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Accountancy · Class 12 Commerce

Ch 3Reconstitution of a Partnership Firm — Retirement/Death of a Partner — Class 12 Accountancy, concept-first.

Just like admitting a new partner, the retirement or death of a partner also reconstitutes a partnership firm. The existing partnership deed comes to an end, and the remaining partners must frame a new deed to continue the business on changed terms.

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Key concepts

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Partner Retirement Methods

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.

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Chapter contents

The NCERT structure, section by section. Open a section to see its questions, then read the concept-first solution.

Introduction

Just like admitting a new partner, the retirement or death of a partner also reconstitutes a partnership firm.

3.1

Ascertaining the Amount Due to Retiring/Deceased Partner

When a partner retires or dies, the firm must calculate the total amount payable to that partner (or to their legal representatives).

3.2

New Profit Sharing Ratio

When a partner retires or dies, the partnership agreement changes. The remaining partners must decide how they will share the firm’s future profits.

3.3

Gaining Ratio

13 Q

When a partner retires or dies, the remaining (continuing) partners take over that partner's share of profit.

+Illustrationsi5 questions
  1. Illustration 1Madhu, Neha and Tina are partners sharing profits in the ratio of 5 : 3 : 2. Calculate the new profit sharing ratio and gaining ratio if: 1.…Free
  2. Illustration 2Alka, Harpreet and Shreya are partners sharing profits in the ratio of 3 : 2 : 1. Alka retires and her share is taken up by Harpreet and Shr…Free
  3. Illustration 3Murli, Naveen and Omprakash are partners sharing profits in the ratio of 3/8, 1/2 and 1/8. Murli retires and surrenders 2/3rd of his share i…Preview
  4. Illustration 4Kumar, Lakshya, Manoj and Naresh are partners sharing profits in the ratio of 3 : 2 : 1 : 4. Kumar retires and his share is acquired by Laks…Preview
  5. Illustration 5Ranjana, Sadhna and Kamana are partners sharing profits in the ratio 4 : 3 : 2. Ranjana retires; Sadhna and Kamana decide to share profits i…Preview
+Do It Yourselfi8 questions
  1. Q1Distinguish between Gaining Ratio and Sacrificing Ratio in terms of: 1. Meaning 2. Effect on partner's share of profit 3. Mode of calculatio…Free
  2. Q2Anita, Jaya and Nisha are partners sharing profits and losses in the ratio of 1 : 1 : 1. Jaya retires from the firm. Anita and Nisha decide…Free
  3. Q3Azad, Vijay and Amit are partners sharing profits and losses in the proportion of 1/4, 1/8 and 10/16 respectively. Calculate the new profit-…Free
  4. Q4Azad, Vijay and Amit are partners sharing profits and losses in the proportion of 1/4, 1/8 and 10/16. Calculate the gaining ratio of the con…Preview
  5. Q5Anu, Prabha and Milli are partners sharing profits equally. Anu retires. Calculate the future profit-sharing ratio of the continuing partner…Preview
  6. Q6Rahul, Robin and Rajesh are partners sharing profits in the ratio of 3 : 2 : 1. Calculate the new profit-sharing ratio of the remaining part…Preview
  7. Q7Puja, Priya and Pratistha are partners sharing profits and losses in the ratio of 5 : 3 : 2. Priya retires. Her share is taken by Puja and P…Preview
  8. Q8Ashok, Anil and Ajay are partners sharing profits equally. Anil retires from the firm. Ashok and Ajay decide to share future profits and los…Preview
3.4

Treatment of Goodwill

The retiring or deceased partner has contributed to building the firm’s goodwill during their association with the firm.

3.4.1

When goodwill does not appear in the books

8 Q

When goodwill does not appear in the books, the retiring partner has a right to be compensated for their share of the firm's goodwill, but no existing goodwill account needs to be written off.

