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Reconstitution of a Partnership Firm – Retirement/Death of a Partner – Class 12 Accountancy notes, important questions and MCQs

NCERT Class 12 Accountancy, chapter 3. Notes, key terms, important questions with answers and MCQs.

Chapter overview

When a partner retires or dies, the remaining partners acquire his share of profit in a gaining ratio. The amount due to the outgoing partner includes his capital, share of goodwill, share of revaluation profit and reserves, and share of profit up to the date of retirement or death, less drawings and losses. The amount is paid immediately, in instalments, or transferred to a loan account or the executors' account.

Gaining ratio and goodwill

Gaining ratio = new share − old share, for each continuing partner.
If not specified, continuing partners are assumed to gain in their old ratio.
The outgoing partner's share of goodwill is credited to his capital account and debited to the continuing partners in the gaining ratio.

Revaluation, reserves and profit up to date

Assets and liabilities are revalued; the profit or loss is shared by all partners, including the outgoing partner, in the old ratio.
Reserves and accumulated profits are distributed among all partners in the old ratio.
On death, the deceased partner's share of profit from the last balance sheet date to the date of death is calculated on the basis of time or sales, and debited to the profit and loss suspense account.

Settlement

The amount due is paid in cash, transferred to the retiring partner's loan account with interest, or paid partly in each way.
On death, the amount is transferred to the deceased partner's executors' account and paid to the legal heirs.
Amounts received from a joint life policy are shared by all partners in the old ratio.

Key terms

Gaining ratio: the ratio in which continuing partners acquire the share of an outgoing partner
Retirement of a partner: a partner leaving the firm while others continue the business
Executors' account: an account to which the amount due to a deceased partner is transferred for payment to legal heirs
Profit and loss suspense account: a temporary account debited with a deceased partner's share of profit up to death
Joint life policy: an insurance policy taken by the firm on the lives of all partners

Important questions with answers

What is the gaining ratio?2 marks

The gaining ratio is the ratio in which the continuing partners acquire the share of profit of a retiring or deceased partner. It is calculated for each continuing partner as new share minus old share and is used to debit the continuing partners for the outgoing partner's share of goodwill.

How is a deceased partner's share of profit up to the date of death calculated?3 marks

It can be calculated on the time basis, using the previous year's or average profit proportionately for the period from the last balance sheet date to the date of death, or on the sales basis, using the ratio of profit to sales applied to sales made up to the date of death. The amount is credited to the deceased partner's capital account and debited to the profit and loss suspense account.

Explain the steps involved in settling the account of a retiring partner.5 marks

When a partner retires, several adjustments are made. First, the new profit-sharing ratio and gaining ratio of the continuing partners are determined. Second, the retiring partner's share of goodwill is calculated and credited to his capital account, with the continuing partners' capital accounts debited in the gaining ratio, since AS 26 does not allow goodwill to be raised in the books. Third, assets and liabilities are revalued through a revaluation account, and the profit or loss is shared by all partners, including the retiring partner, in the old ratio. Fourth, reserves and accumulated profits or losses are distributed among all partners in the old ratio. Fifth, the retiring partner's share of profit up to the date of retirement and interest on capital, if any, are credited, and his drawings and interest on drawings are debited. The balance of his capital account is the amount due to him. This may be paid in cash immediately, transferred to his loan account to be paid in instalments with interest, or settled partly in cash and partly through the loan account. Finally, the continuing partners may adjust their capitals in the new ratio.

Quick revision

Gaining ratio = new − old.
Goodwill: debit gaining partners, credit outgoing partner.
Revaluation and reserves: all partners, old ratio.
Death: profit up to death via P&L suspense; executors' account.

Exam tips

Calculate the gaining ratio first; it is used for goodwill on retirement and death.
Prepare the retiring partner's capital account step by step: capital, goodwill, revaluation, reserves, profit share, less drawings.

Practice MCQs

On retirement, continuing partners acquire the retiring partner's share in the
1. sacrificing ratio
2. capital ratio
3. gaining ratio
4. equal ratio always
Show answer
Answer: (c) gaining ratio. They gain his share.
The amount due to a deceased partner is transferred to the
1. realisation account
2. executors' account
3. revaluation account
4. bank only
Show answer
Answer: (b) executors' account. It is paid to legal heirs.
Revaluation profit at retirement is shared by
1. all partners in the old ratio
2. continuing partners only
3. the retiring partner only
4. nobody
Show answer
Answer: (a) all partners in the old ratio. It relates to the period before retirement.
Gaining ratio is
1. old share − new share
2. old share × new share
3. new share − old share
4. new share ÷ capital
Show answer
Answer: (c) new share − old share. For each continuing partner.
The retiring partner's share of goodwill is debited to
1. his capital account
2. goodwill account always
3. revaluation account
4. continuing partners in the gaining ratio
Show answer
Answer: (d) continuing partners in the gaining ratio. They compensate him.
A deceased partner's share of profit up to death is debited to
1. profit and loss account
2. capital account of all
3. profit and loss suspense account
4. revaluation account
Show answer
Answer: (c) profit and loss suspense account. It is a temporary adjustment.
A, B and C share 2:2:1. B retires; A and C share the future profits 3:2. The gaining ratio is
1. 2:1
2. 3:2
3. 1:1
4. 4:1
Show answer
Answer: (c) 1:1. A = 3/5 − 2/5 = 1/5; C = 2/5 − 1/5 = 1/5.
If nothing is said about the new ratio after retirement, continuing partners share in
1. equal ratio
2. their old ratio
3. the retiring partner's ratio
4. capital ratio
Show answer
Answer: (b) their old ratio. Their gaining ratio equals their old ratio.

All chapters of Class 12 Accountancy

Written by Kundali IQ from standard, well-established facts to help with revision. This is not an official NCERT publication; always read your textbook too.