Meet Your Tutor
Retirement and death adjustments become manageable when you settle each claim in a fixed sequence: ratio and goodwill, revaluation and reserves, profit to date, capital, and finally the amount due. I will help you explain who receives each adjustment and use a debit-credit fairness check before closing the account.
Imagine a small sweet shop that three cousins have run together for eleven years. One morning the eldest says, quietly, that his knees are finished and he would like to step out. Nobody is angry. Nobody has done anything wrong. But now a real question sits on the table: what exactly does he take with him, and what stays behind for the two who will keep the shutters open? That single question is the whole chapter. Retirement or death of a partner is not a sad topic in Accountancy — it is a fairness topic. We are simply working out, rupee by rupee, what a departing partner has honestly earned up to the day he leaves. Everything here follows the NCERT Class 12 Accountancy textbook Accountancy — Partnership Accounts (Part I), 2026–27 reprint, and the CBSE curriculum for the 2026–27 session. If you have felt lost in this chapter before, it is almost never because the sums are hard. It is because nobody told you the order in which to do them. We will fix that first, and then the numbers become almost boring — which, in an exam, is exactly what you want.
What You’ll Learn
Jump straight to what you need:
- What Retirement Really Means and the Rights of a Retiring Partner
- How to Find the New Profit-Sharing Ratio
- Gaining Ratio Questions Class 12 Accountancy — and How It Differs from Sacrificing Ratio
- Treatment of Goodwill on Retirement or Death (AS 26)
- Hidden Goodwill When the Value Is Not Given
- Revaluation of Assets and Reassessment of Liabilities
- Accumulated Profits, Reserves and Losses
- Joint Life Policy and the Life Policy Reserve
- Adjustment of Partners’ Capitals into the New Ratio
- Settlement of the Retiring Partner’s Dues and Section 37
- Death of a Partner — Share of Profit up to the Date of Death
- The Deceased Partner’s Executor’s Account
- Balance Sheet of the Reconstituted Firm
- Practice Worksheet with Solved Answers
Your Game Plan
- Learn the exit sequence — the Six R Farewell Ledger — before touching a single sum.
- Get comfortable with ratios: new ratio first, then gaining ratio.
- Practise goodwill, revaluation and reserves as three separate small habits.
- Chain them together on one full question and make the Balance Sheet tally.
- Add the death-specific bits: profit to the date of death, and the Executor’s Account.
- Finish the worksheet at the end without looking at the answers first.
The Six R Farewell Ledger. Every retirement question in the world is these six moves, in this order. Say them out loud until they stick: Ratio, Reward, Revalue, Release, Refill, Repay.
Study Notes
What Retirement Really Means and the Rights of a Retiring Partner
Retirement (सेवानिवृत्ति) means a partner stops being a partner while the firm itself carries on. This is important: the firm does not shut down. The shutters stay up, the customers keep coming, only the list of owners gets shorter. That is why we call it a reconstitution of the firm and not a dissolution.
Under Section 32 of the Indian Partnership Act, 1932, a partner may retire in any of three ways: with the consent of all the other partners; in accordance with an express agreement among the partners; or, where the partnership is at will, by giving written notice to all the other partners of the intention to retire. Death is treated in the same accounting family because the arithmetic is nearly identical — the only extra step is calculating the profit earned between the last Balance Sheet date and the date of death.
So what does a retiring partner walk away with? Think of it as opening a locker that has five drawers with his name on them.
- The balance standing to the credit of his Capital Account (and Current Account, if the firm keeps fixed capitals).
- His share of goodwill, because the reputation he helped build stays behind with the firm.
- His share of the profit or loss on revaluation of assets and liabilities.
- His share of accumulated profits and reserves lying undistributed — and he must also bear his share of accumulated losses.
- Any interest on capital, salary or commission due to him up to the date of retirement.
Working, drawer by drawer:
Capital = ₹60,000
Add share of General Reserve = ₹36,000 × 1/6 = ₹6,000
Less share of revaluation loss = ₹12,000 × 1/6 = ₹2,000
Add share of goodwill = ₹72,000 × 1/6 = ₹12,000
Tara’s claim = 60,000 + 6,000 − 2,000 + 12,000 = ₹76,000
Notice we did not touch the other partners’ capitals here. We only opened Tara’s five drawers. Every retirement question, however long, is this same little exercise wearing a bigger coat.
Why it works: the firm is a common pot. While Tara was a partner, one-sixth of every good thing and one-sixth of every bad thing in that pot was hers. The moment she leaves, we freeze the pot, count it honestly, hand her one-sixth of the freshly counted value, and let the other two carry on with the rest. Nothing more mysterious than that.
