- Why This Chapter Matters
- 1. Meaning of Retirement and Death
- 2. What Needs to Be Done at the Time of Retirement/Death
- 3. Amount Payable to Retiring/Deceased Partner
- Amount includes:
- Deductions include:
- Final Understanding:
- 4. New Profit Sharing Ratio
- Important Cases:
- 5. Gaining Ratio (Very Important)
- Formula:
- Why It Matters:
- 6. Treatment of Goodwill
- Case 1: Goodwill Not in Books
- Case 2: Goodwill Already in Books
- Case 3: Hidden Goodwill
- 7. Revaluation of Assets and Liabilities
- Revaluation Account Records:
- Profit/Loss Transfer:
- 8. Unrecorded Assets and Liabilities
- 9. Accumulated Profits and Losses
- Rule:
- 10. Share of Profit Till Date
- Methods:
- Entry:
- 11. Settlement of Amount
- Methods:
- Interest on Loan:
- 12. Special Case: Death of a Partner
- 13. Adjustment of Capitals
- Situations:
- 14. Common Mistakes Students Make
- Final Understanding
Why This Chapter Matters
This chapter is the reverse of admission, but more complex.
Here:
- A partner leaves or dies
- Firm must calculate what is due to him
- Remaining partners adjust everything fairly
If this is not clear, you will lose marks in:
- Goodwill adjustment
- Capital accounts
- Final settlement
1. Meaning of Retirement and Death
When a partner leaves the firm voluntarily → Retirement
When a partner passes away → Death
In both cases:
- Old partnership agreement ends
- New agreement is formed
- Business continues with remaining partners
2. What Needs to Be Done at the Time of Retirement/Death
At the time of retirement or death, the firm must:
- Calculate new profit-sharing ratio
- Calculate gaining ratio
- Adjust goodwill
- Revalue assets and liabilities
- Adjust accumulated profits/losses
- Calculate share of profit till date
- Settle amount due
These are the core steps of the chapter
3. Amount Payable to Retiring/Deceased Partner
This is the most important practical part.
Amount includes:
- Capital balance
- Current account balance
- Share of goodwill
- Share of reserves
- Share of revaluation profit
- Share of profit till date
- Interest on capital
- Salary/commission
Deductions include:
- Drawings
- Interest on drawings
- Share of losses
- Revaluation loss
- Debit balances
Final Understanding:
Amount Due = Total Credits – Total Debits
This amount is either:
- Paid immediately
- Converted into loan
4. New Profit Sharing Ratio
After a partner leaves, remaining partners share profits in a new ratio.
Important Cases:
Case 1: No information given
→ Old ratio continues among remaining partners
Case 2: Share acquired in specific ratio
→ New ratio must be calculated
Case 3: New ratio given directly
→ Use that
5. Gaining Ratio (Very Important)
Gaining ratio shows:
Who benefits from the outgoing partner’s share
Formula:
Gaining Ratio = New Share – Old Share
Why It Matters:
- Used for goodwill adjustment
- Determines who compensates whom
6. Treatment of Goodwill
Outgoing partner is entitled to goodwill.
Why?
Because goodwill is built by all partners.
Case 1: Goodwill Not in Books
Entry:
Gaining Partners’ Capital A/c Dr.
→ Retiring Partner’s Capital A/c
Case 2: Goodwill Already in Books
- First write off old goodwill
- Then adjust new goodwill
Case 3: Hidden Goodwill
When lump sum paid is more than actual capital balance:
Hidden Goodwill = Extra Amount Paid
This difference is treated as goodwill
7. Revaluation of Assets and Liabilities
Before settlement:
- Assets must show real value
- Liabilities must be correct
Revaluation Account Records:
- Increase in assets → Gain
- Decrease in assets → Loss
- Increase in liabilities → Loss
- Decrease in liabilities → Gain
Profit/Loss Transfer:
Transferred to all partners (including outgoing) in old ratio
8. Unrecorded Assets and Liabilities
Sometimes:
- Assets not recorded
- Liabilities missing
These must be recorded during revaluation.
9. Accumulated Profits and Losses
Examples:
- General Reserve
- Profit & Loss balance
Rule:
These belong to old partners → distribute in old ratio
10. Share of Profit Till Date
If partner retires mid-year:
Profit must be calculated till that date.
Methods:
- Based on last year profit
- Based on average profit
- Based on sales
Entry:
Profit & Loss Suspense A/c Dr.
→ Retiring Partner’s Capital A/c
11. Settlement of Amount
After all adjustments, final amount is paid.
Methods:
1. Immediate Payment
Capital A/c Dr. → Cash/Bank
2. Loan Method
Capital A/c Dr. → Loan A/c
3. Part Payment + Loan
Interest on Loan:
If unpaid:
- Interest is charged
- Paid over time
12. Special Case: Death of a Partner
In case of death:
- Amount is transferred to Executor’s Account
- Payment is made to legal heirs
13. Adjustment of Capitals
After retirement:
- Remaining partners may adjust capital
- Based on new profit-sharing ratio
Situations:
- Total capital fixed
- Total capital not fixed
- Capital adjusted after paying retiring partner
14. Common Mistakes Students Make
- Confusing gaining ratio with sacrificing ratio
- Ignoring goodwill adjustment
- Forgetting revaluation entries
- Using new ratio instead of old ratio
- Missing hidden goodwill
- Not calculating profit till date
Final Understanding
This chapter is about fair settlement.
When a partner leaves:
- He must get what he deserves
- Remaining partners must adjust fairly
If you understand:
- Gaining ratio
- Goodwill
- Revaluation
- Final settlement
Then this chapter becomes scoring.
Sushant Kumar
Founder
As a current B.Com (Hons) student at DU SOL and an active Chartered Accountancy (CA) aspirant, I understand the exact pressure, syllabus confusion, and administrative hurdles students face daily. TheSushant.in was built to provide first-hand, stress-tested guidance. Every DU SOL update, exam strategy, and CA study note shared here comes directly from my personal academic journey, official notifications, and real-time student experience. No generic advice: practical, student-to-student blueprints to help you clear your exams and level up.
