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Reconstitution of a Partnership Firm – Retirement/Death of a Partner

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Chapter Notes

Overview
This chapter deals with the accounting treatment when a partner retires or dies, leading to the reconstitution of the firm. The key idea is to ascertain the amount due to the retiring or deceased partner by adjusting for goodwill, revaluation of assets and liabilities, accumulated profits/losses, and share of profit up to the date of retirement/death. A student must understand that the continuing partners compensate the outgoing partner for their share of goodwill in the gaining ratio, and the new profit-sharing ratio among the remaining partners must be computed.
Key Concepts (12)
Reconstitution of a Partnership Firm
A change in the partnership agreement, such as retirement or death of a partner, which ends the existing partnership deed and requires a new deed to be framed.
e.g. When a partner retires, the remaining partners continue the business under changed terms and conditions.
Retiring Partner
A partner who leaves the firm voluntarily or as per the partnership deed, and is entitled to receive the amount due from the firm.
e.g. If Deepti retires from a firm where Asha, Deepti, and Nisha are partners, Deepti is the retiring partner.
Deceased Partner
A partner who dies, and the amount due is paid to their legal representatives or executors.
e.g. If a partner dies, the firm pays the due amount to the deceased partner's executor.
New Profit Sharing Ratio
The ratio in which the remaining partners will share future profits after the retirement or death of a partner.
e.g. If Asha, Deepti, and Nisha share profits in 3:2:1 and Deepti retires, the new ratio between Asha and Nisha is 3:1.
Gaining Ratio
The ratio in which the continuing partners acquire the share of the retiring or deceased partner.
e.g. If Amit and Gagan gain Dinesh's share in the ratio 1:2, the gaining ratio is 1:2.
Goodwill
The value of the firm's reputation and customer connections, for which the retiring/deceased partner is compensated by the continuing partners in their gaining ratio.
e.g. If the firm's goodwill is valued at Rs. 60,000 and B's share is Rs. 20,000, A and C adjust this in their gaining ratio.
Hidden Goodwill
The excess amount paid to a retiring/deceased partner over their capital account balance, representing their share of goodwill not recorded in the books.
e.g. If R's capital is Rs. 60,000 but he is paid Rs. 75,000, the hidden goodwill is Rs. 15,000.
Revaluation Account
A nominal account prepared to record the change in value of assets and liabilities at the time of retirement/death, with profit or loss transferred to all partners' capital accounts in the old ratio.
e.g. If machinery decreases by Rs. 10,000 and buildings increase by Rs. 25,000, the net profit is transferred to partners.
Accumulated Profits and Losses
Reserves or accumulated losses appearing in the balance sheet, which are distributed to all partners in their old profit-sharing ratio at the time of retirement/death.
e.g. General Reserve of Rs. 90,000 is transferred to Inder, Gajender, and Harinder in 3:2:1 ratio.
Profit and Loss Suspense Account
An account used to record the retiring/deceased partner's share of profit for the intervening period (from last balance sheet to date of retirement/death).
e.g. If Vipul retires on June 30, his share of profit for 3 months is credited to Profit and Loss Suspense A/c.
Retiring Partner's Loan Account
An account opened when the amount due to the retiring partner is not paid immediately, and is settled in instalments with or without interest.
e.g. If Rs. 60,000 is due to Mahinder and paid in four yearly instalments with interest, a loan account is maintained.
Executor's Account
An account opened in the name of the deceased partner's legal representative to record the amount due and its settlement.
e.g. On the death of a partner, the amount due is transferred to the Executor's Account.
Formulas & Equations (6)
New Share of Continuing Partner = Old Share + Acquired Share from the Outgoing Partner
Reads as: New share equals old share plus acquired share from the outgoing partner
Variables: Old Share: partner's existing profit share; Acquired Share: portion of retiring partner's share taken over
Use when: When continuing partners acquire the retiring partner's share in a ratio different from their old ratio
⚠ Forgetting to add the acquired share to the old share, or using the old ratio instead of the acquisition ratio
Gaining Share of Continuing Partner = New Share – Old Share
Reads as: Gaining share equals new share minus old share
Variables: New Share: profit share after retirement; Old Share: profit share before retirement
Use when: When the new profit-sharing ratio is specified and you need to find the gaining ratio
⚠ Subtracting new share from old share (reversing the formula), or using the old ratio directly as gaining ratio
Share of Goodwill of Retiring Partner = Firm's Goodwill × (Old Share of Retiring Partner)
Reads as: Share of goodwill equals firm's goodwill multiplied by the retiring partner's old profit share
Variables: Firm's Goodwill: total value of goodwill; Old Share: retiring partner's profit-sharing ratio
Use when: To calculate the amount of goodwill to be credited to the retiring partner's capital account
⚠ Using the new profit-sharing ratio instead of the old ratio, or forgetting to multiply by the firm's goodwill
Hidden Goodwill = Amount Paid to Retiring Partner – Amount Due as per Capital Account (after adjustments)
Reads as: Hidden goodwill equals amount paid minus amount due
Variables: Amount Paid: lump sum settlement; Amount Due: balance in capital account after adjustments for reserves, revaluation, etc.
