Take a breath. This chapter has a reputation for being long, but it is not hard — it is just orderly. Everything you are about to learn is one single idea repeated: when a partner leaves the firm, we stop the clock, settle every rupee that belongs to that partner, and then let the remaining partners carry on. That is it. Once you see the pattern, the ten-mark questions start to feel like a checklist rather than a puzzle.
Think of a partnership like three friends running a tea stall together. They share the stove, the stock of milk and sugar, the regulars who come every morning, and the goodwill of the corner spot. One day one of them says, “I am moving cities.” The other two do not shut the stall — they keep going. But before the friend walks away, everyone has to agree on some honest numbers: what is the stall actually worth today, how much of that belongs to the leaving friend, what share of the profits will the remaining two now take, and how will the leaving friend be paid. Every single topic in this chapter is one of those questions written in the language of accounting.
Death of a partner is handled almost identically, with one extra kindness built into the law: the family does not lose the partner’s share. The amount due is calculated up to the exact date of death and handed over to the partner’s executor — the person legally representing the estate. So retirement and death are taught together because they are, accounting-wise, the same journey with a slightly different ending.
We will go slowly. Every idea gets a plain-English explanation first, then a worked example with the actual journal entries and ledgers, then a warning about the mistake most students make there. If a section feels shaky, do not push forward. Sit with it, redo the example on paper with the book closed, and only then move on.
What You’ll Learn
- What Actually Happens When a Partner Leaves
- New Profit-Sharing Ratio and Gaining Ratio
- Treatment of Goodwill on Retirement or Death (AS 26)
- Hidden Goodwill — When the Valuation Is Not Given
- Revaluation of Assets and Reassessment of Liabilities
- Accumulated Profits, Losses and Reserves
- Joint Life Policy and JLP Reserve
- Adjustment of Partners’ Capitals After Retirement
- Settlement of Dues and the Retiring Partner’s Loan Account
- Death of a Partner — Share of Profit up to the Date of Death
- Deceased Partner’s Capital Account and Executor’s Account
- A Full Board-Level Question, Start to Finish
- Practice Worksheet with Answers
Your Game Plan
Please do not try to swallow this chapter in one sitting. Here is the order that works, tested on a lot of nervous students:
- Day 1 — ratios only. Master the new ratio and gaining ratio. Nothing else. If the gaining ratio is wrong, every rupee after it is wrong, so this is the foundation.
- Day 2 — goodwill. Learn the one journal entry, then practise hidden goodwill separately. These are almost guaranteed marks.
- Day 3 — Revaluation Account and reserves. Both are mechanical. Drill the format until you can draw it from memory.
- Day 4 — capital adjustment and the loan account. These carry the trickiest arithmetic, so give them a fresh brain.
- Day 5 — death of a partner. Share of profit up to date of death, then the Executor’s Account.
- Day 6 — full questions. Attempt the big combined problem at the end of this page under timed conditions, then the worksheet.
- Day 7 — repair work. Redo only the questions you got wrong. That is where the real marks hide.
What Actually Happens When a Partner Leaves
Let us get the vocabulary sorted, because half the confusion in this chapter is vocabulary rather than arithmetic.
Reconstitution simply means the firm carries on, but with a changed line-up or a changed agreement. Admission of a partner, change in profit-sharing ratio, retirement and death are all reconstitutions. The firm does not die — the partnership (the old agreement) ends and a new one begins with the surviving partners. That distinction matters: this is not dissolution, so we are not selling everything off. We are just settling one person’s account.
A partner may retire (a) with the consent of all other partners, (b) as per an express agreement in the partnership deed, or (c) in a partnership at will, by giving written notice to all the other partners. On death, the partnership between the deceased and the others ends automatically on the date of death — no notice is needed.
Now, why do we need any accounting at all? Because the books were written for the old firm. The stock might be recorded at last year’s value. The building bought years ago sits at cost while the market has moved. There is a reserve lying on the liabilities side that nobody has ever divided. And the firm’s reputation — its goodwill — has never been entered in the books at all, because AS 26 does not allow us to record goodwill we generated ourselves. If we let the retiring partner walk away on those stale numbers, either the partner or the remaining partners get cheated.
