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Retirement   [ Reconstitution ]


A partner may retire from the firm:-


1) If there is an agreement to that effect.

2) If all the partners consent to his retirement

3) If the partner is at will, by giving the notice to all the partners of his

    decision to retire.


The retiring partner is entitled to the amount due to him, which includes:-


      Balance in his capital / current A/C.

      Share of goodwill.

      Share in the gain/loss on revaluation.

      Share of accumulated profit (losses) and reserves.

      I.O.C salary etc. from the date of the last B/sheet to the date of retirement.

Drawing and I.O.D are debited for that period to the concerned partner

Capital A/C.

      Share in the profit of the current year.


Liability of a retiring partner

▪️ liability of the firm for the acts before retirement.

▪️ Liability of the firm for the acts after retirement.

    (Until a public notice of his retirement is given)

  Adjustment at the time of retirement


1. Change in P.S.R:-

The retirement partner gains part of the retiring partner’s share of the profit

   New share of partner= old share + acquired share 


Cash (i) when new P.S.R  is not given,

In that case, retirement partners are preassumed to share profits is an old ratio


→ the new P.S.R of the retirement partners is calculated by simply striking out the share of the retiring partner and finding out the new denominator of the remaining ratio.


NOTE→ Before attempting any calculation, ratio, if it appears infraction, should first be brought to a simple figure by taking L.C.M.



                                  A:       B:       C

                                  1/2:    2/5:      1/10:


                                    ⇒ 5: 4: 1

         Calculate new P.S.R


a)     'A'     retires

                             B.C.    4:1


b).    'B'.    retires

                             A.C.     5:1


      Under this, the P.S.R b/w the continuous parents will remain the same.



                     when the remaining partners purchase the share of the

   retiring partner in a specified ratio:-

   In this case, the acquired share is added to their existing share.


Example:-                    A:   B:   C                 

                                     5:    3:    2


                   B retires

                                   His share is taken by ⇒ A: C

                                                                            2: 1


A taken share of 'B' =3/10  (old ) × 2/3      ⇒  2/10


A new

 share = 5/10 ( old )  + 2/10 (gain)    ⇒ 7/10


C taken   = 3/10 × 1/3 = 1/10

   'C'  new = 2/10 + 1/10 = 3/10


           New    P.S.R

                        A: C

                        7: 3       Ans

Gaining ratio:-    ( G.R)


The ratio in which the continuing partners acquire the outgoing partners share

Is called the gaining ratio.




                      New Ratio – Old Ratio


1)    When no agreement exists:-

Continuing partner shall continue to share profits in the old ratio, Thus

In effect, the gain is in old P.S.R.


2)     When new P.S.R is given:-


             New Ratio  – Old Ratio


                                  A:   B:   C

                                             3:    –:   2 ⇒ 5 * 2      new   

                                  5:    3:   2 ⇒ 10*1       old

                                  6:    –:   4

                                  5:    3:   2

                                  1:    –:   2



                  A: C

New P.S.R 1: 2


2. Accounting Treatment Of Goodwill:-


When a partner retires (or died) he receives some compensation from the remaining partner in the ratio they take the share of the retiring partner. That competition is

 known as goodwill. ( AS -26 )




STEP1 → If any amt. of goodwill already appears all partners cap/current A/C.

                 Or [In old P.S.R] to goodwill A/C.


STEP2 → Share given to outgoing partner


                 Continuing part cap/current A/C Dr (In - G R) to outgoing part cap/current A/C

                 (share of goodwill).


NOTE →  if any continuing partner sacrifices due to Reconstitution.


                 Continuing part capital A/C - Dr [who gains]

                 To retiring partners capital A/C

                 To continuing partners capital A/C [who sacrifices]


3. Revaluation Of Assets And Reassessment Of Liabilities:-


                   Same as in the previous chapter


4. Reserves And Accumulated Profits/Losses:-


                 Same as in the previous chapter  


5.  Computation Of Amount Due To Retiring Partner:-


It is determined by preparing the capital A/C of the retiring partner.



Dr.                                                                  Retiring partner capital / current A/C G






Int on drawing


Share in accumulated


Share in loss on


Retiring partner

 loan A/C











Opening Bal.

Share of profit on


Share of res/Accumulated


Share of goodwill


Share of profit till the

 date of retirement

Sal. I.O.C till the date of retirement
















Journal Entry


      Retiring part capital A/C  - Dr.

             To retiring part loan A/C


               This A/C is shared on the liability side of B/sheet.


                Payment of amt due to the retiring partner


1) Payment of Full Amt:-

               Payment is made on the date of retirement.


       entry ⇒ Retiring partner capital A/C Dr.

                                  To Cash / Bank A/C


  [Instead On opening loan account payment is made in cash]


2) Payment by equal installments:-

If may be agreed upon the partners. That principal amount will be paid in a number of installments in such a case balance of his capital A/C will be transferred to his loan A/C and interest is also paid loan.


Exercise:-  Partner Loan = Rs 20,000 int - 6% P.A Paid In 2 Equal Installments


               ⇒  Each Installments Will Be Of Rs 10,000 Plus Int.


                                                Partner loan A/C









To Bank



To balance c/d


To Bank

















By par. Cap A/C



By int A/C[2000 *6/100]


By balance b/d

By int A/C [10,000*6/100]















1)    Amt. transferred to loan A/C from capital A/C

 retiring Part capital account Dr.

To retiring part loan A/C


2)     On interest being provided

          Int. On loan A/C Dr.