Use when: When a lump sum is paid to the retiring partner and no goodwill account exists
⚠ Treating the entire lump sum as goodwill without deducting the capital account balance
Share of Profit up to Retirement/Death = (Last Year's Profit or Average Profit) × (Period from last Balance Sheet to date of retirement/12 months) × (Old Share of Retiring Partner)
Reads as: Share of profit equals profit for the period multiplied by the retiring partner's share
Variables: Last Year's Profit: profit of the previous year; Period: number of months; Old Share: retiring partner's profit-sharing ratio
Use when: To calculate the retiring/deceased partner's share of profit for the intervening period
⚠ Using the new profit-sharing ratio instead of the old ratio, or not adjusting for the time period
Interest on Retiring Partner's Loan = Outstanding Loan Balance × Rate of Interest × (Period/12)
Reads as: Interest equals outstanding balance times rate times time
Variables: Outstanding Loan Balance: amount due at the beginning of the period; Rate: agreed interest rate per annum; Period: time in months
Use when: When the retiring partner's loan is settled in instalments with interest
⚠ Calculating interest on the full loan amount every year without reducing the outstanding balance
How It Works
Ascertaining the Amount Due to Retiring/Deceased Partner
  1. Step 1: Determine the credit balance of the partner's capital account.
  2. Step 2: Add credit balance of current account (if any).
  3. Step 3: Add share of goodwill.
  4. Step 4: Add share of accumulated profits (reserves).
  5. Step 5: Add share of gain on revaluation of assets and liabilities.
  6. Step 6: Add share of profit up to the date of retirement/death.
  7. Step 7: Add interest on capital, salary/commission due up to the date.
  8. Step 8: Deduct debit balance of current account, share of goodwill to be written off, share of accumulated losses, share of loss on revaluation, share of loss up to date, drawings, and interest on drawings.
💡 Students often forget to include or deduct items like interest on drawings or share of profit for the intervening period.
Calculation of New Profit Sharing Ratio and Gaining Ratio
  1. Step 1: Identify the old profit-sharing ratio of all partners.
  2. Step 2: Determine how the retiring partner's share is acquired by continuing partners (in old ratio, specified ratio, or new ratio given).
  3. Step 3: If acquired in old ratio, new ratio = old ratio among continuing partners.
  4. Step 4: If acquired in a specified ratio, add acquired share to each continuing partner's old share.
  5. Step 5: If new ratio is given, calculate gaining share = new share – old share for each continuing partner.
  6. Step 6: Express gaining shares in a ratio to get the gaining ratio.
💡 The gaining ratio is only calculated when the new profit-sharing ratio is specified; otherwise, it is the same as the old ratio among continuing partners.
Treatment of Goodwill on Retirement/Death
  1. Step 1: Value the goodwill of the firm as per agreement.
  2. Step 2: Calculate the retiring/deceased partner's share of goodwill.
  3. Step 3: If goodwill does not appear in the books, debit the gaining partners' capital accounts in their gaining ratio and credit the retiring partner's capital account.
  4. Step 4: If goodwill already appears in the books, write it off by debiting all partners' capital accounts in the old ratio.
  5. Step 5: Then adjust the retiring partner's share of current goodwill as in Step 3.
  6. Step 6: If a continuing partner sacrifices, they are also compensated by the gaining partner.
💡 The journal entry for goodwill adjustment is always between the gaining partners (debit) and the retiring partner (credit), not the firm's cash account.
Revaluation of Assets and Liabilities
  1. Step 1: Prepare a Revaluation Account.
  2. Step 2: For increase in asset value, debit asset and credit Revaluation A/c.
  3. Step 3: For decrease in asset value, debit Revaluation A/c and credit asset.
  4. Step 4: For increase in liability, debit Revaluation A/c and credit liability.
  5. Step 5: For decrease in liability, debit liability and credit Revaluation A/c.
  6. Step 6: For unrecorded asset, debit asset and credit Revaluation A/c.
  7. Step 7: For unrecorded liability, debit Revaluation A/c and credit liability.
  8. Step 8: Transfer the profit or loss on revaluation to all partners' capital accounts in the old profit-sharing ratio.
💡 The revaluation profit or loss is shared by all partners (including the retiring one) in the old ratio, not the new ratio.
Adjustment of Accumulated Profits and Losses
  1. Step 1: Identify accumulated profits (e.g., General Reserve) and accumulated losses (e.g., Profit and Loss A/c debit balance).
  2. Step 2: For accumulated profits, debit the reserve account and credit all partners' capital accounts in the old ratio.
  3. Step 3: For accumulated losses, debit all partners' capital accounts in the old ratio and credit the Profit and Loss A/c.
💡 These adjustments are made before calculating the amount due to the retiring partner.
Disposal of Amount Due to Retiring Partner
  1. Step 1: If paid immediately in full, debit Retiring Partner's Capital A/c and credit Cash/Bank A/c.
  2. Step 2: If treated as loan, debit Retiring Partner's Capital A/c and credit Retiring Partner's Loan A/c.
  3. Step 3: If partly paid, debit Retiring Partner's Capital A/c (total due), credit Cash/Bank (amount paid) and Retiring Partner's Loan A/c (balance).
  4. Step 4: For loan settlement in instalments, record interest on outstanding balance and payment of instalment each year.
💡 In the absence of agreement, Section 37 of the Indian Partnership Act, 1932 applies, giving the outgoing partner an option to receive interest @ 6% p.a. or share of profits earned with their money.
Adjustment of Partners' Capitals after Retirement
