of the Balance Sheet until the last instalment is paid (p. 126). Illustration 11 (pp. 126–128) shows three instalment structures:
| Structure | Payment pattern | Interest |
|---|---|---|
| (a) Fixed principal + interest on unpaid balance | Principal equal each year (e.g. ₹15,000 on ₹60,000) | 12% on the opening balance each year |
| (b) Fixed instalments including interest | Equal yearly payment (e.g. ₹20,000); balance plus interest cleared in the final year | 12% on the opening balance |
| (c) Equal instalments including interest (annuity pattern) | Constant yearly payment (e.g. ₹19,754 for ₹60,000 at 12% for 4 years) | 12% on the unpaid balance; annuity factor used |
Structure (c) follows the same logic as a home-loan EMI: the yearly payment is constant, but early instalments carry more interest and later ones more principal. Interest is always computed on the opening balance of the loan account.
Adjustment of Continuing Partners’ Capitals
The remaining partners may adjust their capitals to the new profit sharing ratio; excess capital is withdrawn, a shortage is brought in (NCERT, p. 134). Three cases:
| Case | Total capital of the new firm | New capital per partner | Example |
|---|---|---|---|
| 1. Total capital specified | Given in the question (e.g. ₹1,20,000) | Total × new share; compare with the existing balance | Illustration 14 (p. 134): Mohit 80,000 vs 82,000 → withdraw 2,000; Sohan 40,000 vs 41,000 → withdraw 1,000 |
| 2. Total capital not specified | Sum of the continuing partners’ adjusted capitals (e.g. ₹2,40,000) | Total ÷ in the new ratio | Illustration 15 (pp. 135–136): Asha 1,80,000 vs 1,60,000 → bring 20,000; Lata 60,000 vs 80,000 → withdraw 20,000 |
| 3. Retiring partner’s claim contributed by continuing partners | Existing capitals + retiring partner’s claim (e.g. 60,000 + 50,000 + 70,000 = ₹1,80,000) | Total × new share | Illustration 16 (pp. 136–137): Pankaj and Rahul each 90,000; bring 30,000 and 40,000 |
Journal entries: for withdrawal — Partner’s Capital A/c Dr → Cash/Bank A/c; for contribution — Cash/Bank A/c Dr → Partner’s Capital A/c (p. 134). Direction rule: existing capital greater than new capital means withdrawal (debit the capital account); lesser means bring in (credit it). The ‘Do it Yourself’ capital problem on p. 139 is a good drill.
Death of a Partner: The Executor’s Account
Death follows the same accounting path as retirement, with one key difference: the amount due is transferred to the deceased partner’s executor’s account and paid to the executors (NCERT, pp. 128, 140). Because death can occur at any time, the claim always includes profit or loss, interest on capital and interest on drawings for the intervening period.
The three profit methods from the previous section apply unchanged (pp. 141–142), and goodwill may be valued by years’ purchase of average profit (pp. 144–145).
Structure of the deceased partner’s capital account (pattern of Illustration 18, pp. 142–144): the credit side shows the balance b/d, the share of reserve fund, the share of goodwill from the continuing partners’ capitals in the gaining ratio, Profit & Loss Suspense and interest on capital; the debit side transfers the total to the executor’s account.
The executor’s account then records the immediate payment, and the unpaid balance is carried as an executor’s loan bearing interest where agreed (pp. 144–145).
Dates matter in every death problem: each computation runs from the date of the last balance sheet to the date of death (p. 143).