          To retiring part loan A/C


3)     On being installment paid

    Retiring partners loan A/C Dr.

            To Bank A/C


6. Adjustment of capital:- [if agreed]


• New capital may be in new P.S.R

• Capital may be adjusted through partners current account


( If any deficit in b/w new and old capital partners may have brought in further capital if any excess partners may withdraw some capital)


This adjustment can be done by 3 ways:-


A) when total cap. of the new firm is given:-


STEP1→ calculate the present capital of the remaining partner

                   [after all adjustment]

STEP2→  calculate proportionate capital on the basis of the total cap of a new firm

STEP3→  Find out surplus/ deficit from above 2 steps





Concerned part cap. A/C Dr.

To cash Bank/current A/C

Cash/bank/current account to Concuruned part capital account


 ⇒ Unless otherwise mentioned, any Surplus/Deficit will

     Be adjusted through cash/Bank and not current A/C.


B) When Total Capital of New Firm is Not Given:-


STEP1→ calculate the present capital of remaining part

                (After all adjustments)

STEP2→  calculate total capital of new frim

                 = aggregate of an adjusted cap. [Step I]

STEP3→ Distribute the capital (step (ii)) in new P. S. R

STEP4→  any surplus/deficit occur is adjusted by taking/giving cash or by current A/C                                                                    

                 Concerned partners.


C) when the retiring partner is to be paid through cash brought in by the remaining part in a manner to make their capital proportionate to their

 new P. S. R:-


STEP1→ calculate the present capital of the remaining part

                (After all adjustment)

STEP2→ calculate total capital of the new firm as follows:- aggregate of present capital                                                                                                                                (step i) + shortage of cash brought in by continuing part in order

 to make payment to retiring


Shortage of cash = Amt payable to retiring partner-existing cash balance + minimum    cash balance req.


STEP3→ calculates the new capital of the partner by distributing the capital    ( step ii)    in new P. S. R

STEP4→  find out surplus/deficit comparing new cap with adjusted old capital.

STEP5→ pass necessary journal entry for adjusting surplus/deficit



Retirement during an accounting year


The partner is entitled to the share of all profit and loss till the date of retirement.


⇒ His share is calculated as per provisions of the partnership deed.

⇒ if the deed is silent the amt of profit should be calculated in the manner agreed by the   partner.


 There are 2 ways of calculating


1) previous Year Basis In this the profit of the previous year is taken as a base.

2)  Average profit of past few years:-


STEP A→ Take total profit of the given no of years

STEP B→ Calculate the average

STEP C→ Reduce the profit for the period up to the date of retirement

STEP D→ Calculate the share of retiring partner on the basis of old P. S. R

STEP E→ pass an entry

                             P&l suspense account..... Dr.

                 To retiring partners cap account

                                        [With his share of profit ]


      P&l suspense account is shown is b/sheet at the time of retirement

      When P&l account is prepared at the end of accounting year the balance of P&l suspense account is transferred to P&l app account.


Death of a Partner


When a partner dies, his h hairs are entitled to the amt due and the rights which a retiring partner has

His Heins also become entitled to the share of profit


Heirs is entitled to /the amount in deceased part capital account


Dr.                                                                            Deceased part cap A/c




To share of loss on

To revaluation on

To Drawing

To I.OD up to the date


To acc losses

To deceased part

 executors A/C {B.F}










By share of goodwill

By share of profit

of revelation

By share in acc profit & res

By I.O.C up to the of death

By salary up to the date of










share of profit up to the date of death


= Balance is transferred

                       Deceased part cap A/C.....Dr.

                                     To deceased partner executors, A/C




      Payment To The Executors Is Made In Always:-


1)    Full payment in one installment:-

                       Deceased partner executors A/C……Dr.

                              To Bank A/C

2)     when payment is made in more than one installment:-


            ⇒  Interest @6% P.A is paid by the firm unless otherwise agreed

            ⇒  Executors can opt to take a share of profit instead of int.





a)    When int. Is paid

            Interest A/C……Dr.

            To Deceaesd part executors A/C


b)    When installment is paid

           Deceased part executors A/C……Dr

            To Bank A/C


Issues At The Time Of Death:-


1)     profit of deceased partner. If the part deed in between the yr. Profit

 is calculated on the basis of-


2)     Time basis –

Under this, it is assumed that profit had orison uniformly over the yr.


Example:-  Profit of the previous yr. ⇒ 24,000

        Part died after 2 months


                                                                     Deceased part share = 3/10


Calculate profit share of deceased part on time basis


Ans        profit of 2 months = 24,000*2/12 = 4,000


              Deceased part share = 4000 * 3/10 =1200




               P & S suspense A/C…..Dr.

                                        To deceased part. cap A/C


In case of loss revenue entry is passed


2) Turnover or sales basis:-


     We should know


a)    The sales of the whole yr, and

b)    Sale up to the date of death.



                   Partners dies ⇒ 1st march 2012, accounts closed 31st Dec. The profit till

 The date of death is to be ascertained on the basis of sales, assuming profits for

2012 is the same as for 2011. The following information is available:-


           Sale for 2011                                             Rs. 1,20,000

           Profit for 2011                                            Rs.   24,000

           Sales of jan & feb                                      Rs.   30,000


⇒ Rate of profit to sales    =                           Profit/sales*100


                                          =                           24,000/1,20,000*100


                                          =                             20%


2) Treatment of goodwill:-


                               Same as in retirement  

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