  1. Step 1: Determine the total capital of the new firm (if specified).
  2. Step 2: Divide the total capital among continuing partners in their new profit-sharing ratio.
  3. Step 3: Compare each partner's existing capital with the required capital.
  4. Step 4: If excess, partner withdraws cash (debit capital, credit bank).
  5. Step 5: If deficit, partner brings in cash (debit bank, credit capital).
💡 This adjustment is only done if the partners decide to adjust capitals in the new profit-sharing ratio.
Exam Traps — Don't Make These Mistakes
⚠ Confusing Gaining Ratio with New Profit Sharing Ratio
✗ Students often state that the gaining ratio is the same as the new profit-sharing ratio.
→ The gaining ratio is the ratio in which continuing partners acquire the retiring partner's share, while the new profit-sharing ratio is the ratio in which they share future profits. They are different unless the continuing partners' old ratio is the same as the new ratio.
✓ Gaining ratio is calculated as New Share – Old Share, and it represents the proportion of the retiring partner's share acquired by each continuing partner.
⚠ Using New Ratio for Goodwill Adjustment
✗ Students debit the continuing partners' capital accounts in the new profit-sharing ratio for goodwill adjustment.
→ Goodwill adjustment should be done in the gaining ratio, not the new profit-sharing ratio. The gaining ratio reflects who benefits from the retiring partner's share.
✓ Debit the gaining partners' capital accounts in their gaining ratio and credit the retiring partner's capital account.
⚠ Forgetting to Write Off Existing Goodwill
✗ When goodwill already appears in the books, students directly adjust the retiring partner's share of current goodwill without writing off the existing goodwill.
→ Existing goodwill must first be written off by debiting all partners' capital accounts in the old ratio. Then the current goodwill is adjusted.
✓ First, write off existing goodwill: debit all partners' capital accounts in old ratio, credit Goodwill A/c. Then, adjust the retiring partner's share of current goodwill.
⚠ Sharing Revaluation Profit/Loss in New Ratio
✗ Students transfer revaluation profit or loss only to the continuing partners' capital accounts in the new ratio.
→ Revaluation profit or loss belongs to all partners (including the retiring one) up to the date of retirement/death, so it must be shared in the old profit-sharing ratio.
✓ Transfer the revaluation profit or loss to all partners' capital accounts (including the retiring partner) in their old profit-sharing ratio.
⚠ Incorrect Calculation of Intervening Period Profit
✗ Students calculate the retiring partner's share of profit for the full year instead of the period from the last balance sheet to the date of retirement.
→ The retiring partner is only entitled to profit for the period they were a partner in the current year, not the entire year.
✓ Calculate profit for the intervening period (e.g., 3 months) and then multiply by the retiring partner's old share.
Compare & Contrast
Meaning
Gaining Ratio
Sacrificing Ratio
Gaining ratio is the ratio in which continuing partners gain the share of the retiring partner; sacrificing ratio is the ratio in which existing partners give up their share to a new partner.
Recipient of Amount Due
Retirement of a Partner
Death of a Partner
On retirement, the amount due is paid to the retiring partner; on death, the amount due is paid to the legal representatives or executors of the deceased partner.
Exam Focus
Marks pattern: 2 MCQs (1 mark each), 1 Short Answer (3 marks), 1 Long Answer (6 marks) — total 11 marks
Most asked: Calculation of new profit-sharing ratio and gaining ratio · Treatment of goodwill (including hidden goodwill) · Preparation of Revaluation Account and Partners' Capital Accounts · Settlement of retiring partner's account (including loan account) · Adjustment of accumulated profits and losses
Don't skip: Numerical problem on retirement/death involving goodwill, revaluation, and capital accounts (6 marks); Calculation of gaining ratio and new profit-sharing ratio (3 marks)
One-Line Revision (read aloud before the exam)
  1. Retirement or death of a partner leads to reconstitution of the firm and requires a new partnership deed.
  2. The amount due to a retiring/deceased partner includes capital, current account balance, goodwill, reserves, revaluation profit, and share of profit up to date.
  3. Deductions from the amount due include drawings, accumulated losses, revaluation loss, and interest on drawings.
  4. New profit-sharing ratio is the ratio in which remaining partners share future profits after retirement/death.
  5. Gaining ratio is calculated as New Share – Old Share for each continuing partner.
  6. If no information is given, continuing partners acquire the retiring partner's share in their old profit-sharing ratio.
  7. Goodwill adjustment is done by debiting gaining partners' capital accounts and crediting the retiring partner's capital account in the gaining ratio.
  8. Hidden goodwill is the excess paid over the capital account balance after adjustments.
  9. Revaluation Account records changes in asset and liability values, and the profit/loss is shared in the old ratio.
  10. Accumulated profits (reserves) are transferred to all partners' capital accounts in the old ratio.
  11. The retiring partner's share of profit for the intervening period is credited to Profit and Loss Suspense A/c.
  12. If the amount due is not paid immediately, it is transferred to the Retiring Partner's Loan Account.
  13. In the absence of agreement, Section 37 of the Indian Partnership Act, 1932 provides for interest @ 6% p.a. or share of profits.
  14. Adjustment of capitals after retirement is done only if partners decide to align capitals with the new profit-sharing ratio.

