Q.Prateek, Charu and Sirima were partners in a firm sharing profits in the ratio of 3 : 2 : 1. Prateek retired from the firm on 31st March, 2023. Charu and Sirima decided that the capital of the new firm will be ₹6,30,000. The capital accounts of Charu and Sirima after all adjustments on the date of retirement showed a credit balance of ₹4,35,000 and ₹1,89,000 respectively. Calculate the amount of actual cash to be brought into the firm or to be paid to the partners. Also pass necessary journal entries.
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🔒 Start your 14-day free trial to unlock the full solution →Part (a)Concept understanding — Partner Retirement Methods
Partner Retirement Methods – A First Look
Think of a partnership like a three-legged race. Three friends tie their legs together and run. Now imagine one friend wants to stop running mid-race. The other two can't just untie and keep going — they have to settle accounts with the leaving friend first. How much does the leaving friend get? Who pays? That's what retirement of a partner is about.
What Does "Retirement of a Partner" Mean?
When a partner leaves the firm (by choice, age, or agreement), the remaining partners continue the business. The retiring partner is entitled to their share of the firm's net worth — not just their original capital, but also their share of accumulated profits, reserves, revaluation gains, and goodwill.
The key idea: the retiring partner's claim = what they brought in + what the firm earned on their behalf – what they've already taken out.
Why Does This Matter?
If you just give the retiring partner their capital back, you're shortchanging them. The firm may have grown, built up reserves, or owned assets that appreciated. Conversely, if the firm has losses, the retiring partner must bear their share. Proper accounting ensures fairness — no one gets cheated, and the remaining partners don't overpay.
The Accounting Treatment – Step by Step
The NCERT Class-12 textbook follows a clear sequence. Let's walk through it.
Step 1: Revalue Assets and Reassess Liabilities
The firm's balance sheet may not reflect current values. So we create a Revaluation Account.
Revaluation Account is a nominal account. It captures gains (credit) and losses (debit) from revaluing assets and liabilities.
Journal entry:
- If asset value increases: Debit Asset A/c, Credit Revaluation A/c
- If liability increases: Debit Revaluation A/c, Credit Liability A/c
The profit or loss on revaluation is then transferred to all partners' capital accounts in their old profit-sharing ratio.
Step 2: Adjust for Goodwill
The retiring partner is entitled to their share of the firm's goodwill. The remaining partners compensate them because they'll continue to benefit from the firm's reputation.
Treatment (as per NCERT):
- Calculate the firm's total goodwill (agreed value).
- Retiring partner's share = Total goodwill × Retiring partner's profit share.
- The remaining partners debit their capital accounts in their gaining ratio (new ratio – old ratio) and credit the retiring partner's capital account.
Journal entry:
Remaining Partners' Capital A/c (individually) Dr.
To Retiring Partner's Capital A/c
Step 3: Transfer Reserves and Accumulated Profits
Any General Reserve, Profit & Loss A/c (credit balance), or accumulated profits belong to all partners. The retiring partner's share is transferred to their capital account.
Journal entry:
General Reserve A/c Dr.
Profit & Loss A/c Dr.
To All Partners' Capital A/c (in old ratio)
Step 4: Settle the Retiring Partner's Account
After all adjustments, the retiring partner's capital account shows the final amount due. This is paid either in cash or transferred to a loan account if the firm can't pay immediately.
Journal entry:
Retiring Partner's Capital A/c Dr.
To Bank A/c (or Retiring Partner's Loan A/c)
The Capital Account Format (as per NCERT)
Here's how a retiring partner's capital account looks in the ledger:
| Dr. | Retiring Partner's Capital Account | Cr. |
|---|---|---|
| Particulars | Amount (₹) | Particulars |
| To Revaluation A/c (loss) | xxx | By Balance b/d |
| To Goodwill A/c (if written off) | xxx | By Revaluation A/c (gain) |
| To Retiring Partner's Loan A/c | xxx | By General Reserve A/c |
| To Bank A/c (final payment) | xxx | By Profit & Loss A/c |
| By Goodwill A/c (remaining partners) | ||
| By Interest on Capital (if any) | ||
| Total | xxx | Total |
Part (b)Concept understanding — Guarantee of Profit
Profit Appropriation Account – A First Look
Think of a partnership firm as a group of friends who run a business together. At the end of the year, they have earned some profit. But before they split that profit among themselves, they must first settle certain obligations: pay interest on the capital each partner contributed, give a salary to a partner who works full-time, or pay a commission to a partner who brought in a special client. Only after these items are accounted for can the remaining profit be divided.
