Class 12 Book Keeping and Accountancy Chapter 4: Reconstitution of Partnership (Retirement of Partner)

Key concepts: Reconstitution of Partnership (Retirement of Partner)

Retirement of a partner

A partner ceases to be a member while the remaining partners continue the business. He is paid what is due after adjusting capital, current account, revaluation result, reserves and goodwill.

New profit sharing ratio

The ratio in which the continuing partners agree to share future profits and losses after the retiring partner has gone.

Gain (benefit) ratio

The ratio in which continuing partners take over the retiring partner's share. Gain ratio = New ratio - Old ratio. It is used to write off goodwill raised only for the retiring partner's share.

Goodwill treatment

Goodwill may be raised for the whole firm (credited to all partners in old ratio) or only for the retiring partner's share (credited to him). It may be kept or written off.

Reserves and accumulated profit or loss

Reserves and accumulated profits are credited to all partners, including the retiring one, in their profit sharing ratio. An accumulated loss is debited to them in the same ratio.

Revaluation of assets and liabilities

Assets and liabilities are revalued at retirement. The profit or loss goes to the capital accounts of all partners, including the retiring partner, in the profit sharing ratio.

Adjustment of capitals

Continuing partners may reset capitals by dividing the firm's total capital in the new ratio; any surplus is withdrawn or moved to current or loan account and any deficit is brought in.

Amount payable to retiring partner

It may be paid in one lump sum, in instalments with the balance moved to his Loan A/c, wholly moved to his Loan A/c, or partly paid in cash with the rest moved to his Loan A/c.

Quick revision: important points

• Gain ratio = New ratio - Old ratio.
• Revaluation profit or loss and reserves are shared by all partners in the old (profit sharing) ratio.
• Retiring partner's profit up to retirement: P&L Suspense A/c Dr, To Retiring Partner's Capital A/c.
• Goodwill for retiring partner's share only and written off: continuing partners debited in gain ratio.
• Balance due, if unpaid: Retiring Partner's Capital A/c Dr, To Retiring Partner's Loan A/c.

Practice MCQs with answers

1. What is meant by retirement of a partner?

   1. The firm is closed and all its assets are sold
   2. One partner leaves and the remaining partners carry on the firm
   3. A new person joins the firm and takes a share of profit
   4. The partners change their profit sharing ratio without anyone leaving
   Show answer

   Answer: B. One partner leaves and the remaining partners carry on the firm
   In retirement one partner goes out and the others continue the business; it is one way of reconstituting a partnership.

2. Which of the following is NOT a way in which a partner may retire?

   1. By giving notice to the other partners in a partnership at will
   2. In accordance with the partnership agreement
   3. With the consent of all the other partners
   4. By selling his share to an outsider without asking the other partners
   Show answer

   Answer: D. By selling his share to an outsider without asking the other partners
   A partner retires by notice (at will), by agreement or with everyone's consent, not by unilaterally passing his share to an outsider.

3. The ratio in which continuing partners decide to share future profits and losses after a partner retires is called the

   1. New profit sharing ratio
   2. Sacrificing ratio
   3. Capital ratio
   4. Old ratio
   Show answer

   Answer: A. New profit sharing ratio
   After retirement the continuing partners fix a new ratio for future profits and losses.

4. Gain ratio is calculated as

   1. Old ratio - New ratio
   2. Old ratio + New ratio
   3. New ratio - Old ratio
   4. Capital ratio - Old ratio
   Show answer

   Answer: C. New ratio - Old ratio
   Each continuing partner's gain is his new share minus his old share.

5. Gain ratio is normally used to

   1. Distribute general reserve among all the partners
   2. Write off goodwill that was raised only to the extent of the retiring partner's share
   3. Divide the revaluation profit among the partners
   4. Share the profit from the date of the last balance sheet
   Show answer

   Answer: B. Write off goodwill that was raised only to the extent of the retiring partner's share
   Because continuing partners gain the retiring partner's share, they bear the write off of his goodwill in the gain ratio.

All Class 12 Book Keeping and Accountancy chapters

• Chapter 1: Introduction to Partnership and Partnership Final Accounts
• Chapter 2: Accounts of Not for Profit Concerns
• Chapter 3: Reconstitution of Partnership (Admission of Partner)
• Chapter 4: Reconstitution of Partnership (Retirement of Partner)
• Chapter 5: Reconstitution of Partnership (Death of Partner)
• Chapter 6: Dissolution of Partnership Firm
• Chapter 7: Bills of Exchange
• Chapter 8: Company Accounts - Issue of Shares
• Chapter 9: Analysis of Financial Statements
• Chapter 10: Computer in Accounting

Class 12 Book Keeping and Accountancy notes: all chapters