MCQs — 10 Questions with Answers

Q1. Asha, Deepti and Nisha are partners sharing profits in the ratio 3:2:1. If Deepti retires and no information is given about profit sharing, what will be the new profit sharing ratio between Asha and Nisha?

  • A. 3:1 (in their old ratio) ✓
  • B. 3:2 (in Deepti's old ratio)
  • C. 1:1 (equally)
  • D. 2:1 (combined ratio)

Answer: A — In the absence of any information, continuing partners acquire the retiring partner's share in their old profit sharing ratio; thus Asha and Nisha continue in their old ratio of 3:1.

Q2. Naveen, Suresh and Tarun share profits in ratio 5:3:2. Suresh retires and his share (3/10) is acquired by Naveen and Tarun in ratio 2:1. What is the new profit sharing ratio?

  • A. 7:3 ✓
  • B. 5:2
  • C. 6:3
  • D. 8:2

Answer: A — Naveen's new share = 5/10 + (2/3 of 3/10) = 5/10 + 2/10 = 7/10; Tarun's new share = 2/10 + (1/3 of 3/10) = 2/10 + 1/10 = 3/10; ratio = 7:3.

Q3. Amit, Dinesh and Gagan share profits 5:3:2. Dinesh retires; Amit and Gagan decide new ratio 3:2. What is Gagan's gaining ratio?

  • A. 1/5 ✓
  • B. 2/5
  • C. 1/10
  • D. 3/10 (Dinesh's entire old share)

Answer: A — Gagan's old share = 2/10, new share = 2/5 = 4/10; gaining share = 4/10 − 2/10 = 2/10 = 1/5 of total profit.

Q4. Which of the following is NOT included in the amount due to a retiring partner?

  • A. His capital account balance and current account balance
  • B. His share of goodwill and accumulated profits
  • C. Profits earned by the firm in previous years after his admission ✓
  • D. Interest on capital and salary up to date of retirement

Answer: C — All profits earned in previous years belong to the old partners in their old ratio and are already reflected in accumulated profits; only his proportionate share is due, not the entire past profit.

Q5. A retiring partner's total claim is Rs. 80,000 (capital Rs. 50,000 + current Rs. 10,000 + goodwill Rs. 15,000 + other adjustments Rs. 5,000). If this amount is to be paid in two equal annual instalments with 10% p.a. interest, what is the first instalment amount?

  • A. Rs. 40,000
  • B. Rs. 44,000
  • C. Rs. 48,000 ✓
  • D. Rs. 42,000

Answer: C — Each instalment's principal = 80,000 / 2 = Rs. 40,000. Interest accrues on the outstanding balance during the year: at the start of year 1 the full Rs. 80,000 is outstanding, so interest for year 1 = 80,000 × 10% = Rs. 8,000. First instalment = 40,000 (principal) + 8,000 (interest) = Rs. 48,000.

Q6. In a partnership, Priya, Qureshi and Roma share profits 6:3:1. Roma retires. The new profit sharing ratio of Priya and Qureshi is specified as 2:1. Which is the correct statement?

  • A. Gaining ratio will be calculated as new share minus old share ✓
  • B. Gaining ratio will be the same as old ratio 6:3
  • C. Gaining ratio will be Roma's share divided by 2
  • D. Gaining ratio need not be calculated as new ratio is specified

Answer: A — When new profit sharing ratio is specified, gaining ratio must be calculated as the difference between new share and old share of each continuing partner.

Q7. Which journal entry correctly records the retirement of a partner when goodwill is already in the books and is to be written off?

