Part 1 Chapter 4 Reconstitution of a Partnership Firm: Retirement and Death of a Partner Class 12 NCERT

Concept Overview: What Changes on Retirement or Death?

When a partner retires or dies, the firm is reconstituted because the profit-sharing arrangement changes. The outgoing partner or the deceased partner’s executor must receive the partner’s rightful share in the firm: capital balance, current account balance, share of accumulated profits, share of revaluation profit, share of goodwill, and share of profit up to the date of retirement or death if applicable. Similarly, any accumulated losses, revaluation loss, drawings, interest on drawings, or debit balance reduce the claim. The continuing partners usually gain the outgoing partner’s share, so goodwill compensation is borne by them in their gaining ratio. In examinations, the logic is more important than memorising entries: first identify what belongs to all partners up to the date of change, then identify what is specifically payable to the outgoing partner, and finally decide whether payment is made immediately or transferred to a loan or executor account.

Key Terms You Must Know

Gaining ratio

The ratio in which continuing partners acquire the share of the retiring or deceased partner. It is calculated as New share minus Old share for each continuing partner.

Revaluation Account

A nominal account prepared to record increases or decreases in assets and liabilities at the time of reconstitution. Its profit or loss is distributed among old partners in the old profit-sharing ratio.

Goodwill adjustment

Compensation given to the outgoing partner for the share of future profits taken over by continuing partners. The continuing partners bear it in their gaining ratio.

Executor Account

An account opened in the name of the legal representative of a deceased partner to which the final amount due to the deceased partner is transferred.

Retiring Partner Loan Account

An account used when the amount due to the retiring partner is not fully paid immediately and remains payable by the firm.

Step-by-Step Method to Solve Retirement or Death Problems

1. Find the old ratio, new ratio and gaining ratio — Use the partnership agreement. Gaining ratio is new ratio minus old ratio. If a continuing partner’s share increases, that partner compensates the outgoing partner for goodwill.
2. Adjust accumulated profits and losses — General reserve, credit balance of profit and loss account and workmen compensation reserve are credited to old partners in old ratio unless a definite liability is given. Accumulated losses are debited to old partners in old ratio.
3. Prepare Revaluation Account — Record increase in assets and decrease in liabilities on the credit side; decrease in assets and increase in liabilities on the debit side. Transfer profit or loss to all old partners in old ratio.
4. Adjust goodwill — If goodwill is not to be shown in books, debit gaining partners and credit the retiring or deceased partner for the outgoing partner’s share of goodwill.
5. Ascertain final claim and settle — Balance the outgoing partner’s capital account after all adjustments. Pay by bank, transfer unpaid amount to loan account, or transfer deceased partner’s claim to executor account.

Worked Examples with Journal Logic

• Example 1: A, B and C share profits in 3:2:1. C retires. A and B will share future profits equally. Goodwill of firm is valued at Rs 60,000. Find goodwill adjustment. Step 1: Old shares are A 3/6, B 2/6, C 1/6. New shares are A 1/2 or 3/6, B 1/2 or 3/6. Step 2: Gaining ratio = New share minus Old share. A gains 3/6 - 3/6 = 0. B gains 3/6 - 2/6 = 1/6. So only B gains C’s entire share. Step 3: C’s share of goodwill = Rs 60,000 × 1/6 = Rs 10,000. Step 4: Entry when goodwill is not raised: B Capital A/c Dr. Rs 10,000 To C Capital A/c Rs 10,000. Final answer: B compensates C by Rs 10,000.
• Example 2: X, Y and Z share profits in 5:3:2. Z retires. Machinery increases by Rs 20,000, stock decreases by Rs 8,000, provision for doubtful debts increases by Rs 4,000, and a liability of Rs 6,000 is no longer payable. Find revaluation profit or loss and Z’s share. Step 1: Credit side of Revaluation Account: increase in machinery Rs 20,000 plus liability no longer payable Rs 6,000 = Rs 26,000. Step 2: Debit side: decrease in stock Rs 8,000 plus increase in provision Rs 4,000 = Rs 12,000. Step 3: Revaluation profit = Rs 26,000 - Rs 12,000 = Rs 14,000. Step 4: Old ratio is 5:3:2, total 10. Z’s share = Rs 14,000 × 2/10 = Rs 2,800. Final answer: Revaluation profit is Rs 14,000 and Z is credited with Rs 2,800.
• Example 3: P, Q and R share profits 2:2:1. R dies on 30 June. Last year’s profit was Rs 1,20,000 and profit up to death is estimated on time basis. Find R’s share of profit till death. Step 1: Period from 1 April to 30 June is 3 months, assuming accounts close on 31 March. Step 2: Estimated profit for 3 months = Rs 1,20,000 × 3/12 = Rs 30,000. Step 3: R’s profit share = Rs 30,000 × 1/5 = Rs 6,000. Step 4: Entry: Profit and Loss Suspense A/c Dr. Rs 6,000 To R’s Executor A/c Rs 6,000. Final answer: R’s executor is credited with Rs 6,000 as profit up to the date of death.