That is exactly what the Profit Appropriation Account does. It is not a separate ledger account in the double-entry system — it is an extension of the Profit and Loss Account. The Profit and Loss Account shows the net profit (or net loss) of the firm. The Profit Appropriation Account shows how that net profit is appropriated (distributed or allocated) among the partners and to various reserves.
Why does it matter?
Without an appropriation account, you would not know:
- How much interest on capital each partner is entitled to.
- Whether a partner’s salary or commission has been paid.
- How much profit is transferred to the General Reserve.
- What remains to be shared as profit among the partners.
In short, it answers the question: “We made Rs 5,00,000 profit — now what happens to it?”
Accounting treatment – the logic
The Profit Appropriation Account is credited with the net profit brought forward from the Profit and Loss Account. Then, all appropriations (interest on capital, partner’s salary, partner’s commission, transfer to reserve) are debited to this account. The balance left after all debits is the divisible profit, which is then credited to the partners’ capital accounts in their profit-sharing ratio.
The Profit Appropriation Account is not a real account — it is a nominal account. It is closed at the end of each year by transferring its balance to the partners’ capital accounts.
The format (as per NCERT Class 12)
Below is the standard proforma. Note that the left side (Dr.) shows all appropriations, and the right side (Cr.) shows the net profit brought in.
| Dr. | Profit and Loss Appropriation Account | Cr. |
|---|---|---|
| Particulars | Amount (Rs) | Particulars |
| To Interest on Capital: | By Net Profit (transferred from P&L A/c) | |
| – Partner A | XXX | |
| – Partner B | XXX | |
| To Partner’s Salary (if any) | XXX | |
| To Partner’s Commission (if any) | XXX | |
| To General Reserve | XXX | |
| To Profit transferred to: | ||
| – Partner A’s Capital A/c | XXX | |
| – Partner B’s Capital A/c | XXX | |
| Total | XXX | Total |
Part (a)
After Prateek (share 3) retires, Charu (2) and Sirima (1) continue in their old mutual ratio 2 : 1 (no new ratio is agreed). Total capital of the new firm is fixed at ₹6,30,000, to be held in 2 : 1.
- Charu's required capital = 2/3 × 6,30,000 = ₹4,20,000
- Sirima's required capital = 1/3 × 6,30,000 = ₹2,10,000
| Partner | Existing balance (₹) | Required (₹) | Action |
|---|---|---|---|
| Charu | 4,35,000 | 4,20,000 | Pay off ₹15,000 (excess) |
| Sirima | 1,89,000 | 2,10,000 | Bring in ₹21,000 (deficit) |
Journal entries
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Charu's Capital A/c ...Dr. | 15,000 | |
| To Bank A/c | 15,000 | |
| (Excess capital paid off to Charu) | ||
| Bank A/c ...Dr. | 21,000 | |
| To Sirima's Capital A/c | 21,000 |
Part (a): Continuing ratio 2 : 1; Charu (needs ₹4,20,000) is paid ₹15,000, Sirima (needs ₹2,10,000) brings in ₹21,000.
Part (b): Aman's ₹20,000 share is topped up to his ₹60,000 guarantee; deficiency ₹40,000 borne by Chaman ₹24,000 and Burman ₹16,000; final shares ₹36,000 / ₹24,000 / ₹60,000.
Part (a)
Concept
When the firm's total capital is fixed after a retirement, each continuing partner's capital should equal their share of that total in the new (continuing) ratio. Since Charu and Sirima did not agree a fresh ratio, they continue in their old mutual ratio 2 : 1. Compare each partner's adjusted balance with the required figure: a surplus is paid off; a deficit is brought in.
Working
New (continuing) ratio Charu : Sirima = 2 : 1. Total capital = ₹6,30,000.