  • A. Retiring Partner's Capital A/c Dr / Goodwill A/c Cr
  • B. Continuing Partners' Capital A/cs Dr / Goodwill A/c Cr ✓
  • C. Goodwill A/c Dr / Continuing Partners' Capital A/cs Cr
  • D. Retiring Partner's Capital A/c Dr / Cash A/c Cr

Answer: B — Goodwill is written off from the continuing partners' capitals in their gaining ratio, so Continuing Partners' Capital A/c is debited and Goodwill A/c is credited.

Q8. In the event of a partner's death, which account is prepared to record all amounts due to the deceased partner's estate and track payments?

  • A. Revaluation Account
  • B. Executor's Account ✓
  • C. Deceased Partner's Capital Account
  • D. Goodwill Account

Answer: B — An executor's account is a specialized account that records the deceased partner's total claim and all cash/other payments made to the legal representatives or estate.

Q9. Both statements: (I) Sacrificing ratio = new share minus old share, (II) Gaining ratio = new share minus old share. Which is true?

  • A. Both are correct
  • B. Both are incorrect
  • C. Only (I) is correct
  • D. Only (II) is correct ✓

Answer: D — Statement (I) is wrong: sacrificing ratio (on admission) = old share − new share. Statement (II) is correct: gaining ratio (on retirement) = new share − old share.

Q10. HOTS: Raj, Sita and Tara share profits 5:3:2. On Sita's retirement, Raj and Tara decide their new ratio as 3:1. If Sita's goodwill share (valued at Rs. 6,000) is paid by Raj and Tara in gaining ratio, how much goodwill does Tara pay?

  • A. Rs. 2,000
  • B. Rs. 3,000
  • C. Rs. 4,000
  • D. Rs. 1,000 ✓

Answer: D — Raj's new share = 3/4, old share = 5/10 = 1/2; Raj's gain = 3/4 − 1/2 = 1/4. Tara's new share = 1/4, old share = 2/10 = 1/5; Tara's gain = 1/4 − 1/5 = 1/20. Gaining ratio (Raj:Tara) = 1/4 : 1/20 = 5:1. Sita's goodwill of Rs. 6,000 is split 5:1, so Tara pays 1/6 × 6,000 = Rs. 1,000.

Flashcards

What is the new profit sharing ratio?

The ratio in which remaining partners will share future profits after a partner retires or dies: new share = old share + acquired share from outgoing partner.

Define gaining ratio.

The ratio in which continuing partners acquire the share of the retiring or deceased partner, calculated as new share minus old share of each remaining partner.

When is gaining ratio the same as old ratio among continuing partners?

When continuing partners acquire the retiring/deceased partner's share in their old profit sharing ratio among themselves.

Formula: gaining share of a continuing partner =

New profit share − Old profit share, expressed as a proportion of the total outgoing partner's old share.

What eight items are included in the amount due to retiring/deceased partner?

Capital balance, current account balance, goodwill share, accumulated profits share, revaluation gain, profit share to date, interest on capital to date, and salary/commission to date.

What are the five main deductions from a retiring partner's total claim?

Debit current account balance, goodwill written off, accumulated losses share, revaluation loss share, loss up to date of retirement, drawings, and interest on drawings.

Distinguish: sacrificing ratio versus gaining ratio.

Sacrificing ratio (admission) = old share − new share; gaining ratio (retirement) = new share − old share.

In a retirement, why is revaluation of assets necessary?

To determine the true value of assets/liabilities as of the retirement date so that the retiring partner receives a fair share of any gain or loss.

What is the purpose of an executor's account in case of partner death?

To record all amounts due to the deceased partner's estate and track the mode and timing of payment to the legal representatives.

When should the new profit sharing ratio be explicitly calculated?

When continuing partners do NOT acquire the retiring/deceased partner's share in their old ratio, or when a new specified ratio is agreed upon.

Important Board Questions

Define gaining ratio and state when it is calculated. [2 marks]

Gaining ratio = new share − old share of each continuing partner; calculate only when new profit sharing ratio is specified and continuing partners do not acquire retiring partner's share in their old ratio.

Priya, Qureshi and Roma are partners sharing profits in ratio 6:3:1. Roma retires and Priya and Qureshi acquire her share in the ratio 2:1. Calculate the new profit sharing ratio and gaining ratio of Priya and Qureshi. [5 marks]

Step 1: Roma's share = 1/10; Priya acquires 2/3 of 1/10 = 2/30; Qureshi acquires 1/3 of 1/10 = 1/30. Step 2: Priya's new share = 6/10 + 2/30 = 20/30; Qureshi's new share = 3/10 + 1/30 = 10/30. Step 3: New ratio = 20:10 = 2:1. Step 4: Gaining ratio = (20/30 − 6/10) : (10/30 − 3/10) = (2/30) : (1/30) = 2:1.