How to Find the New Profit-Sharing Ratio
The new profit-sharing ratio is simply the ratio in which the continuing partners will divide profits from the day after the retirement. Nothing is created and nothing is destroyed — the leaver’s slice of the pie is handed over to those who stay. The only question is: in what proportion do they take it?
There are exactly three situations, and the question always tells you which one you are in.
- Nothing is said. Assume the continuing partners take the retiring partner’s share in their old mutual ratio. The new ratio is then just the old ratio of the remaining partners.
- A specified ratio is given for acquiring the retiring partner’s share. Split his share in that ratio and add each piece to the acquirer’s old share.
- The new ratio is given outright. Then you do not have to find it — you work backwards to the gaining ratio instead.
Nothing is specified, so Anand and Bhavna simply continue with their old mutual proportion.
Anand : Bhavna = 3 : 2.
As fractions of the whole: Anand = 3/5, Bhavna = 2/5.
New ratio = 3 : 2.
Check: 3/5 + 2/5 = 5/5 = 1. The whole cake is accounted for, which is your quickest proof that you have not slipped.
Step 1 — Y’s share: 3/10.
Step 2 — split it 2:1:
X acquires = 3/10 × 2/3 = 6/30 = 1/5 (that is 2/10)
Z acquires = 3/10 × 1/3 = 3/30 = 1/10
Check: 2/10 + 1/10 = 3/10 ✓ the whole of Y’s share is gone.
Step 3 — add to old shares:
X = 5/10 + 2/10 = 7/10
Z = 2/10 + 1/10 = 3/10
New ratio = 7 : 3. Gaining ratio = 2 : 1 (the ratio in which they acquired).
Check: 7/10 + 3/10 = 1 ✓
Old shares: A = 4/9, B = 3/9. New shares: A = 5/9, B = 4/9.
Gain of A = 5/9 − 4/9 = 1/9
Gain of B = 4/9 − 3/9 = 1/9
Gaining ratio = 1 : 1.
Check: total gain = 1/9 + 1/9 = 2/9, which is exactly C’s old share. If your two gains do not add up to the retiring partner’s share, something is wrong — go back before you touch the goodwill entry.
Why it works: profit shares are fractions of one whole firm. When one fraction is removed, the remaining fractions must stretch to fill the gap so that the total returns to 1. The new ratio is nothing but a record of how far each remaining partner stretched.
Gaining Ratio Questions Class 12 Accountancy — and How It Differs from Sacrificing Ratio
The gaining ratio is the ratio in which the continuing partners gain the retiring partner’s share. In plain words: how much extra profit is each of them now getting, compared with before? Put that extra against each other and you have the gaining ratio.
Gain = New Share − Old Share. That is the entire formula. If the answer comes out negative for somebody, that partner has actually sacrificed, not gained — which does happen in tricky questions, and we will see one.
| Point of difference | Sacrificing Ratio | Gaining Ratio |
|---|---|---|
| When is it used? | Admission of a partner, or any increase in someone’s share | Retirement or death of a partner |
| Formula | Old Share − New Share | New Share − Old Share |
| Who is affected? | Partners whose share goes down | Partners whose share goes up |
| Direction of goodwill | Incoming partner compensates the sacrificing partners | Gaining partners compensate the retiring partner |
| Capital account effect | Sacrificing partners are credited | Gaining partners are debited |
Old: P = 3/6, Q = 2/6. New: P = 1/2 = 3/6, Q = 1/2 = 3/6.
Gain of P = 3/6 − 3/6 = 0 (no change at all)
Gain of Q = 3/6 − 2/6 = 1/6
So Q alone gains, and Q alone bears the whole of R’s goodwill. Gaining ratio: Q gains 1/6, P gains nothing.
Check: total gain 0 + 1/6 = 1/6 = R’s old share ✓
The goodwill entry here debits only Q’s Capital Account. Debiting P as well — which is what most students do out of habit — would be plainly unfair to P.
Why it works: goodwill is compensation. You compensate somebody only for what you actually took from them. A partner whose share did not rise took nothing, so he pays nothing. The gaining ratio is simply the bill, itemised.
Treatment of Goodwill on Retirement or Death (AS 26)
Here is the everyday version. The sweet shop’s regulars come back every Diwali because of a recipe the retiring cousin perfected. He is leaving, but the recipe and the loyal customers stay. The two who continue will keep earning from that reputation for years. Fairness says they should buy his share of it from him today.
