Q.(a) Tavish, Umesh and Varun were partners in a firm sharing profits and losses in the ratio of 4 : 3 : 2. Tavish retired. Umesh and Varun decided to share profits and losses in future in the ratio of 5 : 3. The gaining share of Umesh will be : (A) 21/72 (B) 11/72 (C) 45/72 (D) 32/72
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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 — Goodwill Adjustment on Retirement
Goodwill Adjustment on Retirement – A First Look
Think of a cricket team. Four friends start a team together. Over time, they build a reputation – people come to watch them, sponsors pay them, and their brand becomes valuable. Now one player retires. Should he walk away with nothing for the reputation the team built while he was part of it? Of course not. That reputation – the team's ability to earn more than just its raw assets – is goodwill.
In a partnership, goodwill is that same intangible value: the firm's name, its customer loyalty, its location advantage, its reputation for quality. When a partner retires, the remaining partners continue the business. They will enjoy the benefits of that goodwill going forward. The retiring partner, who helped build it, deserves a share of its value at the time of retirement.
The Precise Meaning
Goodwill on retirement is the compensation paid by the continuing partners to the retiring partner for his/her share of the firm's reputation and earning power. It is not a cash payment for a physical asset – it is an adjustment of the partners' capital accounts to reflect that the retiring partner's share of goodwill is being transferred to the remaining partners.
Goodwill is not brought into the books as a new asset. It is adjusted through the partners' capital accounts. The retiring partner's capital account is credited with his/her share of goodwill, and the continuing partners' capital accounts are debited in their gaining ratio.
Why Does This Matter?
If goodwill were ignored, the retiring partner would be underpaid. The continuing partners would get a free benefit – the firm's reputation – without compensating the person who helped create it. The adjustment ensures fairness: the retiring partner gets his/her rightful share, and the continuing partners pay for the advantage they now exclusively enjoy.
The Accounting Treatment – Step by Step
The NCERT textbook gives a clear procedure. Here is the logic:
-
Calculate the firm's total goodwill at the time of retirement. This is usually given in the problem or valued using an agreed method (e.g., average profit method, super profit method).
-
Find the retiring partner's share of that goodwill.
Retiring partner's share = Total goodwill × Retiring partner's profit-sharing ratio.
-
Determine the gaining ratio of the continuing partners.
Gaining ratio = New ratio – Old ratio (for each continuing partner).
If the new ratio is not given, the continuing partners share the retiring partner's share in their old profit-sharing ratio.
-
Pass the journal entry:
Continuing Partners' Capital A/cs (individually) Dr. (in gaining ratio) To Retiring Partner's Capital A/cThis entry reduces the continuing partners' capital (they pay) and increases the retiring partner's capital (he receives).
Do not debit the Goodwill account. The goodwill is not being recorded as an asset – it is an adjustment among partners. Only if the firm decides to raise goodwill as an asset and then write it off would you touch the Goodwill account, but that is a different treatment (usually for admission, not retirement).
Format: Partners' Capital Accounts (after adjustment)
Here is how the capital accounts look after the goodwill adjustment. Assume three partners: A, B, and C. C retires. A and B continue in the ratio 3:2. Total goodwill is ₹1,00,000. Old ratio was 2:2:1 (A:B:C). C's share = 1/5 × ₹1,00,000 = ₹20,000. Gaining ratio of A and B = New ratio – Old ratio = (3/5 – 2/5) : (2/5 – 2/5) = 1/5 : 0. So A gains fully. A's capital is debited ₹20,000; C's capital is credited ₹20,000.
| Particulars | A (₹) | B (₹) | C (₹) |
|---|---|---|---|
| To C's Capital A/c (Goodwill) | 20,000 | – | – |
Part (a)
Old (Tavish : Umesh : Varun) = 4 : 3 : 2 → Umesh old = 3/9. New (Umesh : Varun) = 5 : 3 → Umesh new = 5/8. …
Part (a): Umesh's gaining share = 21/72 — option (A).