Explain the accounting treatment of goodwill on the retirement of a partner when goodwill is already recorded in the books. How is it written off and which partners' capitals are affected? Provide a journal entry and one illustrative example with figures. [6 marks]

Goodwill written off from continuing partners' capitals in their gaining ratio; journal entry: Continuing Partners' Capital A/c (gaining ratio) Dr / Goodwill A/c Cr. Example: If goodwill = Rs. 10,000 and gaining ratio 2:1, reduce Priya's capital by Rs. 6,666.67 and Qureshi's by Rs. 3,333.33. Rationale: retiring partner is not bearing goodwill loss; only those who gain share should bear the burden.

Assertion-Reason Questions for Reconstitution of a Partnership Firm – Retirement/Death of a Partner

Q1. Assertion (A):

When continuing partners acquire a retiring partner's share in their old profit sharing ratio, the new profit sharing ratio among them remains unchanged.

Reason (R):

In the absence of any specification, it is assumed that continuing partners acquire the retiring partner's share proportionally to their existing profit sharing ratio.

Answer: A — Both A and R are true, and R is the correct explanation of A — Both statements are true and the reason correctly explains why the new ratio remains the same—because acquisition in old ratio preserves the old ratio among continuing partners. This is a fundamental assumption in partnership reconstitution.

Q2. Assertion (A):

The gaining ratio of continuing partners is always the same as their old profit sharing ratio.

Reason (R):

The gaining ratio depends on the proportion in which continuing partners acquire the retiring partner's share, which may differ from their old ratio.

Answer: D — A is false but R is true — Both statements are false. The gaining ratio equals the old ratio only when partners acquire the retiring share in their old ratio. When a new ratio is specified, gaining ratio differs from both old and new ratios. The assertion overgeneralizes, and the reason, while partially correct, does not adequately explain the relationship.

Q3. Assertion (A):

Goodwill is credited to the retiring partner based on their old profit sharing ratio.

Reason (R):

The retiring partner is entitled to their share of goodwill accumulated during their partnership, calculated on the ratio at which they were sharing profits before retirement.

Answer: A — Both A and R are true, and R is the correct explanation of A — Both statements are true, and the reason correctly justifies the assertion. Goodwill reflects past value created by all partners including the retiring one, so the retiring partner's entitlement is measured by their old ratio, not new or gaining ratio.

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Case-Based Questions (CBQ) for Reconstitution of a Partnership Firm – Retirement/Death of a Partner

Case Study:

Amit and Bhavna are partners in a firm sharing profits in the ratio of 3:2. They admit Chetan as a new partner. Amit surrenders 1/3rd of his share in favour of Chetan, and Bhavna surrenders 1/4th of her share in favour of Chetan. The new profit-sharing ratio is calculated as 6:4:5.

Q1. What is the sacrificing ratio of Amit and Bhavna?

  • A. 3:2
  • B. 2:1 ✓
  • C. 1:1
  • D. 4:3

Answer: B

Q2. If the goodwill of the firm is valued at ₹1,50,000, what amount will Chetan bring as his share of goodwill?

  • A. ₹50,000 ✓
  • B. ₹60,000
  • C. ₹75,000
  • D. ₹1,00,000

Answer: A

Q3. Which partner(s) will receive the goodwill amount brought by Chetan?

  • A. Only Amit
  • B. Only Bhavna
  • C. Both Amit and Bhavna in sacrificing ratio ✓
  • D. All partners including Chetan in new ratio

Answer: C

Q4. If Chetan brings ₹30,000 as his share of goodwill in cash but the firm’s goodwill is revalued at ₹1,80,000, what additional amount should Chetan bring?

  • A. ₹10,000
  • B. ₹20,000
  • C. ₹30,000 ✓
  • D. ₹60,000

Answer: C

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Previous Year Questions (PYQ) for Reconstitution of a Partnership Firm – Retirement/Death of a Partner

Real CBSE board exam questions from past papers — free to attempt.

CBSE 2026 · Set 67/3/1 · 1 mark

Arun, Varun and Tarun were partners in a firm sharing profits and losses in the ratio of 5 : 3 : 2. On 31st March, 2025, Arun died. Varun and Tarun decided to share future profits equally. The gaining ratio of Varun and Tarun will be:

  • 1 : 1
  • 3 : 2
  • 2 : 3
  • 5 : 2

CBSE 2026 · Set 67/3/1 · 3 marks

Tara, Meera and Neera were partners in a firm sharing profits and losses equally. Their capitals on 1st April, 2025 were ₹4,00,000; ₹3,00,000 and ₹2,00,000 respectively. The firm closes its books on 31st March every year. Tara died on 30th June, 2025. The partnership deed provides that in the event of death of a partner, her legal representatives will be entitled to the following: (i) Interest on capital @ 6% p.a. (ii) Her share in the profits of the firm till the date of her death. Tara had withdrawn ₹8,000 for her treatment till 30th June, 2025 and interest on drawings @ 12% p.a. is to be charged. Her share in the profits for the entire year was ₹1,80,000. Calculate the amount payable to Tara's legal representatives on her death.