Here is the checklist. Memorise the order — examiners award marks in roughly this sequence, and working in order stops you from double-counting.
| Step | What you do | Why it exists |
|---|---|---|
| 1 | New ratio and gaining ratio | The leaver’s share has to go somewhere; we need to know who took how much. |
| 2 | Goodwill adjustment | The gainers are buying a share of a reputation the leaver helped build. They pay for it. |
| 3 | Revaluation of assets and liabilities | Stale book values are corrected; the resulting profit or loss belongs to the OLD partners. |
| 4 | Accumulated profits, losses and reserves | Undistributed past earnings and losses are shared out in the OLD ratio. |
| 5 | Share of profit up to date of death (death only) | A death rarely falls on 31 March; the estate is owed profit for the part-year. |
| 6 | Close the capital account, find the amount due | This is the number the leaver (or the executor) is actually owed. |
| 7 | Settlement — cash now, loan account, or instalments | Few firms have that much idle cash, so most of it becomes a loan carrying interest. |
| 8 | Adjust the remaining partners’ capitals; draw the new Balance Sheet | The new firm usually wants capitals in the new profit-sharing ratio. |
Read that table once more before you continue. Almost every long question in this chapter is that table, in that order, with numbers attached. Don’t move on until this feels comfortable.
New Profit-Sharing Ratio and Gaining Ratio
Picture a chapati divided into six equal pieces among three friends: A takes three, B takes two, C takes one. That is a 3:2:1 ratio. Now B leaves and hands over his two pieces. Those two pieces must go to A and C — the chapati is not going to shrink. The new ratio tells us how the whole chapati is now split between A and C. The gaining ratio tells us how B’s two pieces specifically were divided.
Gain = New Share − Old Share
New Share = Old Share + Gain
And a self-check that never fails: the total of all the gains must exactly equal the retiring partner’s old share.
Compare this with admission, where you learned sacrificing ratio. It is the mirror image. On admission the old partners give up share, so we compute Old − New. On retirement the continuing partners receive share, so we compute New − Old. Same subtraction, flipped around. If you keep mixing them up, remember: the person leaving is the one giving something up, so everyone still there is gaining.
Questions come in three flavours. Let us do one of each.
When the question is silent, the assumption is that the continuing partners keep sharing between themselves exactly as before. A and C were 3 : 1 relative to each other, so the new ratio is 3 : 1.
Now prove it with the formula.
A’s old share = 3/6. A’s new share = 3/4. A’s gain = 3/4 − 3/6 = 9/12 − 6/12 = 3/12.
C’s old share = 1/6. C’s new share = 1/4. C’s gain = 1/4 − 1/6 = 3/12 − 2/12 = 1/12.
Gaining ratio = 3/12 : 1/12 = 3 : 1.
Check: total gain = 3/12 + 1/12 = 4/12 = 1/3 = 2/6, which is exactly B’s old share. Correct.
Notice something lovely — when nothing is said, gaining ratio = old ratio of the remaining partners = new ratio. All three are 3 : 1. This is the single most common situation in exams, so if a question gives you no ratio information at all, do not panic; you already have the answer.
Q’s share = 3/10. That is the parcel being handed over.
P acquires 2/3 of it = 2/3 × 3/10 = 6/30 = 1/5 = 2/10.
R acquires 1/3 of it = 1/3 × 3/10 = 3/30 = 1/10.
Now add each gain to the old share.
P’s new share = 5/10 + 2/10 = 7/10
R’s new share = 2/10 + 1/10 = 3/10
New ratio = 7 : 3. Gaining ratio = 2/10 : 1/10 = 2 : 1 (which is simply what the question told us).
Check: 7/10 + 3/10 = 10/10 = 1. The whole chapati is accounted for. Also 2/10 + 1/10 = 3/10 = Q’s share. Both tests pass.
Why it works: “acquire in the ratio 2 : 1” is an instruction about how to slice Q’s parcel — not about the final shares. Students lose marks by writing the new ratio as 2 : 1. Always slice the parcel first, then add.
Put everything over a common denominator so the subtraction is painless. Old shares are ninths; the new ratio 5 : 4 also totals 9, so ninths work for both.
X: gain = 5/9 − 4/9 = 1/9
Z: gain = 4/9 − 2/9 = 2/9
Gaining ratio = 1 : 2.