Board Exam Tips and Common Traps

Do not distribute revaluation profit in the new ratio; it belongs to all old partners because it arises before reconstitution. Do not use sacrificing ratio for retirement or death unless the question specifically asks for a different adjustment; normally continuing partners compensate in gaining ratio. If goodwill is adjusted without appearing in books, do not open a Goodwill Account. In death questions, clearly write whether profit is calculated on time basis or sales basis, because the final amount changes. Always label accounts correctly: retiring partner may have Loan Account, but deceased partner’s balance goes to Executor Account.

Journal Entry Patterns to Remember

• For revaluation profit: Revaluation A/c Dr. To Partners Capital A/cs in old ratio. For revaluation loss, reverse the entry.
• For accumulated general reserve: General Reserve A/c Dr. To Partners Capital A/cs in old ratio.
• For accumulated loss: Partners Capital A/cs Dr. To Profit and Loss A/c in old ratio.
• For goodwill compensation without raising goodwill: Gaining Partners Capital A/cs Dr. To Retiring or Deceased Partner Capital A/c.
• For amount due to deceased partner: Deceased Partner Capital A/c Dr. To Deceased Partner Executor A/c.

Practice Questions with Solutions

• Q: A, B and C share profits in 4:3:2. C retires and A and B agree to share future profits in 5:4. Calculate gaining ratio. A: Step 1: Old shares: A = 4/9, B = 3/9, C = 2/9. New shares: A = 5/9, B = 4/9. Step 2: Gain of A = 5/9 - 4/9 = 1/9. Step 3: Gain of B = 4/9 - 3/9 = 1/9. Final answer: Gaining ratio of A and B is 1:1.
• Q: D, E and F share profits in 2:1:1. F retires. Goodwill of the firm is Rs 80,000 and D and E will share profits in 3:2. Find F’s share of goodwill and the gaining partners’ burden. A: Step 1: F’s old share = 1/4, so F’s share of goodwill = Rs 80,000 × 1/4 = Rs 20,000. Step 2: Old shares: D = 2/4 = 10/20, E = 1/4 = 5/20. New shares: D = 3/5 = 12/20, E = 2/5 = 8/20. Step 3: Gains: D = 12/20 - 10/20 = 2/20; E = 8/20 - 5/20 = 3/20. Gaining ratio = 2:3. Step 4: D’s burden = Rs 20,000 × 2/5 = Rs 8,000; E’s burden = Rs 20,000 × 3/5 = Rs 12,000. Final answer: F is credited with Rs 20,000; D is debited Rs 8,000 and E is debited Rs 12,000.
• Q: G, H and I share profits in 3:2:1. I retires. Revaluation shows land increased by Rs 45,000, furniture decreased by Rs 9,000 and an unrecorded liability of Rs 6,000 is recognised. Calculate revaluation profit and I’s share. A: Step 1: Credit Revaluation Account with increase in land Rs 45,000. Step 2: Debit Revaluation Account with decrease in furniture Rs 9,000 and unrecorded liability Rs 6,000, total debit Rs 15,000. Step 3: Revaluation profit = Rs 45,000 - Rs 15,000 = Rs 30,000. Step 4: I’s old share = 1/6, so I’s share = Rs 30,000 × 1/6 = Rs 5,000. Final answer: Revaluation profit is Rs 30,000 and I is credited with Rs 5,000.
• Q: J, K and L share profits in 5:3:2. L dies on 31 December. The accounting year ends on 31 March. Last year’s profit was Rs 2,40,000. Calculate L’s share of profit up to death on time basis. A: Step 1: Period from 1 April to 31 December = 9 months. Step 2: Estimated profit for 9 months = Rs 2,40,000 × 9/12 = Rs 1,80,000. Step 3: L’s share in profit = 2/10. Step 4: L’s share = Rs 1,80,000 × 2/10 = Rs 36,000. Final answer: L’s Executor Account will be credited with Rs 36,000 for profit up to death.

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