CBSE 2026 · Set 67/3/1 · 6 marks

Radha, Shyam and Meera were partners in a firm sharing profits and losses equally. Their Balance Sheet as at 31st March, 2025 was as follows: Balance Sheet of Radha, Shyam and Meera as at 31st March, 2025 Liabilities Amount (₹) Assets Amount (₹) Capitals: Patents 1,80,000 Radha 4,00,000 Building 6,90,000 Shyam 4,00,000 Debtors 2,70,000 Meera 4,00,000 12,00,000 Stock 3,60,000 General Reserve 3,00,000 Bank 1,80,000 Creditors 1,80,000 16,80,000 16,80,000 Shyam retired from the firm on the above date on the following terms: (i) The new profit sharing ratio between the remaining partners was agreed at 3 : 2. (ii) The value of stock was to be reduced by ₹1,20,000. (iii) Patents were considered as valueless and hence were to be written off. (iv) Goodwill of the firm was valued at ₹6,00,000. (v) Shyam was paid ₹1,00,000 immediately on his retirement and the balance was transferred to his loan account. Pass necessary journal entries for Shyam's retirement from the firm.

CBSE 2026 · Set 67/3/2 · 3 marks

Rani, Megha and Mahan were partners in a firm sharing profits and losses in the ratio of 2 : 2 : 1. On 1st April, 2025, their capitals were 7,50,000; 4,00,000 and 5,00,000 respectively. The firm closes its books on 31st March every year. On 31st December, 2025, Mahan died. The partnership deed provides that in the event of death of a partner, his/her legal representatives will be entitled to the following: (i) Interest on capital @ 12% p.a. (ii) His share in the profits of the firm till the date of his death. Mahan had withdrawn 1,20,000 for personal use till 31st December, 2025 and interest on drawings @ 10% p.a. is to be charged. His share in the profits of the firm was calculated on the basis of the average profits of last three years. The average profits of last three years were 6,00,000. Pass necessary journal entries in the books of the firm to record the amounts due to Mahan's legal representatives.

CBSE 2026 · Set 67/3/2 · 6 marks

Radha, Shyam and Meera were partners in a firm sharing profits and losses equally. Their Balance Sheet as at 31st March, 2025 was as follows: Balance Sheet of Radha, Shyam and Meera as at 31st March, 2025 Liabilities Amount (₹) Assets Amount (₹) Capitals: Patents 1,80,000 Radha 4,00,000 Building 6,90,000 Shyam 4,00,000 Debtors 2,70,000 Meera 4,00,000 12,00,000 Stock 3,60,000 General Reserve 3,00,000 Bank 1,80,000 Creditors 1,80,000 16,80,000 16,80,000 Shyam retired from the firm on the above date on the following terms: (i) The new profit sharing ratio between the remaining partners was agreed at 3 : 2. (ii) The value of stock was to be reduced by 1,20,000. (iii) Patents were considered as valueless and hence were to be written off. (iv) Goodwill of the firm was valued at 6,00,000 and Shyam's share in goodwill was 1,00,000 on his retirement. (v) Shyam was paid 1,00,000 immediately on his retirement and the balance was transferred to his loan account. Pass necessary journal entries for Shyam's retirement in the books of the firm.

CBSE 2026 · Set 67/3/3 · 3 marks

Tanvi, Manvi and Noori were partners in a firm sharing profits and losses in the ratio of 5 : 3 : 2. On 1st April, 2025, their capitals were ₹8,00,000; ₹6,00,000 and ₹4,00,000 respectively. The firm closes its books on 31st March every year. Tanvi died on 30th September, 2025. The partnership deed provides that in the event of death of a partner, his/her legal representatives will be entitled to the following: (i) Interest on capital @ 9% p.a. (ii) Her share in the profits of the firm till the date of her death. Till 30th September, 2025 Tanvi had withdrawn ₹1,00,000 for personal use and interest on drawings @ 12% p.a. is to be charged. Her share in ₹3,60,000. sented to her legal representatives.

CBSE 2026 · Set 67/3/3 · 6 marks

Radha, Shyam and Meera were partners in a firm sharing profits and losses equally. Their Balance Sheet as at 31st March, 2025 was as follows: Balance Sheet of Radha, Shyam and Meera as at 31st March, 2025 Liabilities Amount (₹) Assets Amount (₹) Capitals: Patents 1,80,000 Radha 4,00,000 Building 6,90,000 Shyam 4,00,000 Debtors 2,70,000 Meera 4,00,000 12,00,000 Stock 3,60,000 General Reserve 3,00,000 Bank 1,80,000 Creditors 1,80,000 16,80,000 16,80,000 Shyam retired from the firm on the above date on the following terms: (i) The new profit sharing ratio between the remaining partners was agreed at 3 : 2. (ii) The value of stock was to be reduced by ₹1,20,000. (iii) Patents were considered as valueless and hence were to be written off. (iv) Goodwill of the firm was valued at retirement. (v) Shyam was paid ₹1,00,000 immediately on his retirement and the balance was transferred to his loan account.