Check: 1/9 + 2/9 = 3/9, and Y’s old share was 3/9. Perfect.
Look how counter-intuitive this is: X has the bigger new share (5/9) but the smaller gain. Z quietly picked up twice as much of Y’s share. Since goodwill is paid in the gaining ratio, Z will bear twice as much of the goodwill cost as X. This is precisely why you must never assume the gaining ratio equals the new ratio.
Treatment of Goodwill on Retirement or Death (AS 26)
Go back to the tea stall. Why do regulars walk past two other stalls to come to this one? Maybe the chai is genuinely better, maybe the spot is perfect, maybe the owners remember everyone’s name. That invisible pull is goodwill — the reason the firm earns more than an ordinary firm with the same assets would earn. The retiring partner helped build it over the years, so on the way out that partner deserves to be paid for their share of it.
But here is the rule that trips everyone. Accounting Standard 26 (Intangible Assets) does not allow a firm to record self-generated goodwill in its books. Purchased goodwill can be recorded; goodwill you built yourself cannot. So we are not allowed to write “Goodwill A/c Dr” and park it on the assets side.
How do we pay the retiring partner then? We move the money sideways, capital account to capital account. The partners who gained share pay the partner who is leaving, directly. No asset is created, no cash necessarily moves, and the Balance Sheet total is untouched.
Gaining Partners’ Capital A/cs Dr. (in gaining ratio)
To Retiring / Deceased Partner’s Capital A/c (with his share of goodwill)
(To any continuing partner who sacrificed, if applicable)
Retiring partner’s share of goodwill = Firm’s goodwill × Retiring partner’s profit share.
Why it works: the gainers are effectively buying a slice of a money-making reputation. Debiting their capital reduces what the firm owes them — that is their purchase price. Crediting the leaver increases what the firm owes the leaver — that is the sale price. Value simply changes hands between owners; the firm itself is neither richer nor poorer.
Step 1 — gaining ratio.
A: 5/9 − 4/9 = 1/9
B: 4/9 − 3/9 = 1/9
Gaining ratio = 1/9 : 1/9 = 1 : 1. (Check: 1/9 + 1/9 = 2/9 = C’s old share. ✔)
Step 2 — C’s share of goodwill.
= ₹1,80,000 × 2/9 = ₹40,000
Step 3 — split ₹40,000 in the gaining ratio 1 : 1.
A pays ₹20,000, B pays ₹20,000.
Journal Entry
A’s Capital A/c Dr. ₹20,000
B’s Capital A/c Dr. ₹20,000
To C’s Capital A/c ₹40,000
(Being C’s share of goodwill adjusted through the capital accounts of the gaining partners in their gaining ratio 1 : 1)
Notice the ₹1,80,000 never appears in any account. Only C’s slice of it moves.
Step 1 — work out gain or sacrifice for each continuing partner.
A: new 1/3, old 3/6 = 1/2. Gain = 1/3 − 1/2 = 2/6 − 3/6 = −1/6. Negative, so A has sacrificed 1/6.
B: new 2/3, old 2/6 = 1/3. Gain = 2/3 − 1/3 = 1/3 = 2/6. B has gained 2/6.
Sanity check: B gained 2/6. Of that, 1/6 came from C leaving and 1/6 came from A giving up share. 2/6 − 1/6 = 1/6 = C’s old share. ✔
Step 2 — value each movement.
B pays for 2/6 of goodwill = ₹1,20,000 × 2/6 = ₹40,000
A receives for 1/6 = ₹1,20,000 × 1/6 = ₹20,000
C receives for 1/6 = ₹1,20,000 × 1/6 = ₹20,000
Journal Entry
B’s Capital A/c Dr. ₹40,000
To A’s Capital A/c ₹20,000
To C’s Capital A/c ₹20,000
(Being goodwill adjusted on C’s retirement — B, the only gaining partner, compensating both the retiring partner C and the sacrificing partner A)
Debits ₹40,000 = Credits ₹40,000. The entry balances, which is your final proof that the shares were computed correctly.
Hidden Goodwill — When the Valuation Is Not Given
Sometimes a question refuses to tell you what the goodwill is worth. Instead it says something like: “the partners agreed to pay C ₹1,30,000 in full settlement of his claim.” That is a clue, not an oversight.