Under Accounting Standard 26 (Intangible Assets), self-generated goodwill cannot be recorded as an asset in the books. So we never open a Goodwill Account and never show goodwill in the new Balance Sheet unless it was already there. Instead we make one clean adjustment entry directly between the partners’ capital accounts.
Gaining Partners’ Capital A/c Dr. (in the gaining ratio)
To Retiring / Deceased Partner’s Capital A/c (with his share of firm goodwill)
Amount credited to the leaver = Value of Firm’s Goodwill × His Profit Share.
That same amount is then split among the gainers in the gaining ratio.
Step 1 — Chirag’s share of goodwill: ₹90,000 × 1/6 = ₹15,000
Step 2 — gaining ratio: no change in the mutual ratio of Anand and Bhavna, so they gain in 3:2.
Step 3 — split ₹15,000 in 3:2:
Anand = 15,000 × 3/5 = ₹9,000
Bhavna = 15,000 × 2/5 = ₹6,000
Check: 9,000 + 6,000 = 15,000 ✓
Journal entry:
Anand’s Capital A/c Dr. 9,000
Bhavna’s Capital A/c Dr. 6,000
To Chirag’s Capital A/c 15,000
(Being Chirag’s share of goodwill adjusted through the capital accounts of the gaining partners in their gaining ratio)
Step 1 — average profit:
Total = 60,000 + 72,000 + 48,000 + 84,000 + 66,000 = ₹3,30,000
Average = 3,30,000 ÷ 5 = ₹66,000
Step 2 — goodwill of firm: 66,000 × 2 = ₹1,32,000
Step 3 — Q’s share: 1,32,000 × 3/10 = ₹39,600
Step 4 — split in the gaining ratio 2:1:
P = 39,600 × 2/3 = ₹26,400
R = 39,600 × 1/3 = ₹13,200
Check: 26,400 + 13,200 = 39,600 ✓
Journal entry:
P’s Capital A/c Dr. 26,400
R’s Capital A/c Dr. 13,200
To Q’s Capital A/c 39,600
Step 1 — write off the existing goodwill in the OLD ratio 4:3:2:
L = 45,000 × 4/9 = ₹20,000; M = 45,000 × 3/9 = ₹15,000; N = 45,000 × 2/9 = ₹10,000. Check: 20,000 + 15,000 + 10,000 = 45,000 ✓
Entry: L 20,000 Dr., M 15,000 Dr., N 10,000 Dr., To Goodwill A/c 45,000.
Step 2 — gaining ratio: L gains 5/9 − 4/9 = 1/9; M gains 4/9 − 3/9 = 1/9. Gaining ratio 1:1. Check: 1/9 + 1/9 = 2/9 = N’s share ✓
Step 3 — N’s share of the new valuation: 90,000 × 2/9 = ₹20,000, split 1:1 → ₹10,000 each.
Entry: L’s Capital A/c Dr. 10,000; M’s Capital A/c Dr. 10,000; To N’s Capital A/c 20,000.
Net effect on N: −10,000 + 20,000 = ₹10,000 credit. Two entries, never one. For more valuation methods, see the detailed notes on goodwill and change in profit-sharing ratio.
Why it works: AS 26 blocks us from parking goodwill on the asset side, but it does not stop us from settling accounts between the owners themselves. Debiting the gainers and crediting the leaver moves exactly the right amount of value from the people who received the reputation to the person who built it — and the firm’s total capital stays unchanged, which is why the Balance Sheet still tallies.
Hidden Goodwill When the Value Is Not Given
Sometimes the question refuses to tell you the goodwill figure. Instead it says something like “the partners agreed to pay ₹1,00,000 to the retiring partner in full settlement.” That extra amount — over and above what his capital account honestly shows after all the other adjustments — can only be one thing. It is his share of goodwill, hiding.
Goodwill of the whole firm = That figure ÷ Retiring partner’s profit share.
Do this last, after revaluation and reserves — otherwise the “capital balance” you subtract is the wrong one.
Step 1 — U’s share of goodwill:
1,00,000 − 76,000 = ₹24,000
Step 2 — goodwill of the firm:
24,000 ÷ 1/4 = 24,000 × 4 = ₹96,000
Step 3 — gaining ratio: nothing said, so S and T gain in their old mutual ratio 2:1.