Radha, Shyam and Meera were partners in a firm sharing profits and losses equally. Their Balance Sheet as at 31st March, 2025 was as follows: Balance Sheet of Radha, Shyam and Meera as at 31st March, 2025 Liabilities Amount (₹) Assets Amount (₹) Capitals: Patents 1,80,000 Radha 4,00,000 Building 6,90,000 Shyam 4,00,000 Debtors 2,70,000 Meera 4,00,000 12,00,000 Stock 3,60,000 General Reserve 3,00,000 Bank 1,80,000 Creditors 1,80,000 16,80,000 16,80,000 Shyam retired from the firm on the above date on the following terms: (i) The new profit sharing ratio between the remaining partners was agreed at 3 : 2. (ii) The value of stock was to be reduced by ₹1,20,000. (iii) Patents were considered as valueless and hence were to be written off. (iv) Goodwill of the firm was valued at retirement. (v) Shyam was paid ₹1,00,000 immediately on his retirement and the balance was transferred to his loan account.

CBSE 2026 · Set 67/4/1 · 1 mark

Ravi, Sunil and Amit were partners in a firm sharing profits and losses in the ratio of 4 : 3 : 5. On 1st April, 2025, Ravi retired. Sunil and Amit decided to share future profits in the ratio of 2 : 3. After all adjustments with respect to general reserve, goodwill and revaluation, etc., the balances in the capital accounts of Ravi, Sunil and Amit stood at ₹3,00,000; ₹2,40,000 and ₹3,60,000 respectively. It was decided that the amount payable to Ravi will be brought by Sunil and Amit in such a way so as to make their capitals proportionate to their new profit sharing ratio. The amount brought in by Sunil and Amit will be:

  • Sunil ₹1,00,000, Amit ₹2,00,000
  • Sunil ₹1,20,000, Amit ₹1,80,000
  • Sunil ₹1,50,000, Amit ₹1,50,000
  • Sunil ₹80,000, Amit ₹2,20,000

CBSE 2026 · Set 67/4/1 · 1 mark

Ravi, Sohan and Neena were partners in a firm sharing profits and losses in the ratio of 5 : 3 : 2. On 1st April 2025, Sohan retired and his share was taken up by Ravi and Neena in the ratio of 2 : 1. The new profit sharing ratio between Ravi and Neena will be:

  • 3 : 2
  • 2 : 1
  • 5 : 4
  • 7 : 3

CBSE 2026 · Set 67/4/1 · 1 mark

Ravi, Nisha and Priya were partners in a firm sharing profits and losses in the ratio of 4 : 3 : 1. Ravi retired and the balance in his Capital Account after making necessary adjustments on account of reserves and revaluation of assets and re-assessment of liabilities was ₹2,40,000. Nisha and Priya agreed to pay him ₹2,70,000 in full settlement of his claim. The value of goodwill of the firm was:

  • ₹30,000
  • ₹90,000
  • ₹60,000
  • ₹1,20,000

CBSE 2026 · Set 67/4/1 · 3 marks

Aarav, Karan and Meera were partners in a firm sharing profits and losses equally. On 31st March, 2023, Karan retired. On the date of his retirement, ₹1,80,000 became due to him. Aarav and Meera agreed to pay Karan in two equal yearly instalments plus interest @ 12% p.a. on unpaid balance, starting from 31st March, 2024. The firm closes its books on 31st March every year. Pass necessary journal entries for the above transactions for the payment of instalments and interest to Karan. Show your workings clearly. Draw his account till it is fully paid.

CBSE 2026 · Set 67/4/1 · 4 marks

Anmol, Kapeesh and Meera were partners in a firm sharing profits and losses in the ratio of 4 : 3 : 3. The firm closes its books on 31st March every year. On 1st July, 2025, Kapeesh died. On that date his capital account showed a credit balance of ₹2,50,000 and he had withdrawn ₹20,000. The firm had a General Reserve of ₹90,000. The partnership deed provided that on the death of a partner, his executors will be entitled to the following: (i) Balance in the capital account and interest on the same @ 12% p.a. (ii) His share in the goodwill of the firm. The goodwill of the firm on 1st July, 2025 was valued at ₹1,40,000. (iii) His share in the profits of the firm was to be calculated on the basis of average profit of the last three years. The average profit of the firm for the three years ended 31st March, 2025 was ₹6,00,000. Prepare Kapeesh's Loan Account showing the amount payable to his executors.

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