Think about it in everyday terms. Suppose your share of a family business, on paper, is worth ₹1,00,000 — and the others insist on handing you ₹1,30,000 to walk away cleanly. Why the extra ₹30,000? Because your paper value ignores the reputation of the business. That ₹30,000 is your share of goodwill. We call it hidden goodwill because the question hid it inside the settlement figure.
Retiring partner’s share of goodwill = Amount agreed to be paid − Balance in his capital account after all other adjustments
Firm’s total goodwill = That share ÷ Retiring partner’s profit share
(equivalently, share of goodwill × reciprocal of his share)
The words “after all other adjustments” carry all the weight. You must first finish revaluation, reserves and accumulated losses. Only when the capital account is otherwise complete can the leftover gap be safely called goodwill.
Step 1 — find the hidden amount.
Agreed payment ₹1,30,000 − C’s adjusted capital ₹1,00,000 = ₹30,000
This ₹30,000 is C’s share of goodwill.
Step 2 — scale up to the firm’s goodwill.
C’s share of profit = 1/6.
Firm’s goodwill = ₹30,000 ÷ (1/6) = ₹30,000 × 6 = ₹1,80,000
Step 3 — gaining ratio.
A and B continue in the old ratio, so the gaining ratio is simply 3 : 2.
Step 4 — split ₹30,000 in 3 : 2.
A: ₹30,000 × 3/5 = ₹18,000
B: ₹30,000 × 2/5 = ₹12,000
Journal Entry
A’s Capital A/c Dr. ₹18,000
B’s Capital A/c Dr. ₹12,000
To C’s Capital A/c ₹30,000
(Being C’s share of hidden goodwill adjusted in the gaining ratio 3 : 2)
Proof: C’s capital now reads ₹1,00,000 + ₹30,000 = ₹1,30,000 — exactly the agreed settlement. Whenever you finish a hidden-goodwill sum, run this proof. If the capital account does not land on the agreed figure, something earlier went wrong.
Revaluation of Assets and Reassessment of Liabilities
Books of account are honest but slow. A shop bought in 2015 still sits at its 2015 cost. Stock that has gone out of fashion is still carried at full price. A repair bill that arrived but was never entered is simply missing. None of that matters day to day — but the moment a partner leaves, those stale numbers decide how much money someone actually receives. So we pause and mark everything to its true present value.
The account we use for this is the Revaluation Account (also called the Profit and Loss Adjustment Account). It is a nominal account: losses on the debit side, gains on the credit side, and the balancing figure is the revaluation profit or loss.
Why? Because the change in value built up during the years the leaver was still a partner. It is their gain or their loss too.
Here is the rule for which side an item goes on. Do not memorise a list — reason it out with one question: does this adjustment make the firm richer or poorer?
| Debit side of Revaluation A/c (losses) | Credit side of Revaluation A/c (gains) |
|---|---|
| Decrease in the value of an asset | Increase in the value of an asset |
| Increase in a liability | Decrease in a liability |
| A liability discovered but never recorded (e.g. outstanding repairs) | An asset discovered but never recorded (e.g. unrecorded investment) |
| Creating or increasing a provision for doubtful debts | Reducing an excess provision for doubtful debts |
| A creditor now claiming more than recorded | A creditor no longer payable (written back) |
(i) Land and Building, book value ₹4,00,000, is to be appreciated by 20%.
(ii) Plant and Machinery, book value ₹2,50,000, is to be reduced to ₹2,20,000.
(iii) Stock of ₹1,20,000 is to be written down by 10%.
(iv) A provision for doubtful debts is to be created at 5% on debtors of ₹80,000 (no provision exists at present).
(v) Creditors of ₹90,000 include ₹6,000 which is no longer payable.
(vi) An outstanding repairs bill of ₹9,000 has not been recorded.
Workings first — always.