S = 24,000 × 2/3 = ₹16,000; T = 24,000 × 1/3 = ₹8,000. Check: 16,000 + 8,000 = 24,000 ✓
Journal entry:
S’s Capital A/c Dr. 16,000
T’s Capital A/c Dr. 8,000
To U’s Capital A/c 24,000
U’s account now reads 76,000 + 24,000 = ₹1,00,000, exactly the promised settlement ✓
Revaluation of Assets and Reassessment of Liabilities
Book values go stale. The building bought in 2014 sits in the ledger at its old cost while the market has moved on; the stock may have spoiled; a repair bill may never have been recorded. If we settled the retiring partner on stale figures, either he or the continuing partners would be quietly cheated. So on the date of retirement we take a fresh, honest look at everything and route the difference through a Revaluation Account (also called the Profit and Loss Adjustment Account).
Increase in an asset → credit Revaluation. Decrease in an asset → debit Revaluation.
Increase in a liability → debit Revaluation. Decrease in a liability → credit Revaluation.
The resulting profit or loss belongs to all partners in the OLD ratio, including the one leaving — because these gains and losses arose while he was still a partner.
Here is the firm we will follow for the rest of this chapter. Keep this Balance Sheet in view; every later section builds on it.
| Liabilities | ₹ | Assets | ₹ |
|---|---|---|---|
| Creditors | 48,000 | Cash at Bank | 30,000 |
| Bills Payable | 12,000 | Debtors 60,000 less Provision 3,000 | 57,000 |
| General Reserve | 36,000 | Stock | 72,000 |
| Workmen Compensation Reserve | 18,000 | Furniture | 45,000 |
| Capitals: Anand | 1,20,000 | Machinery | 1,20,000 |
| Bhavna | 90,000 | Building | 60,000 |
| Chirag | 60,000 | ||
| Total | 3,84,000 | Total | 3,84,000 |
Working:
Building: 60,000 × 20% = +₹12,000 (credit)
Machinery: 1,20,000 × 10% = −₹12,000 (debit)
Stock: 72,000 − 66,000 = −₹6,000 (debit)
Provision: required 60,000 × 10% = 6,000; existing 3,000; extra needed = ₹3,000 (debit)
Unrecorded creditor: liability up by ₹3,000 (debit)
Total debits = 12,000 + 6,000 + 3,000 + 3,000 = ₹24,000
Total credits = ₹12,000
Loss on revaluation = 24,000 − 12,000 = ₹12,000, shared 3:2:1:
Anand ₹6,000 | Bhavna ₹4,000 | Chirag ₹2,000. Check: 6,000 + 4,000 + 2,000 = 12,000 ✓
| Particulars (Dr.) | ₹ | Particulars (Cr.) | ₹ |
|---|---|---|---|
| To Machinery A/c | 12,000 | By Building A/c | 12,000 |
| To Stock A/c | 6,000 | By Loss transferred to: | |
| To Provision for Doubtful Debts A/c | 3,000 | Anand’s Capital A/c | 6,000 |
| To Creditors A/c (unrecorded) | 3,000 | Bhavna’s Capital A/c | 4,000 |
| Chirag’s Capital A/c | 2,000 | ||
| Total | 24,000 | Total | 24,000 |
Why it works: the Revaluation Account is a temporary holding tray. Every correction to a book value lands in it, the tray is totalled once, and the single net figure is then dropped into the partners’ capitals in the old ratio. Because every rupee that leaves an asset arrives in the tray, and every rupee in the tray eventually reaches a capital account, the Balance Sheet cannot fall out of balance.
Accumulated Profits, Reserves and Losses
A General Reserve is profit the firm earned in earlier years and simply did not hand out. It has the retiring partner’s name on part of it. The same applies, in reverse, to accumulated losses sitting on the asset side — a debit balance of Profit and Loss Account, or an Advertisement Suspense Account. Those are past losses he has not yet absorbed, and he must absorb his share now.
General Reserve ₹36,000 in 3:2:1:
Anand = 36,000 × 3/6 = ₹18,000
Bhavna = 36,000 × 2/6 = ₹12,000
Chirag = 36,000 × 1/6 = ₹6,000 (check: 18,000 + 12,000 + 6,000 = 36,000 ✓)
Workmen Compensation Reserve:
Transfer ₹6,000 to Workmen Compensation Claim (a liability in the new Balance Sheet).
Surplus to distribute = 18,000 − 6,000 = ₹12,000, in 3:2:1:
Anand = ₹6,000 | Bhavna = ₹4,000 | Chirag = ₹2,000 (check: total 12,000 ✓)
Entries:
General Reserve A/c Dr. 36,000 — To Anand 18,000, To Bhavna 12,000, To Chirag 6,000
Workmen Compensation Reserve A/c Dr. 18,000 — To Workmen Compensation Claim 6,000, To Anand 6,000, To Bhavna 4,000, To Chirag 2,000
General Reserve 3:2:1 → D ₹18,000 (Cr.), E ₹12,000 (Cr.), F ₹6,000 (Cr.)