Key Terms and Definitions at a Glance
| Term | Meaning | Where it matters |
|---|---|---|
| Reconstitution | A change in the agreement of a running firm; the old deed ends and a new deed is framed | Start of every problem (p. 107) |
| New profit sharing ratio | The ratio in which remaining partners share future profits after an exit | Goodwill and capital adjustments (p. 108) |
| Gaining ratio | The ratio in which continuing partners acquire the outgoing partner’s share | Goodwill compensation (p. 109) |
| Hidden goodwill | The excess of a lump sum settlement over the amount otherwise due | Lump sum settlements (p. 118) |
| Profit & Loss Suspense A/c | Account recording the outgoing partner’s share of interim profit without closing the books | Mid-year retirement and death (pp. 123, 141) |
| Retiring partner’s loan account | Account holding the unpaid balance due to the retired partner | Settlement by instalments (p. 125) |
| Executor | The legal representative of a deceased partner | Death cases (pp. 140, 147) |
| Executor’s account | Account opened to settle the deceased partner’s claim with the legal heirs | Death cases (pp. 140, 147) |
| Retirement of a partner | A partner leaving a running firm; the firm continues with the rest | Whole chapter (p. 147) |
| Death of a partner | Firm reconstituted on a partner’s death; the claim goes to the executors | Whole chapter (p. 147) |
Formulas You Must Know: Quick Reference
| Formula | What the symbols mean | Source |
|---|---|---|
| \( \text{New Share} = \text{Old Share} + \text{Acquired Share} \) | Continuing partner’s future share = their old share plus what they take from the outgoing partner | pp. 108–109 |
| \( \text{Acquired Share} = \text{Acquisition fraction} \times \text{Retiring partner’s share} \) | The fraction applies to the outgoing share, not the firm’s total profit | p. 109 |
| \( \text{Gaining Share} = \text{New Share} – \text{Old Share} \) | Needed when the new ratio is specified | pp. 109–110 |
| \( \text{Intervening profit (last year basis)} = \text{Last year’s profit} \times \frac{\text{months}}{12} \times \text{old share} \) | months = part of the year before the exit date | pp. 123, 141 |
| \( \text{Average Profit} = \frac{\text{Total profit}}{\text{Number of years}} \) | Used for interim profit and for goodwill by years’ purchase | pp. 124, 141 |
| \( \text{Intervening profit (average basis)} = \text{Average profit} \times \frac{\text{months}}{12} \times \text{old share} \) | Same time fraction, average profit in place of last year’s profit | pp. 124, 141 |
| \( \text{Intervening profit (sales basis)} = \frac{\text{Last year’s profit}}{\text{Last year’s sales}} \times \text{Period sales} \times \text{old share} \) | Profit assumed proportional to sales | pp. 124, 142 |
| \( \text{Goodwill} = \text{Years’ purchase} \times \text{Average profit} \) | Years’ purchase is the agreed multiplier | pp. 144–145 |
| \( \text{Hidden goodwill} = \text{Lump sum paid} – \text{Amount otherwise due} \) | Excess of settlement over the adjusted claim | pp. 118–119 |
| \( \text{Interest on capital} = \text{Capital} \times \text{Rate} \times \frac{\text{months}}{12} \) | From the last balance sheet date to the exit date | p. 143 |
| \( \text{New capital} = \text{Total capital of new firm} \times \text{New share} \) | Cash to bring in or withdraw = New capital − Existing capital | pp. 134–135 |
| Section 37 option | Interest at 6% p.a. until payment, or a share of profits earned with the outgoing partner’s money | p. 125 |
Show months as fractions of 12 and rupees as the unit in every step.
Worked Examples: Two Original Problems Solved Step by Step
Example A: The Full Retirement Chain — Meera, Kavita and Sana
Meera, Kavita and Sana share profits in the ratio 5:3:2. Kavita retires. Goodwill is valued at ₹1,00,000, and Meera and Sana agree a new ratio of 3:2. Record the goodwill adjustment.
Step 1 — Old shares.
Total = 5 + 3 + 2 = 10, so Meera 5/10, Kavita 3/10, Sana 2/10.
