Retirement of a Partner
Complete Chapter Notes
The mirror image of admission. Learn how the new ratio and gaining ratio are calculated when a partner leaves, how the retiring partner is compensated for goodwill, how the amount due is settled under Section 37, and how the loan account and capital adjustment are prepared — with a solved numerical for every case.
Retirement Is Admission in Reverse
In admission, a new partner buys a share of future profits and the old partners sacrifice. In retirement, the opposite happens: the remaining partners gain the share given up by the retiring partner, so they must compensate him. Everything he has earned till the date of retirement — capital, share of goodwill, reserves and revaluation profit — is calculated, credited to his account, and then paid or converted into a loan.
1. Meaning of Retirement and Amount Payable
Retirement means that an existing partner leaves the firm while the remaining partners continue the business. As per Section 32 of the Indian Partnership Act, 1932, a partner may retire in three ways: (i) with the consent of all the other partners, (ii) as per an express agreement among the partners, or (iii) by giving a written notice to the other partners, where the partnership is at will.
The retiring partner is entitled to receive:
Capital Balance
The credit balance of his capital account (and current account, if any) on the date of retirement.
Share of Goodwill
His share of the goodwill of the firm, contributed by the gaining partners.
Share of Reserves
His share of reserves and accumulated profits, in the old ratio.
Revaluation Profit
His share of the profit on revaluation of assets and liabilities.
Interest / Salary Due
Any interest on capital or salary due up to the date of retirement.
Less: Deductions
Drawings, interest on drawings, share of accumulated losses and revaluation loss are deducted.
2. New Profit-Sharing Ratio After Retirement
The new ratio is the ratio in which the remaining partners will share future profits. If the question gives no other information, the remaining partners are assumed to continue in their old ratio among themselves. If they acquire the retiring partner’s share in an agreed proportion, add each partner’s acquired portion to his old share.
Solution (i): A and C continue in their old mutual ratio of 5 : 2. New ratio = 5 : 2 and gaining ratio = 5 : 2 (they gain in their old ratio).
Solution (ii): B’s share = 3/10, taken equally, so each gains 1.5/10 = 3/20. A’s new share = 10/20 + 3/20 = 13/20. C’s new share = 4/20 + 3/20 = 7/20. New ratio = 13 : 7 and gaining ratio = 1 : 1.
3. Gaining Ratio
The gaining ratio decides who pays the retiring partner for goodwill and how much. It is needed because the remaining partners acquire the retiring partner’s share of future profits, and compensation must follow the gain.
4. Distinction Between Sacrificing Ratio and Gaining Ratio
| Basis | Sacrificing Ratio | Gaining Ratio |
|---|---|---|
| Meaning | Ratio in which partners give up a part of their share | Ratio in which partners acquire an additional share |
| Formula | Old Ratio − New Ratio | New Ratio − Old Ratio |
| When calculated | Mainly on admission of a partner (and on a change in ratio) | Mainly on retirement or death of a partner (and on a change in ratio) |
| Purpose | To divide the premium for goodwill brought by the new partner | To decide the contribution of remaining partners towards the goodwill of the outgoing partner |
| Effect on share | Share of the partner decreases | Share of the partner increases |
5. Accounting Treatment of Goodwill on Retirement
The retiring partner helped build the goodwill of the firm, so he must be compensated for his share of it. As per AS-26, a Goodwill Account cannot be raised; the adjustment is made through the capital accounts:
Working: Existing goodwill of ₹50,000 is written off in the old ratio 5 : 3 : 2 (X 25,000; Y 15,000; Z 10,000). Y’s share of goodwill = 2,10,000 × 3/10 = ₹63,000. Since X and Z continue in their old mutual ratio, the gaining ratio is 5 : 2, so X contributes 45,000 and Z contributes 18,000.
| Date | Particulars | L.F. | Dr. (₹) | Cr. (₹) |
|---|---|---|---|---|
| X’s Capital A/c Dr. | 25,000 | |||
| Y’s Capital A/c Dr. | 15,000 | |||
| Z’s Capital A/c Dr. | 10,000 | |||
| To Goodwill A/c | 50,000 | |||
| (Being existing goodwill written off among all partners in the old ratio 5 : 3 : 2) | ||||
| X’s Capital A/c Dr. | 45,000 | |||
| Z’s Capital A/c Dr. | 18,000 | |||
| To Y’s Capital A/c | 63,000 | |||
| (Being the share of goodwill of Y adjusted through the capital accounts of the gaining partners in the gaining ratio 5 : 2) | ||||
Hidden Goodwill on Retirement
If the firm agrees to pay the retiring partner more than the amount actually due to him, the excess is his share of hidden goodwill. It is debited to the gaining partners in the gaining ratio.