- Charu = 2/3 × 6,30,000 = ₹4,20,000
- Sirima = 1/3 × 6,30,000 = ₹2,10,000
| Partner | Existing (₹) | Required (₹) | Difference (₹) | Action |
|---|---|---|---|---|
| Charu | 4,35,000 | 4,20,000 | 15,000 excess | Withdraw / pay off |
| Sirima | 1,89,000 | 2,10,000 | 21,000 deficit | Bring in |
Cross-check: total existing ₹6,24,000 vs required ₹6,30,000 ⇒ net inflow ₹6,000 = Sirima's ₹21,000 in − Charu's ₹15,000 out. ✓
Journal entries
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| 2023 Mar 31 | Charu's Capital A/c ...Dr. | 15,000 | |
| To Bank A/c | 15,000 | ||
| (Excess capital paid off to Charu) | |||
| Bank A/c ...Dr. | 21,000 | ||
| To Sirima's Capital A/c | 21,000 | ||
| (Deficit capital brought in by Sirima) |
Showing the 12 most recent of 105 on this concept.
- CBSE 2026Set MARCH1 markMCQQ.When only old profit-loss sharing ratio is given, gaining ratio of remaining partners will be _____.(a) 1 : 1(b) Old ratio(c) Capital ratio(d) Can not be calculated
›Reveal solutionSolution
With only the old ratio available, the gaining ratio of the remaining partners is the old ratio, so the answer is (b).
Gaining ratio = new ratio minus old ratio. If the new ratio is not specified, the assumption is that the continuing partners take over the retiring/deceased partner's share in the s …
- CBSE 2026Set MARCH1 markQ.What is gain ratio?
›Reveal solutionSolution
Gain ratio = New ratio minus Old ratio; it is the proportion in which continuing partners take over the outgoing partner's share.
When a partner retires or dies, the share of profit released by that partner is taken up by the remaining partners. The proportion in which they acquire this share is called the gain (or gaining) ratio.
Gain ratio = New profit-sharing ratio - Old profit-sharing ratio
…
- CBSE 2026Set MARCH1 markQ.In the case of death of a partner, the amount due to the deceased partner is transferred to his ______ account.
›Reveal solutionSolution
On the death of a partner, the amount due is transferred to the Deceased Partner's Executor's Account.
When a partner dies, his Capital Account is credited with his capital, his share of accumulated profits/reserves, revaluation profit, share of goodwill, interest on capital and his share of profit up to the date of death, and debited with drawings and any losses. The resulting balance (the amount due) is then transferred out of his Capital Account:
Journal Entry Deceased Partner's Capital A/c Dr. - CBSE 2026Set MARCH1 markMCQQ.A, B and C are partners sharing profits in the ratio of 5 : 3 : 2. If C retires, the New Profit Sharing Ratio between A and B will be :(a) a) 3 : 2(b) b) 5 : 3(c) c) 5 : 2(d) d) 1 : 1
›Reveal solutionSolution
Without any fresh agreement, the remaining partners keep their old mutual ratio, so the new ratio of A and B is 5 : 3 - option (b).
A, B and C shared profits 5 : 3 : 2. On C's retirement, C's share (2/10) is taken over by A and B. When nothing else is stated, the remaining partners share future profits in their existing relative proportion, i.e. 5 : 3.
…
- CBSE 2026Set MARCH1 markQ.Profit or loss on revaluation is transferred to all partners' capital accounts in case of retirement of a partner. [State True/False]
›Reveal solutionSolution
The statement is True - revaluation profit/loss goes to all partners in the old ratio on retirement.
When a partner retires, assets and liabilities are revalued so that the retiring partner gets the benefit or bears the burden of changes that occurred while he was a partner. The profit or loss shown by the Revaluation Account therefore relates to the period during which the retiring partner was present, and it is distributed among all partners (old + retiring) in their …
- CBSE 2026Set ANNUAL1 markMCQQ.Seema, Madhu and Shweta are partners in the ratio of 2 1/3 : 3 1/3 : 4 1/3 in a firm. Shweta retired from the firm. Gaining ratio will be A) 7 : 13 B) 7 : 10 C) 10 : 13 D) 13 : 7
›Reveal solutionSolution
After converting the mixed numbers, the old ratio is 7 : 10 : 13; on Shweta's retirement the gaining ratio of Seema and Madhu is their old ratio 7 : 10 — option (B).
