Q.Madhu, Neha and Tina are partners sharing profits in the ratio of 5 : 3 : 2. Calculate the new profit sharing ratio and gaining ratio if:
- Madhu retires
- Neha retires
- Tina retires.
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 |
The balance b/d is the opening capital. All adjustments (revaluation profit, reserves, goodwill) are credited. Payments and losses are debited. The final balance is either paid or turned into a loan.
The Formula for Interest on Capital (if applicable)
If the partnership deed allows interest on capital, and the retiring partner's capital remains in the firm for part of the year:
Interest on capital = Capital amount × Rate of interest per annum × (Period in months / 12)
This is credited to the retiring partner's capital account before final settlement.
A Common Mistake to Avoid
Students often confuse gaining ratio with new ratio. The gaining ratio is used only for goodwill adjustment. It is calculated as: Gaining ratio = New ratio – Old ratio. The remaining partners compensate the retiring partner in this ratio, not in their old ratio.
Putting It All Together – A Simple Illustration (No Invented Data)
Suppose a firm has three partners: A, B, and C sharing profits 5:3:2. C retires. The firm's goodwill is valued at ₹1,00,000. C's share of goodwill = ₹1,00,000 × 2/10 = ₹20,000. A and B will gain in the ratio of their new shares (say 5:3, if they continue in the same proportion). So A pays ₹12,500 and B pays ₹7,500 to C's capital account.
After all revaluation and reserve transfers, C's capital account shows a final amount. That amount is paid or treated as a loan.
The Core Idea to Remember
Retirement accounting is about settling the departing partner's claim fairly. Every adjustment — revaluation, goodwill, reserves — ensures that the retiring partner gets exactly what they've earned, and the continuing partners don't bear an unfair burden. The capital account is the central ledger where all these adjustments converge, and the final balance is the amount due.
When nothing is said about how the continuing partners take over the retiring partner's share, they are assumed to acquire it in their old mutual ratio — so the new ratio between them, and their gaining ratio, are both simply that old ratio.
- If Madhu retires: new ratio Neha : Tina = 3 : 2; gaining ratio = 3 : 2.
- If Neha retires: new ratio Madhu : Tina = 5 : 2; gaining ratio = 5 : 2.
- If Tina retires: new ratio Madhu : Neha = 5 : 3; gaining ratio = 5 : 3.
New ratio and gaining ratio are identical in each case — Madhu retires: 3 : 2; Neha retires: 5 : 2; Tina retires: 5 : 3.
With no information on the acquisition proportion, the remaining partners keep their old mutual ratio, so the new profit sharing ratio equals the gaining ratio in every case: Madhu retires → 3 : 2; Neha retires → 5 : 2; Tina retires → 5 : 3.
Concept
In the absence of any agreement about the proportion in which the continuing partners acquire the outgoing partner's share, the Indian practice is to assume they acquire it in their old profit sharing ratio among themselves. The new profit sharing ratio is then just their old ratio, and since each gains exactly in that proportion, the gaining ratio is the same ratio too.
Solution
Old ratio Madhu : Neha : Tina = 5 : 3 : 2.
- Madhu retires — the business continues between Neha and Tina, who keep their old ratio 3 : 2. New ratio = 3 : 2; gaining ratio = 3 : 2.
- Neha retires — Madhu and Tina continue in their old ratio 5 : 2. New ratio = 5 : 2; gaining ratio = 5 : 2.
- Tina retires — Madhu and Neha continue in their old ratio 5 : 3. New ratio = 5 : 3; gaining ratio = 5 : 3.
Madhu retires: 3 : 2; Neha retires: 5 : 2; Tina retires: 5 : 3 (new ratio = gaining ratio in each case).
Showing the 12 most recent of 95 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 same proportion in which they already share profits. Hence their gaining ratio is simply their old ratio.
✓Final answer(b) Old ratio.
- 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
It is mainly used to charge the continuing partners with the retiring partner's share of goodwill. (It is the opposite of the sacrificing ratio used at the time of admission.)
✓Final answerGain ratio is the ratio in which the continuing partners gain the outgoing partner's share of profit, found by New ratio - Old 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. → To Deceased Partner's Executor's A/c The executor (legal representative) is then paid either in cash or in instalments with interest.
✓Final answerThe amount due to the deceased partner is transferred to his Executor's Account.
- 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.
✓Final answerCorrect option: (b) 5 : 3.
A took 5 parts and B took 3 parts before; retaining the same proportion, the new profit-sharing ratio between A and B is 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 old profit-sharing ratio.
✓Final answerTRUE.
Profit or loss on revaluation at retirement is credited/debited to all partners' capital accounts in the OLD ratio, including the retiring partner's account.
- 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).
When a partner retires and no new ratio is specified, the continuing partners are presumed to acquire the retiring partner's share in their existing (old) ratio. Hence the gaining ratio of Seema and Madhu = 7 : 10.
✓Final answerGaining ratio = 7 : 10 — option (B).
- 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
So when a lump-sum payment is made, the Cash/Bank Account is credited because cash flows out of the business.
✓Final answerThe Cash/Bank Account is credited when a lump-sum payment is made to the retiring partner.
- 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 paid to his legal representatives.
✓Final answerTo the legal representatives (executors/heirs) of the deceased partner.
- 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 death of a partner leads to the reconstitution of a partnership firm.
✓Final answerReconstitution.
- 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
Since the new share (4/7 ≈ 0.571) is greater than the old share (1/3 ≈ 0.333), Hema has GAINED, and her gaining share works out exactly to 5/21, matching the mechanism by which a retiring partner's share is picked up by the continuing partners in their gaining ratio.
✓Final answerHema's gain = 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.
Therefore, this final balance is transferred from the deceased partner's Capital Account to his Executor's Account (also called the Deceased Partner's Account or Legal Representative's Account), which is shown as a liability in the reconstituted firm's balance sheet until it is actually paid off (in a lump sum or in installments, with interest as agreed or as per Section 37 of the Indian Partnership Act, 1932).
✓Final answerThe balance of the deceased partner's capital account is transferred to his Executor's (legal representative's) Account.
- 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 ₹45,000This debits the Profit and Loss Suspense Account (a temporary account that is later closed against the next full year's actual profit) and credits the deceased partner's Capital Account, so his executors can be paid his rightful share of profit without disturbing the firm's normal annual Profit and Loss Account.
✓Final answer(B) Debit of Profit and Loss Suspense Account.
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