Solution: Hidden goodwill (share of R) = 1,50,000 − 1,20,000 = ₹30,000. The gaining partners are debited ₹30,000 in their gaining ratio and R is credited.
6. Revaluation of Assets and Reassessment of Liabilities
A Revaluation Account is prepared exactly as on admission. The only difference to remember: the profit or loss on revaluation is shared by ALL partners, including the retiring partner, in the OLD ratio, because the change in values took place while he was still a partner.
7. Treatment of Reserves and Accumulated Profits / Losses
Reserves, the credit balance of the Profit & Loss Account and the Workmen Compensation Reserve (in excess of any claim) are credited to ALL partners in the OLD ratio. Accumulated losses (debit balance of P&L Account, Advertisement Suspense) are debited to all partners in the old ratio. The rules for the Workmen Compensation Reserve and the Investment Fluctuation Reserve are the same as in Chapter 2 (Part A).
Solution: General Reserve of ₹60,000 in 3 : 2 : 1 → P 30,000; Q 20,000; R 10,000. Revaluation profit = 50,000 − 8,000 − 6,000 = ₹36,000, shared in 3 : 2 : 1 → P 18,000; Q 12,000; R 6,000. R’s capital account is credited with a total of ₹16,000 from these two items before settlement.
8. Settlement of the Amount Due (Section 37)
The total amount due to the retiring partner may be settled in three ways: (i) paid in full immediately (Retiring Partner’s Capital A/c Dr. → To Bank A/c), (ii) transferred fully to his Loan Account (Retiring Partner’s Capital A/c Dr. → To Retiring Partner’s Loan A/c), or (iii) partly paid and the balance transferred to his Loan Account.
| Year Ended | Opening Balance (₹) | Interest @ 10% (₹) | Amount Paid (₹) | Closing Balance (₹) |
|---|---|---|---|---|
| 31 March 2027 | 1,20,000 | 12,000 | 72,000 (60,000 + 12,000) | 60,000 |
| 31 March 2028 | 60,000 | 6,000 | 66,000 (60,000 + 6,000) | Nil |
Note: Interest is always calculated on the outstanding balance, so it reduces every year while the principal instalment stays equal.
9. Adjustment of Capitals in the New Ratio
The remaining partners may decide to keep their capitals in proportion to the new profit-sharing ratio. The total capital is either given in the question or taken as the sum of the adjusted capitals of the remaining partners. Each partner’s required capital = total capital × his new share. Surplus is withdrawn (or credited to the Current Account) and deficit is brought in (or debited to the Current Account).
Working: Required capitals: A = 5,00,000 × 3/5 = ₹3,00,000; B = 5,00,000 × 2/5 = ₹2,00,000. A has a surplus of ₹40,000 (withdraws); B has a deficit of ₹20,000 (brings in).
| Date | Particulars | L.F. | Dr. (₹) | Cr. (₹) |
|---|---|---|---|---|
| A’s Capital A/c Dr. | 40,000 | |||
| To Bank A/c | 40,000 | |||
| (Being surplus capital withdrawn by A) | ||||
| Bank A/c Dr. | 20,000 | |||
| To B’s Capital A/c | 20,000 | |||
| (Being deficit capital brought in by B) | ||||
10. Preparation of the Balance Sheet
The Balance Sheet of the reconstituted firm is prepared after all adjustments. Follow this order in a full question: (1) distribute reserves and accumulated profits or losses among all partners in the old ratio, (2) prepare the Revaluation Account and transfer its result to all partners in the old ratio, (3) adjust goodwill through the capital accounts in the gaining ratio, (4) settle the amount due to the retiring partner or transfer it to his Loan Account, (5) adjust the capitals of the remaining partners, and (6) prepare the new Balance Sheet showing revalued assets, the Loan Account of the retiring partner as a liability, and the closing capitals.
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20 MCQs — Retirement of a Partner
Mixed difficulty — theory, ratio cases, goodwill treatment, Section 37 and CUET-level numericals in Q17–Q20. The answer with a full explanation is given below each question.
Chapter 4 — Live Quiz
20 questions · Retirement of a Partner · One at a time · Instant feedback