Advertisement Suspense 3:2:1 → D ₹9,000 (Dr.), E ₹6,000 (Dr.), F ₹3,000 (Dr.)
Check: 9,000 + 6,000 + 3,000 = 18,000 ✓
Net credit: D = 18,000 − 9,000 = ₹9,000; E = 12,000 − 6,000 = ₹6,000; F = 6,000 − 3,000 = ₹3,000
Check: 9,000 + 6,000 + 3,000 = ₹18,000, which is exactly 36,000 − 18,000 ✓
Pass two separate entries in the answer book, not one netted entry — examiners award marks for both.
Joint Life Policy and the Life Policy Reserve
Many firms take a single insurance policy on the joint lives of all partners, with the firm paying the premium. The idea is practical: when a partner dies or retires, the firm suddenly needs a large sum of cash to pay him or his family. A policy provides it.
Two treatments are commonly taught. Under the first, the premium is charged to the Profit and Loss Account each year and no asset is carried; on the death or retirement of a partner the amount received (or the surrender value) is credited to all partners in the old ratio. Under the second, a Joint Life Policy Account is maintained at surrender value, with a matching Joint Life Policy Reserve; on the event, the balance is distributed in the old ratio just like any other reserve.
The surrender value is an unrecorded asset belonging to all three partners in the old ratio.
K = 36,000 × 3/6 = ₹18,000
L = 36,000 × 2/6 = ₹12,000
M = 36,000 × 1/6 = ₹6,000
Check: 18,000 + 12,000 + 6,000 = 36,000 ✓
Entry: Joint Life Policy A/c Dr. 36,000 — To K’s Capital A/c 18,000, To L’s Capital A/c 12,000, To M’s Capital A/c 6,000.
M therefore carries away ₹6,000 more than his plain capital balance. Old ratio, once again — because the policy grew while all three were partners.
Adjustment of Partners’ Capitals into the New Ratio
Once the leaver is settled, the two who remain often want their capitals to sit in the same proportion as their new profit-sharing ratio. It feels right: if you take three-fifths of the profit, you should carry three-fifths of the capital. This is the Refill step of the Six R Farewell Ledger, and it always comes after everything else has been posted.
First, let us finish the capital accounts of our running example so that we have real balances to work with.
| Particulars | Anand ₹ | Bhavna ₹ | Chirag ₹ |
|---|---|---|---|
| Opening balance (Cr.) | 1,20,000 | 90,000 | 60,000 |
| Add: General Reserve (3:2:1) | 18,000 | 12,000 | 6,000 |
| Add: Workmen Compensation surplus (3:2:1) | 6,000 | 4,000 | 2,000 |
| Less: Revaluation loss (3:2:1) | (6,000) | (4,000) | (2,000) |
| Goodwill adjustment (gainers Dr., leaver Cr.) | (7,200) | (4,800) | 12,000 |
| Balance | 1,30,800 | 97,200 | 78,000 |
| Less: Paid by cheque | — | — | (18,000) |
| Transferred to Chirag’s Loan A/c | — | — | (60,000) |
| Closing balance | 1,30,800 | 97,200 | Nil |
Goodwill of the firm here was valued at ₹72,000, so Chirag’s share is 72,000 × 1/6 = ₹12,000, borne by Anand and Bhavna in their gaining ratio 3:2 — that is ₹7,200 and ₹4,800, which add back to ₹12,000.
1. Find the total capital of the new firm (either given, or the sum of the adjusted balances of the continuing partners).
2. Divide that total in the new profit-sharing ratio — this is what each partner should have.
3. Compare with what each partner does have. A shortfall is brought in as cash; a surplus is withdrawn (or transferred to that partner’s Current Account if the question says so).
Step 1 — total capital: 1,30,800 + 97,200 = ₹2,28,000
Step 2 — required capitals in 3:2:
Anand = 2,28,000 × 3/5 = ₹1,36,800
Bhavna = 2,28,000 × 2/5 = ₹91,200
Check: 1,36,800 + 91,200 = 2,28,000 ✓
Step 3 — compare:
Anand has 1,30,800, needs 1,36,800 → brings in ₹6,000
Bhavna has 97,200, needs 91,200 → withdraws ₹6,000
Check: the two movements cancel, so the total capital is unchanged ✓
Entries:
Bank A/c Dr. 6,000 — To Anand’s Capital A/c 6,000
Bhavna’s Capital A/c Dr. 6,000 — To Bank A/c 6,000
Net effect on Bank: nil.