Part (b): Firm's goodwill = ₹10,00,000 — option (D).
Part (a)
Gaining share = New share − Old share. Umesh's old share = 3/9, new share = 5/8. …
Showing the 12 most recent of 119 on this concept.
- CBSE 2026Set 67/5/11 markMCQQ.Raha, Naveen and Vandana were partners in a firm sharing profits and losses equally. Naveen retired on 31st March, 2025. The balance in his capital account after making the necessary adjustments on account of reserves and revaluation of assets and reassessment of liabilities was ₹ 1,27,000. Naveen was paid ₹ 1,50,000 in full settlement of his claim. The value of goodwill of the firm on the date of Naveen’s retirement was : (A) ₹ 1,50,000 (B) ₹ 23,000 (C) ₹ 69,000 (D) ₹ 4,50,000
›Reveal solutionSolution
The value of goodwill of the firm on the date of Naveen's retirement is ₹69,000.
When a partner retires from a firm, the continuing partners acquire the retiring partner's share of future profits. Since goodwill represents the firm's reputation and earning capacity, the retiring partner is entitled to be compensated for their share in the firm's goodwill, as they contributed to building it during their tenure. This compensation ensures fairness, as the continuing partners will benefit from the firm's established goodwill in the future.
The accounting treatment for goodwill on a partner's retirement involves adjusting the capital accounts of the partners. The retiring partner's capital account is credited with their share of goodwill, increasing their claim against the firm. This increase is borne by the continuing partners, whose capital accounts are debited in their gaining ratio. The gaining ratio is the ratio in which the continuing partners acquire the retiring partner's share of profits.
The general journal entry for goodwill adjustment on retirement is:
Gaining Partners' Capital A/c Dr. (in their gaining ratio)
To Retiring Partner's Capital A/c Cr. (with their share of goodwill)
In this specific problem, we are given the amount paid to the retiring partner and their capital balance after all other adjustments (reserves, revaluation). The difference between the amount paid and this adjusted capital balance represents the retiring partner's share of goodwill. This is because the payment in full settlement includes not only their capital balance but also their share of any unrecorded or unadjusted goodwill. We can then use the retiring partner's profit-sharing ratio to calculate the total goodwill of the firm.
Solution: Calculation of Firm's Goodwill
The problem provides Naveen's capital balance after all adjustments (excluding goodwill) and the final amount paid to him. The excess amount paid to Naveen over his adjusted capital balance represents his share of the firm's goodwill.
-
Calculate Naveen's Share of Goodwill:
The amount paid to Naveen in full settlement is ₹1,50,000.
His capital account balance after all other adjustments was ₹1,27,000.
The difference is the compensation for his share of goodwill.
-
Calculate the Firm's Total Goodwill: …
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- 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.In the case of death of a partner, which of the following item, will not be adjusted on the basis of time? A) Share in goodwill B) Interest on capital C) Interest on drawings D) Share in profits
›Reveal solutionSolution
Share in goodwill is NOT adjusted on a time basis, so option (A) is correct.
When a partner dies part-way through the year, the amount due to the deceased is built up from several items. The following are measured on a time basis (for the part of the year up to the date of death):
- Interest on capital (option B) - proportionate to the period.
- Interest on drawings (option C) - proportionate to the period.
- Share in profits (option D) - profit of the firm up to the date of death, shared time-wise. …
- 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 markMCQQ.On retirement of a partner, goodwill will be credited to Capital Account of(a) Retiring partner(b) Remaining partners(c) All partners(d) None of them
›Reveal solutionSolution
On retirement, goodwill is credited to the retiring partner's capital account - option (a).
When a partner retires, he gives up his share of future profits to the continuing partners, so he is compensated for his share of the firm's goodwill. The standard treatment is to credit the retiring partner's capital account with his share of goodwill a …
- 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 …
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