+Illustrationsi4 questions
  1. Illustration 6Keshav, Nirmal and Pankaj are partners sharing profits and losses in the ratio of 4 : 3 : 2. Nirmal retires and the goodwill is valued at ₹7…Free
  2. Illustration 7Jaya, Kirti, Ekta and Shewata are partners in a firm sharing profits and losses in the ratio of 2 : 1 : 2 : 1. On Jaya's retirement, the goo…Free
  3. Illustration 8Deepa, Neeru and Shilpa were partners in a firm sharing profits in the ratio of 5 : 3 : 2. Neeru retired and the new profit sharing ratio be…Preview
  4. Illustration 9Hanny, Pammy and Sunny are partners sharing profits in the ratio of 3 : 2 : 1. Goodwill is appearing in the books at a value of ₹60,000. Pam…Preview
+Test Your Understandingi4 questions
  1. Q1Abhishek, Rajat and Vivek are partners sharing profits in the ratio of 5 : 3 : 2. If Vivek retires, the new profit sharing ratio between Abh…Free
  2. Q2The old profit sharing ratio among Rajender, Satish and Tejpal was 2 : 2 : 1. The new profit sharing ratio after Satish's retirement is 3 :…Free
  3. Q3Anand, Bahadur and Chander are partners sharing profits equally. On Chander's retirement, his share is acquired by Anand and Bahadur in the…Preview
  4. Q4In the absence of any information regarding the acquisition of the share in profit of the retiring/deceased partner by the remaining partner…Preview
3.4.2

Hidden Goodwill

When a retiring or deceased partner is paid a lump sum amount that is more than what is actually due to them (after all adjustments for reserves, revaluation, accumulated profits/losses, etc.), the ex…

+Test Your Understandingi4 questions
  1. Q1On retirement/death of a partner, the retiring/deceased partner's capital account will be credited with: (a) his/her share of goodwill (b) g…Free
  2. Q2Gobind, Hari and Pratap are partners. On the retirement of Gobind, the goodwill already appears in the Balance Sheet at ₹24,000. The goodwil…Free
  3. Q3Chaman, Raman and Suman are partners sharing profits in the ratio of 5 : 3 : 2. Raman retires, and the new profit sharing ratio between Cham…Preview
  4. Q4On retirement/death of a partner, the remaining partner(s) who have gained due to the change in profit sharing ratio should compensate the:…Preview
3.5

Adjustment for Revaluation of Assets and Liabilities

When a partner retires or dies, the firm’s assets and liabilities may not be recorded at their current realisable values.

+Illustrationsi1 question
  1. Illustration 10Mitali, Indu and Geeta are partners sharing profits and losses in the ratio of 5 : 3 : 2. On March 31, 2017, their Balance Sheet was as unde…Preview
3.6

Adjustment of Accumulated Profits and Losses

When a partner retires or dies, the firm's books may contain accumulated profits (like General Reserve, Reserve Fund, or a credit balance in the Profit Loss Account) or accumulated losses (a debit b…

3.7

Disposal of Amount Due to Retiring Partner

4 Q

Once all adjustments — revaluation of assets and liabilities, treatment of goodwill, distribution of reserves, and calculation of the retiring partner's share of profits up to the date of retirement —…

+Illustrationsi3 questions
  1. Illustration 11Amrinder, Mahinder and Joginder are partners in a firm. Mahinder retires from the firm. On his date of retirement, ₹60,000 becomes due to hi…Free
  2. Illustration 12The Balance Sheet of Ashish, Suresh and Lokesh, who were sharing profits in the ratio of 5 : 3 : 2, is given below as on March 31, 2017: | L…Preview
  3. Illustration 13Shyam, Gagan and Ram are partners sharing profit in the ratio of 2 : 2 : 1. Their Balance Sheet as on March 31, 2017 is as under: | Liabilit…Preview
+Do It Yourselfi1 question
  1. Q1Vijay, Ajay and Mohan started a computer-hardware business in partnership, introducing capitals of ₹50,000, ₹30,000 and ₹20,000 respectively…Preview
3.8

Adjustment of Partners' Capitals

6 Q

When a partner retires or dies, the continuing partners often decide to adjust their capital accounts so that the capitals are in proportion to their new profit-sharing ratio.

+Illustrationsi4 questions
  1. Illustration 14Mohit, Neeraj and Sohan are partners in a firm sharing profits in the ratio of 2 : 1 : 1. Neeraj retires and Mohit and Sohan decide that the…Free
  2. Illustration 15Asha, Deepa and Lata are partners in a firm sharing profits in the ratio of 3 : 2 : 1. Deepa retires. After making all adjustments relating…Free
  3. Illustration 16Lalit, Pankaj and Rahul are partners sharing profits in the ratio of 4 : 3 : 3. After all adjustments on Lalit's retirement with respect to…Preview
  4. Illustration 17The Balance Sheet of Mohit, Neeraj and Sohan, who are partners in a firm sharing profits according to their capitals, as on March 31, 2017 w…Preview
+Do It Yourselfi2 questions
  1. Q1The Balance Sheet of A, B and C, who were sharing profits in proportion to their capitals, stood as on March 31, 2017: | Liabilities | Amoun…Free
  2. Q2R, S and M were carrying on business in partnership sharing profits in the ratio of 3 : 2 : 1 respectively. On March 31, 2017, the Balance S…Preview
3.9