First convert the profit-sharing ratio:
2 1/3 : 3 1/3 : 4 1/3 = 7/3 : 10/3 : 13/3
Multiplying each by 3 = 7 : 10 : 13 (Seema : Madhu : Shweta).
…
- CBSE 2026Set ANNUAL1 markQ.Which account is credited, when lump-sum payment is made to retiring partner?
›Reveal solutionSolution
On a lump-sum settlement, the Cash/Bank Account is credited.
The amount finally due to a retiring partner is paid out of the firm's cash. The entry is:
Retiring Partner's Capital A/c ... Dr
To Cash/Bank A/c
…
- CBSE 2026Set ANNUAL1 markQ.Fill in the blank: The amount due to deceased partner is paid to ________.
›Reveal solutionSolution
Answer: To the legal representatives of the deceased partner.
On a partner's death, the amount standing to his credit is transferred to his Executors'/Legal Representatives' Account and paid to his legal heirs or executors. So the amount due to a deceased partner is p …
- CBSE 2026Set ANNUAL1 markQ.Fill in the blank: Retirement or death of a partner also leads to ________ of a partnership firm.
›Reveal solutionSolution
Answer: Reconstitution.
When a partner retires or dies, the existing partnership agreement ends and the remaining partners continue under a new agreement. The firm is not dissolved but reconstituted. So retirement or d …
- CBSE 2026Set ANNUAL1 markMCQQ.Hema, Jaya and Rama are partners in a partnership firm shares profit-loss equally. Hema and Jaya decided to share profit-loss in the ratio of 4:3 after taking retirement of Jaya. What will be the gain of Hema?(a) 1/3(b) 5/21(c) 4/7(d) 3/4(a) 1/3(b) 5/21(c) 4/7(d) 3/4
›Reveal solutionSolution
Hema's gain on Jaya's retirement = 5/21.
Hema, Jaya and Rama originally shared profit and loss equally, i.e. each had a share of 1/3. The question states that after Jaya's retirement the firm continues between Hema and Rama in the new ratio 4:3 (the stem's wording names "Jaya" a second time, but since Jaya is the partner retiring, the two CONTINUING partners can only be Hema and Rama — this is read as the intended meaning).
Gain (or loss) on reconstitution = New Share − Old Share.
Hema's old share = 1/3
Hema's new share = 4/7 (her part of the new 4:3 ratio)
Gain of Hema = New Share − Old Share
= 4/7 − 1/3
= (4×3 − 1×7) / 21
= (12 − 7) / 21
= 5/21
…
- CBSE 2026Set ANNUAL1 markQ.In case of death of partner, to whom is the balance amount of his capital account transferred?
›Reveal solutionSolution
The deceased partner's capital account balance is transferred to his Executor's Account.
When a partner dies, the partnership between him and the surviving partners automatically comes to an end (though the firm may continue with the surviving partners). The deceased partner's capital account is settled as follows:
- His capital account is credited with: his share of General Reserve/accumulated profits, his share of Revaluation profit (or debited for loss), his share of goodwill of the firm, and his share of profit from the last balance sheet date up to the date of death (calculated on time basis, usually using last year's or average profit).
- His capital account is debited with any drawings made and interest on drawings, if applicable.
- The final (net) balance standing to his credit no longer belongs to the firm — it is a debt payable to his legal representative. …
- CBSE 2026Set ANNUAL1 markMCQQ.On the death of a partner, Ram, his share in the Profits of the firm ₹45,000 till the date of his death is transferred to the _______.(a) Credit of Profit and Loss Suspense Account(b) Debit of Profit and Loss Suspense Account(c) Credit of Profit and Loss Account(d) Debit of Profit and Loss Account(a) Credit of Profit and Loss Suspense Account(b) Debit of Profit and Loss Suspense Account(c) Credit of Profit and Loss Account(d) Debit of Profit and Loss Account
›Reveal solutionSolution
Ram's share of profit till death is transferred to the debit of the Profit and Loss Suspense Account (Option B).
When a partner dies during the course of an accounting year, it is not practical to close the firm's books on the date of death just to work out the exact profit for that broken period. Instead, the firm estimates the deceased partner's share of profit from the start of the year to the date of death (here ₹45,000) and passes the entry:
Profit and Loss Suspense Account Dr. ₹45,000To Ram's Capital Account ₹45,000…
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