(i) Appreciation = ₹4,00,000 × 20% = ₹80,000 → gain, credit
(ii) Fall = ₹2,50,000 − ₹2,20,000 = ₹30,000 → loss, debit
(iii) Fall = ₹1,20,000 × 10% = ₹12,000 → loss, debit
(iv) Provision = ₹80,000 × 5% = ₹4,000 → loss, debit
(v) Liability reduced by ₹6,000 → gain, credit
(vi) New liability ₹9,000 → loss, debit
Revaluation Account
Debit side:
To Plant and Machinery A/c … ₹30,000
To Stock A/c … ₹12,000
To Provision for Doubtful Debts A/c … ₹4,000
To Outstanding Repairs A/c … ₹9,000
To Profit transferred to Capital A/cs:
A ₹12,400 · B ₹12,400 · C ₹6,200 = ₹31,000
Total ₹86,000
Credit side:
By Land and Building A/c … ₹80,000
By Creditors A/c … ₹6,000
Total ₹86,000
Working for the split. Profit = ₹86,000 − ₹55,000 = ₹31,000. Old ratio 2 : 2 : 1, total 5 parts.
A = ₹31,000 × 2/5 = ₹12,400
B = ₹31,000 × 2/5 = ₹12,400
C = ₹31,000 × 1/5 = ₹6,200
Check: 12,400 + 12,400 + 6,200 = ₹31,000 ✔
Closing journal entry for the profit
Revaluation A/c Dr. ₹31,000
To A’s Capital A/c ₹12,400
To B’s Capital A/c ₹12,400
To C’s Capital A/c ₹6,200
(Being profit on revaluation transferred to all partners in the old ratio 2 : 2 : 1)
B is retiring, yet B still receives ₹12,400 — and that is the whole point of the account.
Accumulated Profits, Losses and Reserves
Firms rarely hand out every rupee of profit. Some is kept back for a rainy day and shown on the liabilities side as General Reserve, Reserve Fund, or a credit balance of Profit and Loss A/c. That money is not the firm’s — it belongs to the partners; it just has not been given to them yet.
Losses work the same way in reverse. A debit balance of Profit and Loss A/c, or an Advertisement Suspense A/c (advertising spending not yet written off), sits on the assets side. It is not a real asset — it is a loss waiting to be shared.
When a partner leaves, all of this is distributed in the old ratio so the leaver takes their fair share out with them.
For accumulated profits and reserves:
General Reserve A/c Dr. / Profit and Loss A/c Dr.
To All Partners’ Capital A/cs (old ratio)
For accumulated losses:
All Partners’ Capital A/cs Dr. (old ratio)
To Profit and Loss A/c / Advertisement Suspense A/c
Two reserves need special care because part of them may not belong to the partners at all.
| Item | How to handle it |
|---|---|
| Workmen Compensation Reserve, no claim mentioned | Distribute the whole amount among partners in the old ratio. |
| Workmen Compensation Reserve, claim less than the reserve | Keep the claim as a liability (Workmen Compensation Claim); distribute only the balance. |
| Workmen Compensation Reserve, claim more than the reserve | Nothing is distributed. The excess of the claim over the reserve is a loss debited to the Revaluation Account. |
| Investment Fluctuation Reserve, market value equals cost | Distribute the whole reserve in the old ratio. |
| Investment Fluctuation Reserve, market value below cost | Use the reserve to absorb the fall first; distribute only what is left. If the fall exceeds the reserve, the excess is a revaluation loss. |
Step 1 — General Reserve ₹80,000, old ratio 5 : 3 : 2
A = ₹40,000 · B = ₹24,000 · C = ₹16,000
General Reserve A/c Dr. ₹80,000 — To A ₹40,000, To B ₹24,000, To C ₹16,000
Step 2 — Workmen Compensation Reserve ₹50,000, claim ₹18,000
Distributable = ₹50,000 − ₹18,000 = ₹32,000
A = ₹16,000 · B = ₹9,600 · C = ₹6,400
Workmen Compensation Reserve A/c Dr. ₹50,000 — To Workmen Compensation Claim A/c ₹18,000, To A ₹16,000, To B ₹9,600, To C ₹6,400
(The ₹18,000 stays on the liabilities side of the new Balance Sheet.)