Required: X = 1,80,000 × 3/5 = ₹1,08,000; Y = 1,80,000 × 2/5 = ₹72,000. Check: 1,08,000 + 72,000 = 1,80,000 ✓
X has 1,05,000 → brings in ₹3,000.
Y has 75,000 → withdraws ₹3,000.
When the question fixes the total, use the fixed total even if it differs from the sum of the adjusted balances — the difference simply flows through the Bank Account.
Why it works: profit sharing and capital contribution are two separate agreements, and after a retirement they fall out of step. Refilling puts them back in step. Nothing is gained or lost by anyone — money merely moves between a partner’s pocket and the firm’s bank account.
Settlement of the Retiring Partner’s Dues and Section 37
The final amount standing to the retiring partner’s credit has to be paid. A firm rarely has that much idle cash, so there are three usual routes: pay the whole sum immediately; pay part now and transfer the rest to a Retiring Partner’s Loan Account; or pay the whole amount later in instalments with interest.
(a) interest at 6% per annum on the unpaid amount, or
(b) the share of profit earned with the help of that unpaid amount.
In the absence of any agreement, the 6% option is the one applied in Class 12 questions.
Principal per instalment = 60,000 ÷ 3 = ₹20,000.
Year 1: interest = 60,000 × 6% = ₹3,600 → payment = 20,000 + 3,600 = ₹23,600; balance ₹40,000
Year 2: interest = 40,000 × 6% = ₹2,400 → payment = 20,000 + 2,400 = ₹22,400; balance ₹20,000
Year 3: interest = 20,000 × 6% = ₹1,200 → payment = 20,000 + 1,200 = ₹21,200; balance Nil
Total interest paid = 3,600 + 2,400 + 1,200 = ₹7,200. Total principal repaid = ₹60,000 ✓
Each year’s entries:
Interest on Chirag’s Loan A/c Dr. — To Chirag’s Loan A/c (interest becomes payable)
Chirag’s Loan A/c Dr. — To Bank A/c (payment made)
Balance to loan = 78,000 − 18,000 = ₹60,000
Entries:
Chirag’s Capital A/c Dr. 18,000 — To Bank A/c 18,000
Chirag’s Capital A/c Dr. 60,000 — To Chirag’s Loan A/c 60,000
Chirag’s Capital Account now closes at nil, and ₹60,000 appears on the liabilities side of the new Balance Sheet as Chirag’s Loan. Bank falls from ₹30,000 to ₹12,000.
Death of a Partner — Share of Profit up to the Date of Death
A partner rarely dies conveniently on 31st March. Suppose she dies on 31st August. The firm has been trading and earning since 1st April, and part of that profit is hers — she was a partner while it was earned. Since accounts are not closed on a random August day, we estimate her share by one of two accepted methods.
Turnover or sales basis: Estimate the profit as Sales up to the date of death × Last year’s rate of profit on sales, then take his share of that.
The profit so calculated is debited to the Profit and Loss Suspense Account and credited to the deceased partner’s Capital Account (unless the question directs the continuing partners to bear it in their gaining ratio).
Step 1 — period: 1st April to 31st August = 5 months.
Step 2 — firm’s estimated profit for that period:
1,44,000 × 5/12 = ₹60,000
Step 3 — E’s share (3/10):
60,000 × 3/10 = ₹18,000
Entry:
Profit and Loss Suspense A/c Dr. 18,000
To E’s Capital A/c 18,000
The Profit and Loss Suspense Account appears on the asset side of the new Balance Sheet until the year’s accounts are actually closed.
Step 1 — last year’s rate of profit on sales:
1,44,000 ÷ 12,00,000 × 100 = 12%
Step 2 — estimated profit up to the date of death:
4,50,000 × 12% = ₹54,000
Step 3 — E’s share (3/10):
54,000 × 3/10 = ₹16,200
Entry: Profit and Loss Suspense A/c Dr. 16,200 — To E’s Capital A/c 16,200.
Notice the two methods give different answers — ₹18,000 and ₹16,200 — for the very same death. Neither is wrong. Use the method the question names, and if it names none, use the time basis and say so in one line.
Why it works: both methods answer the same question — how much of this year’s earning had already happened by the date of death? The time basis assumes profit accrues evenly across the calendar. The sales basis assumes profit accrues in step with sales, which suits a seasonal business far better. That is the whole difference.
The Deceased Partner’s Executor’s Account
A deceased partner cannot be paid. The money goes to her legal representative — the executor (निष्पादक). So we close her Capital Account by transferring the final balance to an Executor’s Account, and that account is then settled just like a retiring partner’s loan: in cash, or in instalments with interest at 6% per annum.