Step 2 — Kavita’s share of goodwill (method: firm goodwill × old share).
\[ \text{Kavita’s goodwill share} = \frac{3}{10} \times \text{Rs } 1,00,000 = \text{Rs } 30,000 \]
Step 3 — Gaining ratio (method: new share − old share).
\[ \text{Meera} = \frac{3}{5} – \frac{5}{10} = \frac{6-5}{10} = \frac{1}{10} \]
\[ \text{Sana} = \frac{2}{5} – \frac{2}{10} = \frac{4-2}{10} = \frac{2}{10} \]
Gaining ratio = 1:2.
Step 4 — Journal entry.
Meera pays 1/3 and Sana pays 2/3 of ₹30,000.
| Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|
| Meera’s Capital A/c Dr | 10,000 | ||
| Sana’s Capital A/c Dr | 20,000 | ||
| To Kavita’s Capital A/c | 30,000 | ||
| (Kavita’s share of goodwill adjusted to Meera and Sana in their gaining ratio 1:2) | |||
Final answer: Meera’s Capital A/c debited ₹10,000, Sana’s Capital A/c debited ₹20,000, Kavita’s Capital A/c credited ₹30,000.
Hidden goodwill variant: suppose after all adjustments Kavita’s balance stands at ₹80,000 and Meera and Sana agree to pay a lump sum of ₹95,000. Hidden goodwill = ₹95,000 − ₹80,000 = ₹15,000, debited in the gaining ratio 1:2 — Meera ₹5,000, Sana ₹10,000.
Example B: The Death Chain — Dev, Farah and Gopal
Dev, Farah and Gopal share profits in the ratio 5:3:2. Gopal dies on 30 September. His capital is ₹50,000; interest on capital is 10% per annum; goodwill is valued at ₹90,000; last year’s profit was ₹1,80,000. Compute the amount due and show the transfer to the executor’s account.
Step 1 — Gopal’s share of goodwill (method: firm goodwill × old share).
Gopal’s old share = 2/10.
\[ \text{Goodwill share} = \frac{2}{10} \times \text{Rs } 90,000 = \text{Rs } 18,000 \]
Step 2 — Profit for the intervening period (method: last year’s profit × months/12 × old share).
From 1 April to 30 September = 6 months.
\[ \text{Profit share} = \text{Rs } 1,80,000 \times \frac{6}{12} \times \frac{2}{10} = \text{Rs } 18,000 \]
Step 3 — Interest on capital (method: capital × rate × months/12).
\[ \text{Interest} = \text{Rs } 50,000 \times \frac{10}{100} \times \frac{6}{12} = \text{Rs } 2,500 \]
Step 4 — Total claim.
\[ \text{Rs } 50,000 + \text{Rs } 18,000 + \text{Rs } 18,000 + \text{Rs } 2,500 = \text{Rs } 88,500 \]
Step 5 — Transfer to the executor.
Gopal’s Capital A/c Dr ₹88,500 → Gopal’s Executor’s A/c Cr ₹88,500.
The executor’s account then records payments; the unpaid balance is carried as an executor’s loan.
Final answer: Amount due to Gopal’s executors = ₹88,500. On the credit side of Gopal’s Capital A/c: balance b/d ₹50,000, goodwill ₹18,000 (from Dev and Farah in their gaining ratio 5:3 — ₹11,250 and ₹6,750), Profit & Loss Suspense ₹18,000, interest on capital ₹2,500.