Death of a Partner

3 Q

When a partner dies, the partnership is dissolved as far as that partner is concerned. The accounting treatment is similar to retirement in almost every respect — the deceased partner's claim is calcu…

+Illustrationsi2 questions
  1. Illustration 18Anil, Bhanu and Chandu were partners in a firm sharing profits in the ratio of 5 : 3 : 2. On March 31, 2017, their Balance Sheet was as unde…Free
  2. Illustration 19You are given the Balance Sheet of Mohit, Sohan and Rahul, who are partners sharing profits in the ratio of 2 : 2 : 1, as on March 31, 2017:…Preview
+Do It Yourselfi1 question
  1. Q1On December 31, 2015, the Balance Sheet of Pinki, Qureshi and Rakesh stood as under: **Balance Sheet as on December 31, 2015** | Liabilities…Preview

Terms Introduced in the Chapter

The key terms introduced in this chapter, with a short meaning for each.

Summary

- New Profit-Sharing Ratio Gaining Ratio: On retirement, the remaining partners gain the retiring partner’s share. Gaining Ratio = New Ratio – Old Ratio.

Questions for Practice

23 Q
+Short Answer Questions5 questions
  1. Q1What are the different ways in which a partner can retire from the firm?Free
  2. Q2Write the various matters that need adjustments at the time of retirement of a partner.Free
  3. Q3Distinguish between sacrificing ratio and gaining ratio.Preview
  4. Q4Why do firms revalue assets and reassess their liabilities on retirement or on the event of death of a partner?Preview
  5. Q5Why is a retiring/deceased partner entitled to a share of goodwill of the firm?Preview
+Long Answer Questions4 questions
  1. Q1Explain the modes of payment to a retiring partner.Free
  2. Q2How will you compute the amount payable to a deceased partner?Free
  3. Q3Explain the treatment of goodwill at the time of retirement or on the event of death of a partner?Preview
  4. Q4Discuss the various methods of computing the share in profits in the event of death of a partner.Preview
+Numerical Questions14 questions
  1. Q1Aparna, Manisha and Sonia are partners sharing profits in the ratio of 3:2:1. Manisha retires and goodwill of the firm is valued at ₹1,80,00…Free
  2. Q2Sangeeta, Saroj and Shanti are partners sharing profits in the ratio of 2:3:5. Goodwill is appearing in the books at a value of ₹60,000. San…Free
  3. Q3Himanshu, Gagan and Naman are partners sharing profits and losses in the ratio of 3:2:1. On March 31, 2019, Naman retires. The various asset…Free
  4. Q4Naresh, Raj Kumar and Bishwajeet are equal partners. Raj Kumar decides to retire. On the date of his retirement, the Balance Sheet of the fi…Preview
  5. Q5Digvijay, Brijesh and Parakaram were partners in a firm sharing profits in the ratio of 2:2:1. Their Balance Sheet as on March 31, 2020 was…Preview
  6. Q6Radha, Sheela and Meena were in partnership sharing profits and losses in the proportion of 3:2:1. On April 1, 2019, Sheela retires from the…Preview
  7. Q7Pankaj, Naresh and Saurabh are partners sharing profits in the ratio of 3:2:1. Naresh retired from the firm due to his illness on September…Preview
  8. Q8Puneet, Pankaj and Pammy are partners in a business sharing profits and losses in the ratio of 2:2:1 respectively. Their balance sheet as on…Preview
  9. Q9Following is the Balance Sheet of Prateek, Rockey and Kushal as on March 31, 2020 | Liabilities | Amount (₹) | Assets | Amount (₹) | |---|--…Preview
  10. Q10Narang, Suri and Bajaj are partners in a firm sharing profits and losses in proportion of 1/2, 1/6 and 1/3 respectively. The Balance Sheet o…Preview
  11. Q11The Balance Sheet of Rajesh, Pramod and Nishant who were sharing profits in proportion to their capitals stood as on March 31, 2015 | Liabil…Preview
  12. Q12Following is the Balance Sheet of Jain, Gupta and Malik as on March 31, 2020 | Liabilities | Amount (₹) | Assets | Amount (₹) | |---|---:|--…Preview
  13. Q13Arti, Bharti and Seema are partners sharing profits in the proportion of 3:2:1 and their Balance Sheet as on March 31, 2020 stood as follows…Preview
  14. Q14Nithya, Sathya and Mithya were partners sharing profits and losses in the ratio of 5:3:2. Their Balance Sheet as on March 31, 2020 was as fo…Preview