Workings (E’s share is 3/10 throughout):
Share of General Reserve = 40,000 × 3/10 = ₹12,000
Share of goodwill = 1,50,000 × 3/10 = ₹45,000 (borne by D and F in their gaining ratio 5:2)
Share of revaluation profit = 20,000 × 3/10 = ₹6,000
Share of profit to date of death = ₹18,000
Total credits = 90,000 + 12,000 + 45,000 + 6,000 + 18,000 = ₹1,71,000
Total debits = 8,000 + 200 = ₹8,200
Amount due to the executor = 1,71,000 − 8,200 = ₹1,62,800 ✓
| Particulars (Dr.) | ₹ | Particulars (Cr.) | ₹ |
|---|---|---|---|
| To Drawings A/c | 8,000 | By E’s Capital A/c (balance) | 90,000 |
| To Interest on Drawings A/c | 200 | By General Reserve A/c (3/10) | 12,000 |
| To Balance c/d (amount payable) | 1,62,800 | By D’s and F’s Capital A/c (goodwill) | 45,000 |
| By Revaluation A/c (3/10 of profit) | 6,000 | ||
| By Profit and Loss Suspense A/c | 18,000 | ||
| Total | 1,71,000 | Total | 1,71,000 |
Why it works: the Executor’s Account is simply the deceased partner’s Capital Account under a new name, kept open because the debt survives her. Every item that would have been credited to her while alive is credited to her executor; every item that would have been debited is debited. Nothing changes except who eventually receives the cheque.
Balance Sheet of the Reconstituted Firm
This is the finish line. Every adjustment you have made must now show up in one document that tallies. If it tallies, you have almost certainly done everything correctly. If it does not, the gap itself usually tells you what you forgot — a gap equal to the revaluation loss, or exactly the reserve figure, points straight at the missing step.
Asset workings:
Bank = 30,000 − 18,000 = ₹12,000
Debtors 60,000 less new Provision 6,000 = ₹54,000
Stock = ₹66,000 (reduced)
Furniture = ₹45,000 (unchanged)
Machinery = 1,20,000 − 12,000 = ₹1,08,000
Building = 60,000 + 12,000 = ₹72,000
Liability workings:
Creditors = 48,000 + 3,000 unrecorded = ₹51,000
Workmen Compensation Claim = ₹6,000
Chirag’s Loan = ₹60,000
| Liabilities | ₹ | Assets | ₹ |
|---|---|---|---|
| Creditors (48,000 + 3,000) | 51,000 | Cash at Bank | 12,000 |
| Bills Payable | 12,000 | Debtors 60,000 less Provision 6,000 | 54,000 |
| Workmen Compensation Claim | 6,000 | Stock | 66,000 |
| Chirag’s Loan A/c | 60,000 | Furniture | 45,000 |
| Capitals: Anand | 1,30,800 | Machinery | 1,08,000 |
| Bhavna | 97,200 | Building | 72,000 |
| Total | 3,57,000 | Total | 3,57,000 |
Why it works: notice how the total fell from ₹3,84,000 to ₹3,57,000 — a drop of ₹27,000. Add up the asset-side movements and you get exactly that: bank down ₹18,000, the extra provision down ₹3,000, stock down ₹6,000, machinery down ₹12,000, building up ₹12,000 — a net fall of ₹27,000. Every rupee of movement can be explained. When your Balance Sheet tallies and you can explain the change in the total, you are done.
Practice Worksheet with Solved Answers
Attempt each one on paper first. These are written in the style of retirement or death of a partner class 12 important questions with solved examples, and every answer below has been checked twice. If you want a full timed paper covering this chapter alongside the other partnership chapters, work through the PA 1 sample paper for Class 12 Accountancy after finishing here.
Q1. A, B and C share profits 4:3:1. B retires and A and C decide to share future profits equally between themselves in respect of B’s share. Find the new ratio and the gaining ratio.
A = 4/8 + 3/16 = 8/16 + 3/16 = 11/16
C = 1/8 + 3/16 = 2/16 + 3/16 = 5/16
Check: 11/16 + 5/16 = 1 ✓
New ratio = 11 : 5. Gaining ratio = 1 : 1.
Q2. P, Q and R share profits 3:2:1. R retires and P and Q continue sharing 3:2. Calculate the gaining ratio.
Gain of Q = 2/5 − 2/6 = 12/30 − 10/30 = 2/30
Check: 3/30 + 2/30 = 5/30 = 1/6 = R’s share ✓
Gaining ratio = 3 : 2.