Common Mistakes Students Make in This Chapter
| Students write | Correct is | Because / how to check |
|---|---|---|
| Existing goodwill written off in the new ratio | Write it off in the OLD ratio | The goodwill on the books was created under the old agreement; all partners bear it in the old ratio (p. 117) |
| Revaluation gain distributed in the gaining ratio | Distribute it in the OLD ratio | Revaluation covers the pre-retirement period, when the outgoing partner was still a partner (pp. 120–121) |
| Only the retiring partner compensated for goodwill | The gaining partner compensates both the retiring partner and any sacrificing continuing partner | Compensation follows sacrifice — a continuing partner who loses share must be paid too (pp. 115–116) |
| Acquisition ratio 3:2 applied directly to the firm’s profit | Multiply the fraction by the retiring partner’s share first, e.g. 3/5 of 3/6 | The retiring share is only a part of the total profit (pp. 110–111) |
| Intervening-period profit without the time fraction | Always include months/12 × old share | The claim covers only the part-year before exit, not a full year (pp. 123, 141) |
| Assuming every partner gains | A gain can be zero or negative | Zero-gain partners make no goodwill entry; a negative gain is a sacrifice and must be compensated (pp. 112, 115, 116) |
| In death cases, stopping at the deceased partner’s capital account | Transfer the total to the executor’s account | Payment is made to the executors, not to the deceased partner (p. 140) |
| Using the new ratio for the outgoing partner’s share of interim profit | Use the OLD ratio | The profit was earned before the reconstitution took effect (p. 141) |
How to Write Complete Answers to This Chapter’s Exercises
The exercises run from short descriptive questions to full numerical problems (pp. 147–155). These presentation habits keep your answers complete:
- State the assumption when the question does not say how the retiring share is acquired: the continuing partners acquire it in the old ratio (p. 109).
- Show the gaining-ratio working note before the journal entry — the narration should name the gaining ratio, as in the textbook’s journal on p. 114.
- Write journal entries in full: date, L.F., debit and credit amounts, and a complete narration.
- Use proper ledger format for “prepare…” questions: the Revaluation Account with the profit or loss transfer, Capital Accounts as T-accounts with balancing figures, and the Balance Sheet of the reconstituted firm with the retiring partner’s loan under liabilities (pp. 130–131).
- Number your working notes 1, 2, 3 below the final answer.
- For descriptive questions (“What are the different ways…”, “Why revalue assets…”, “How will you compute…”, pp. 147–148), structure the answer as meaning → need → procedure and entries → conclusion, using the chapter summary on p. 147 as the skeleton.
- In death questions, compute everything from the date of the last balance sheet to the date of death, and finish by transferring the total to the executor’s account.
- Where capitals are adjusted, show the calculation table of new capital versus existing capital before the journal entries (p. 135).
Use the ‘Do it Yourself’ Boxes as Quick Drills
The chapter embeds un-solved practice sets that follow the same methods as the nearby illustrations. Work them in order as a self-test, then check the given answers — the Test your Understanding sets carry their answers on p. 155.
| Location | Skill drilled | How to self-check |
|---|---|---|
| p. 110 | Gaining ratio vs sacrificing ratio concepts | Compare with the comparison table in this page’s gaining ratio section |
| p. 113 | New ratio and gaining ratio computations (seven problems) | Same methods as Illustrations 1–5 |
| pp. 128–129 | Full retirement settlement — goodwill, revaluation, loan transfer | Follow the Illustration 12 pattern |
| p. 139 | Capital adjustment in two firms | Follow Illustrations 14–17 |
| p. 146 | Death, capital account and executor’s account | Follow the Illustration 18–19 pattern |
| pp. 117, 119 | Test your Understanding sets | Answers given on p. 155 |
Revision Summary: The Whole Chapter on One Page
1. The eight steps, with their key formula or entry:
| Step | Key formula or entry |
|---|---|
| 1. New ratio and gaining ratio | New = Old + Acquired; Gaining = New − Old |
| 2. Goodwill | Gaining partners’ capitals Dr → Retiring partner’s capital Cr (gaining ratio) |
| 3. Revaluation of assets and liabilities | Revaluation A/c; profit or loss to all partners in the OLD ratio |
| 4. Unrecorded assets and liabilities | Asset Dr → Revaluation Cr; Revaluation Dr → Liability Cr |
| 5. Accumulated profits and losses | Reserves Dr → All capitals Cr; All capitals Dr → P&L A/c (old ratio) |
| 6. Profit or loss up to the date of exit | P&L Suspense Dr → Outgoing partner’s capital Cr; later closed to gaining partners |
| 7. Adjustment of capitals | New capital = Total × new share; excess withdrawn, deficit brought in |
| 8. Settlement of amount due | Retirement: Capital → Cash/Loan; Death: Capital → Executor’s A/c |
2. The compensation principle in one line: gaining partners compensate sacrificing partners to the extent of their gain, for the respective share of goodwill (p. 147).