Step 3 — Profit and Loss A/c (Dr.) ₹30,000 — an accumulated loss
A = ₹15,000 · B = ₹9,000 · C = ₹6,000
A’s Capital Dr. ₹15,000, B’s Capital Dr. ₹9,000, C’s Capital Dr. ₹6,000 — To Profit and Loss A/c ₹30,000
Step 4 — Advertisement Suspense A/c ₹20,000 — also a loss
A = ₹10,000 · B = ₹6,000 · C = ₹4,000
A’s Capital Dr. ₹10,000, B’s Capital Dr. ₹6,000, C’s Capital Dr. ₹4,000 — To Advertisement Suspense A/c ₹20,000
Net effect on each capital account
A: +40,000 +16,000 −15,000 −10,000 = +₹31,000
B: +24,000 +9,600 −9,000 −6,000 = +₹18,600
C: +16,000 +6,400 −6,000 −4,000 = +₹12,400
Check: total credited = ₹31,000 + ₹18,600 + ₹12,400 = ₹62,000.
Independently: ₹80,000 + ₹32,000 − ₹30,000 − ₹20,000 = ₹62,000 ✔ The two routes agree, so the arithmetic is sound.
Joint Life Policy and JLP Reserve
Here is the problem a Joint Life Policy solves. Suppose three partners run a firm whose capital is tied up in machinery and stock. One partner dies. The family is suddenly owed several lakhs — and the firm has ₹40,000 in the bank. Either the firm sells its machinery (crippling itself) or the family waits years.
A Joint Life Policy is an insurance policy taken by the firm on the lives of all the partners jointly. The firm pays the premium; the firm is the beneficiary. When any partner dies, the insurer pays the full policy amount to the firm, which then has ready cash to settle the estate. It works exactly like a family keeping a recurring deposit specifically for a known future expense.
Two ideas you need: the policy amount (the sum assured, paid only on death or maturity) and the surrender value (the smaller amount the insurer would pay if the policy were cashed in early). On a retirement, nobody has died, so only the surrender value is relevant. On a death, the full policy amount is received.
Part (a) — C retires on 31 March 2026.
No one has died, so the policy has not matured. But it does have a real cash value of ₹90,000 that belongs to all three partners, and C must be given a share before leaving.
Joint Life Policy A/c Dr. ₹90,000
To A’s Capital A/c ₹45,000
To B’s Capital A/c ₹30,000
To C’s Capital A/c ₹15,000
(Being surrender value of the joint life policy credited to all partners in the old ratio 3 : 2 : 1)
Working: ₹90,000 ÷ 6 = ₹15,000 per part. A = 3 parts = ₹45,000; B = 2 parts = ₹30,000; C = 1 part = ₹15,000. Total ₹90,000 ✔
Part (b) — instead, C dies on 31 March 2026 and the policy matures. The JLP already appears in the books at its surrender value of ₹90,000.
The firm now receives the full ₹6,00,000. The asset carried at ₹90,000 disappears, and the difference is a gain shared in the old ratio.
Gain = ₹6,00,000 − ₹90,000 = ₹5,10,000
A = ₹5,10,000 × 3/6 = ₹2,55,000
B = ₹5,10,000 × 2/6 = ₹1,70,000
C = ₹5,10,000 × 1/6 = ₹85,000
Check: 2,55,000 + 1,70,000 + 85,000 = ₹5,10,000 ✔
Bank A/c Dr. ₹6,00,000
To Joint Life Policy A/c ₹90,000
To A’s Capital A/c ₹2,55,000
To B’s Capital A/c ₹1,70,000
To C’s Capital A/c ₹85,000
(Being joint life policy realised on C’s death; the excess over book value shared in the old ratio)
Notice the deceased partner’s own capital is credited with ₹85,000 — which then flows to the executor. That is the whole purpose of the policy: the family is paid out of insurance money rather than out of the firm’s working capital.
Adjustment of Partners’ Capitals After Retirement
After a partner leaves, the remaining partners often notice something untidy: their capital balances are no longer in proportion to their new profit shares. If two partners now share profits 3 : 2 but one has put in ₹4,20,000 and the other ₹2,60,000, the person contributing relatively less money is taking a disproportionate slice of profit. So the partners agree to rebalance — one brings in cash, the other takes some out.
