Lesson 24: Retirement and Death of a Partner
Extracted strictly from NIOS Senior Secondary Accountancy Module 4. Covers new ratio & gaining ratio, AS-10 goodwill adjustments, revaluation of assets, accumulated reserves, settlement of claim, capital adjustments, and deceased partner profit calculations.
1 Retirement Meaning & Gaining Ratio Mechanics
Section 24.1Core Concept & Legal Grounds
When one or more partners leave a firm and the remaining partners continue the business, it is known as Retirement of a Partner. A partner may retire:
1) With the consent of all partners, 2) As per terms of the agreement, or 3) At his/her own will (in partnership at will).
The old partnership agreement dissolves, and the firm is reconstituted with a new agreement among continuing partners.
Gain of an Existing Partner = New Share − Existing (Old) Share
New Share = Existing Share + Gained Share
If no specific info is given, continuing partners take the retiring partner's share in their existing profit sharing ratio. New ratio remains same as old ratio among remaining partners.
Remaining partners purchase retiring partner's share in an agreed ratio (e.g., 1:1 or 2:1). Gained fraction is added to each continuing partner's old share.
Entire retiring share is absorbed by a single continuing partner. Only that partner gains; other partners' shares remain unchanged.
Ashish, Barman & Chander shared profits in 2:1:2 ratio. Chander retires. Ashish and Barman decide to share future profits equally (1:1).
• Ashish's Gain = 1/2 − 2/5 = 1/10
• Barman's Gain = 1/2 − 1/5 = 3/10
• Gaining Ratio between Ashish & Barman = 1 : 3
2 Goodwill Accounting (AS-10) & Revaluation of Assets/Liabilities
Section 24.2 & 24.3Goodwill Accounting under AS-10 Rule
As per Accounting Standard 10 (AS-10), goodwill is recorded in books ONLY when purchased (money paid). Therefore, unpurchased/valued goodwill cannot be raised as an asset account. Retiring partner's share of goodwill is compensated directly through partners' capital accounts in their Gaining Ratio.
Continuing Partners' Capital A/c ... Dr. (Gaining Ratio)
To Retiring Partner's Capital A/c
(Retiring partner credited with his share; continuing debited in gaining ratio)All Partners' Capital A/c ... Dr. (Old Ratio)
To Goodwill A/c
(Existing goodwill appearing in Balance Sheet fully written off in old ratio)Revaluation Account Structure
A Revaluation Account (Nominal A/c) is prepared to record revaluation of assets and reassessment of liabilities. Profit or Loss on revaluation is shared among ALL partners (including retiring/deceased) in OLD profit sharing ratio.
| Dr. Particulars (Losses / Decreases) | Cr. Particulars (Gains / Increases) |
|---|---|
| To Decrease in Value of Assets | By Increase in Value of Assets |
| To Increase in Value of Liabilities | By Decrease in Value of Liabilities |
| To Profit on Revaluation (Transferred to ALL Partners in Old Ratio) | By Loss on Revaluation (Transferred to ALL Partners in Old Ratio) |
3 Accumulated Reserves & Claim Settlement Modes
Section 24.4 & 24.5Accumulated Reserves & Profits
Undistributed profits, general reserves, or reserve funds appearing in the balance sheet belong to all partners. They are credited to ALL partners' capital accounts in their OLD profit sharing ratio.
- Opening credit balance of Capital A/c
- Share in Goodwill of the firm
- Share in Profit on Revaluation
- Share in General Reserve / Accumulated Profit
- Interest on Capital till retirement date
- Share in Loss on Revaluation
- Drawings & Interest on Drawings up to retirement
- Share in accumulated losses / P&L debit balance
- Loans taken by partner from the firm
Settlement Modes & Section 37 Rule
Retiring Partner's Capital A/c ... Dr.
To Cash / Bank A/c
⚖️ Sec. 37 Indian Partnership Act 1932: If unpaid without agreement, retiring partner gets 6% p.a. interest or share of profit attributable to dues.
4 Death of a Partner & Deceased Profit Calculation
Section 24.7Legal Representative / Executor Account
On the death of a partner, all financial dues are credited to the Deceased Partner's Capital Account, and the final net balance is transferred to Deceased Partner's Executor's Account. Legal representatives receive 6% p.a. interest on unpaid dues till final settlement.
2 Methods for Calculating Profit Up to Date of Death
Assumes profit was earned uniformly throughout the year based on previous year's profit.
Calculates profit percentage on last year's sales and applies it to sales up to date of death.
Profit and Loss Suspense A/c ... Dr.
To Deceased Partner's Capital A/c