3. Retirement vs death:
| Basis | Retirement | Death |
|---|---|---|
| Timing | Usually at the end of an accounting period | May occur at any time |
| To whom the amount is paid | The retiring partner | The legal representatives / executors |
| Account used | Retiring Partner’s Capital A/c → Retiring Partner’s Loan A/c | Deceased Partner’s Capital A/c → Executor’s A/c |
| Intervening period | Needed only if retirement is mid-year | Always needed — from last balance sheet to date of death |
| Legal fallback | Section 37: interest at 6% p.a. or a share of profits | Same settlement logic, routed through the executors |
4. What goes in which account:
| Account | What belongs in it |
|---|---|
| Revaluation Account | Changes in asset and liability values, unrecorded items; net gain or loss transferred to all partners in the old ratio |
| Profit & Loss Suspense A/c | Outgoing partner’s share of interim profit; closed by debiting the gaining partners in the gaining ratio |
| Retiring Partner’s Loan A/c | Unpaid balance due to the retired partner; shown under liabilities until cleared |
| Executor’s A/c | Deceased partner’s total claim; payments debited, balance carried as an executor’s loan |
For the next stage of the firm’s life — when the whole business is wound up — see the dissolution of a partnership firm notes. Browse all chapters in the Class 12 Accountancy notes hub, the Class 12 notes index, or the main CBSE notes page.
FAQs: Retirement and Death of a Partner
Why must we write off the existing goodwill before adjusting the new value of goodwill?
Because the goodwill already shown in the books was recorded under the old agreement and belongs to all partners in the old ratio. If you only adjusted the new value, that existing goodwill would effectively be counted twice — once through the old asset and once through the new adjustment (pp. 117–118).
When is there no need to compute the gaining ratio?
In two situations: when the continuing partners acquire the outgoing share in their old ratio (the gaining ratio simply equals their old ratio), and when the acquisition proportion is directly specified in the question. The gaining ratio must be computed only when the new profit sharing ratio is specified (p. 109).
What is hidden goodwill and how is it found?
Hidden goodwill is the excess of a lump sum settlement over the amount otherwise due to the outgoing partner after all adjustments. Formula: lump sum paid − amount otherwise due. The excess is treated as the outgoing partner’s share of goodwill and debited to the gaining partners in their gaining ratio (pp. 118–119).
How is the profit share up to the date of death calculated?
By one of three methods, all using the month fraction and the old share: last year’s profit × months/12 × old share; average profit of the past years × months/12 × old share; or (last year’s profit ÷ last year’s sales) × period sales × old share (p. 141). The period runs from the last balance sheet date to the date of death.
What happens if the retiring partner’s full amount cannot be paid at once?
The amount due is transferred to the retiring partner’s loan account and paid in instalments, with interest entries repeated until the loan is cleared. In the absence of an agreement, Section 37 of the Indian Partnership Act, 1932 gives the outgoing partner the option of interest at 6% per annum until payment, or a share of the profits earned with his money (p. 125).
Where do the retirement and death treatments differ?
Only in two respects: the amount is paid to the retiring partner personally, but to the executors of a deceased partner; and death can occur at any time, so the claim always includes profit or loss, interest on capital and interest on drawings for the intervening period (pp. 128, 140). Everything else — ratios, goodwill, revaluation, reserves, capital adjustment — follows the same path.
Reference: NCERT Class 12 Accountancy textbook, chapter Reconstitution of a Partnership Firm – Retirement/Death of a Partner.
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