Questions phrase this in three ways. Read carefully, because the first line of the working depends entirely on which phrasing you are given.
| If the question says… | Then the total capital of the new firm is… |
|---|---|
| “the total capital of the new firm will be ₹X” | ₹X — the figure is handed to you. |
| “capitals are to be in proportion to the new ratio, based on their combined adjusted capitals” | The sum of the continuing partners’ adjusted capital balances. |
| “the partners will bring in cash to pay off the retiring partner and leave a bank balance of ₹Y” | Existing adjusted capitals plus whatever cash must be brought in — compute the cash requirement first. |
Then compare with the adjusted balance already standing:
Required > Existing → the partner brings in cash
Required < Existing → the partner withdraws cash
A’s required capital = ₹6,00,000 × 3/5 = ₹3,60,000
A already has ₹4,20,000 → surplus of ₹4,20,000 − ₹3,60,000 = ₹60,000 withdrawn
B’s required capital = ₹6,00,000 × 2/5 = ₹2,40,000
B already has ₹2,60,000 → surplus of ₹2,60,000 − ₹2,40,000 = ₹20,000 withdrawn
Journal entries
A’s Capital A/c Dr. ₹60,000 — To Bank A/c ₹60,000
B’s Capital A/c Dr. ₹20,000 — To Bank A/c ₹20,000
(Being excess capital withdrawn by the partners to bring capitals into the new profit-sharing ratio)
Check: ₹3,60,000 + ₹2,40,000 = ₹6,00,000, and 3,60,000 : 2,40,000 = 3 : 2 ✔
Step 1 — total capital of the new firm.
₹3,00,000 + ₹1,80,000 = ₹4,80,000
Step 2 — required capitals.
X = ₹4,80,000 × 3/5 = ₹2,88,000
Y = ₹4,80,000 × 2/5 = ₹1,92,000
Check: 2,88,000 + 1,92,000 = ₹4,80,000 ✔
Step 3 — compare.
X has ₹3,00,000, needs ₹2,88,000 → withdraws ₹12,000
Y has ₹1,80,000, needs ₹1,92,000 → brings in ₹12,000
Journal entries
X’s Capital A/c Dr. ₹12,000 — To Bank A/c ₹12,000
Bank A/c Dr. ₹12,000 — To Y’s Capital A/c ₹12,000
Because the total is unchanged, one partner’s withdrawal exactly equals the other’s contribution — ₹12,000 out, ₹12,000 in. Whenever you use the “combined adjusted capitals” method, this mirror-image result is a free accuracy check. If your two figures do not match, go back.
Step 1 — how much cash is actually needed?
Required for C … ₹2,40,000
Required as minimum closing balance … ₹30,000
Total needed … ₹2,70,000
Less: cash already in bank … ₹40,000
Cash to be brought in by A and B = ₹2,30,000
Step 2 — total capital of the new firm.
₹3,00,000 + ₹2,20,000 + ₹2,30,000 = ₹7,50,000
Step 3 — required capital of each (new ratio 1 : 1).
A = ₹7,50,000 × 1/2 = ₹3,75,000
B = ₹7,50,000 × 1/2 = ₹3,75,000
Step 4 — cash brought in by each.
A: ₹3,75,000 − ₹3,00,000 = ₹75,000
B: ₹3,75,000 − ₹2,20,000 = ₹1,55,000
Check: ₹75,000 + ₹1,55,000 = ₹2,30,000 ✔ — exactly the cash we said was needed.
Journal entries
Bank A/c Dr. ₹2,30,000
To A’s Capital A/c ₹75,000
To B’s Capital A/c ₹1,55,000
(Being cash brought in by the continuing partners to pay off C and to maintain a minimum bank balance)
C’s Capital A/c Dr. ₹2,40,000 — To Bank A/c ₹2,40,000
(Being amount due to C paid in full)
Bank verification: ₹40,000 opening + ₹2,30,000 brought in − ₹2,40,000 paid to C = ₹30,000 — the minimum balance the partners wanted. The circle closes.
Settlement of Dues and the Retiring Partner’s Loan Account
By now the retiring partner’s capital account has been credited with revaluation profit, reserves and goodwill, and debited with any accumulated losses and drawings. Whatever balance is left is the amount due. The question then becomes purely practical: where does that money come from?