Q3. L, M and N share profits 5:3:2. N retires. Goodwill of the firm is valued at ₹60,000 and nothing is said about the future ratio. Pass the journal entry.
Nothing said, so L and M gain in their old mutual ratio 5:3.
L = 12,000 × 5/8 = ₹7,500; M = 12,000 × 3/8 = ₹4,500. Check: 7,500 + 4,500 = 12,000 ✓
Entry: L’s Capital A/c Dr. 7,500; M’s Capital A/c Dr. 4,500; To N’s Capital A/c 12,000.
Q4. Partners share profits 2:2:1. On a retirement it is agreed that Building be appreciated by ₹18,000, Stock be reduced by ₹7,000, a provision for doubtful debts of ₹2,500 be created, and outstanding repairs of ₹3,500 be recorded. Find the revaluation result and each partner’s share.
Debits: Stock 7,000 + Provision 2,500 + Outstanding repairs 3,500 = ₹13,000.
Profit on revaluation = 18,000 − 13,000 = ₹5,000.
Shared 2:2:1 → ₹2,000, ₹2,000 and ₹1,000. Check: total ₹5,000 ✓
Q5. R, S and T share profits 3:2:1. On T’s retirement the books show General Reserve ₹36,000 and Advertisement Suspense Account ₹18,000. Show the net credit to each partner.
Advertisement Suspense 3:2:1 → R ₹9,000, S ₹6,000, T ₹3,000 (debits).
Net credit: R ₹9,000, S ₹6,000, T ₹3,000.
Check: 9,000 + 6,000 + 3,000 = ₹18,000 = 36,000 − 18,000 ✓
Q6. A retiring partner with a 1/5 share has a capital balance of ₹1,44,000 after all adjustments. The partners agree to pay him ₹1,80,000 in full settlement. Find the hidden goodwill of the firm.
Goodwill of the firm = 36,000 ÷ 1/5 = 36,000 × 5 = ₹1,80,000.
Check: 1,80,000 × 1/5 = 36,000 ✓
Q7. After a retirement, X and Y have adjusted capitals of ₹1,05,000 and ₹75,000. They agree that the total capital of the new firm shall equal the sum of these balances, held in their new ratio of 3:2. Find the cash to be brought in or withdrawn.
Required: X = 1,80,000 × 3/5 = ₹1,08,000; Y = 1,80,000 × 2/5 = ₹72,000. Check: total ₹1,80,000 ✓
X brings in ₹3,000; Y withdraws ₹3,000.
Q8. A partner holding a 1/4 share dies on 30th June. The firm closes its books on 31st March each year, and the profit for the previous year was ₹2,40,000. Calculate his share of profit up to the date of death on the time basis.
Firm’s estimated profit = 2,40,000 × 3/12 = ₹60,000.
His share = 60,000 × 1/4 = ₹15,000.
Entry: Profit and Loss Suspense A/c Dr. 15,000 — To Deceased Partner’s Capital A/c 15,000.
Q9. Last year the firm had sales of ₹20,00,000 and a profit of ₹3,00,000. A partner with a 2/5 share dies after sales of ₹6,00,000 have been made in the current year. Calculate his share of profit on the sales basis.
Estimated profit to the date of death = 6,00,000 × 15% = ₹90,000.
His share = 90,000 × 2/5 = ₹36,000.
Q10. A retiring partner’s loan of ₹90,000 is to be repaid in three equal annual instalments of principal with interest at 6% per annum on the outstanding balance. Prepare the schedule and find the total interest.
Year 1: interest 90,000 × 6% = ₹5,400 → instalment ₹35,400; balance ₹60,000
Year 2: interest 60,000 × 6% = ₹3,600 → instalment ₹33,600; balance ₹30,000
Year 3: interest 30,000 × 6% = ₹1,800 → instalment ₹31,800; balance Nil
Total interest = 5,400 + 3,600 + 1,800 = ₹10,800. Total principal ₹90,000 ✓
Q11. Under which section of the Indian Partnership Act, 1932 is an outgoing partner entitled to interest on unpaid dues, at what rate, and what is the alternative available to him?
One Last Thing Before You Close This Page
You do not need to be brilliant at this chapter. You need to be orderly. Tomorrow, do not attempt a whole question — just write out the Six R Farewell Ledger from memory: Ratio, Reward, Revalue, Release, Refill, Repay. The day after, do one small sum for each R. By the end of the week you will be solving full board-level questions without once wondering what comes next. Small, honest, daily improvement — kaizen — beats a panicked all-nighter every single time. Start with one R today.