There are three routes, and a question may combine them.
| Route | Journal entry |
|---|---|
| Paid fully in cash now | Retiring Partner’s Capital A/c Dr. — To Bank A/c |
| Left entirely in the firm as a loan | Retiring Partner’s Capital A/c Dr. — To Retiring Partner’s Loan A/c |
| Part cash now, balance as a loan | Retiring Partner’s Capital A/c Dr. — To Bank A/c (part) — To His Loan A/c (balance) |
Once the amount sits in a loan account it stops being capital. The retiring partner is now a creditor of the firm, shown on the liabilities side, and entitled to interest.
If the partners agreed a rate (say 10% p.a.), use that rate.
If there is no agreement, Section 37 of the Indian Partnership Act, 1932 applies. The outgoing partner (or the estate) may choose either interest at 6% per annum on the unpaid amount, or the share of profits earned by the firm attributable to the use of that money — whichever the outgoing partner prefers.
Why 6% and why a choice? The law is protecting someone whose money is still funding a business they no longer control. If the firm did badly, at least 6% is guaranteed; if the firm did wonderfully on the back of that money, the outgoing partner can claim a proportionate share of the profit instead. Note this is a different provision from the 6% payable on a partner’s loan to a running firm in the absence of a deed — same rate, different section, so read the question carefully.
Interest workings (always on the balance at the start of the year)
Year 1: ₹3,00,000 × 10% = ₹30,000 → total paid ₹1,30,000 → balance ₹2,00,000
Year 2: ₹2,00,000 × 10% = ₹20,000 → total paid ₹1,20,000 → balance ₹1,00,000
Year 3: ₹1,00,000 × 10% = ₹10,000 → total paid ₹1,10,000 → balance Nil
C’s Loan Account
Year ended 31 March 2027
Dr.: 31 Mar 2027 To Bank A/c ₹1,30,000 · To Balance c/d ₹2,00,000 — Total ₹3,30,000
Cr.: 1 Apr 2026 By C’s Capital A/c ₹3,00,000 · 31 Mar 2027 By Interest on Loan A/c ₹30,000 — Total ₹3,30,000
Year ended 31 March 2028
Dr.: 31 Mar 2028 To Bank A/c ₹1,20,000 · To Balance c/d ₹1,00,000 — Total ₹2,20,000
Cr.: 1 Apr 2027 By Balance b/d ₹2,00,000 · 31 Mar 2028 By Interest on Loan A/c ₹20,000 — Total ₹2,20,000
Year ended 31 March 2029
Dr.: 31 Mar 2029 To Bank A/c ₹1,10,000 — Total ₹1,10,000
Cr.: 1 Apr 2028 By Balance b/d ₹1,00,000 · 31 Mar 2029 By Interest on Loan A/c ₹10,000 — Total ₹1,10,000
The account closes exactly. Total interest paid over three years = ₹30,000 + ₹20,000 + ₹10,000 = ₹60,000, and total principal repaid = ₹3,00,000. Total cash outflow ₹3,60,000.
Rate: 6% per annum under Section 37 of the Indian Partnership Act, 1932.
Period: 1 August 2026 to 31 March 2027 = 8 months
Interest = ₹2,00,000 × 6/100 × 8/12
= ₹2,00,000 × 0.06 = ₹12,000 for a full year
= ₹12,000 × 8/12 = ₹8,000
Journal Entry
Interest on D’s Loan A/c Dr. ₹8,000
To D’s Loan A/c ₹8,000
(Being interest at 6% p.a. for 8 months allowed to the outgoing partner under Section 37)
D’s Loan Account will now show ₹2,08,000 on the liabilities side of the Balance Sheet as at 31 March 2027, unless some of it has been paid. Interest is an expense of the firm, so it is also debited to the Profit and Loss Account — not to the Profit and Loss Appropriation Account, because D is no longer a partner.
Death of a Partner — Share of Profit up to the Date of Death
Everything you have learned so far applies unchanged when a partner dies: gaining ratio, goodwill, revaluation, reserves. There is exactly one extra step, and it exists for a very human reason.
Retirement is planned — partners usually arrange it for the year-end so the books close cleanly. Death is not planned. A partner may die on 31 July, four months into the financial year. During those four months the partner was still a partner, still entitled to a share of whatever the firm earned. But the accounts will not be prepared until 31 March. So we estimate the profit for that part-year and credit the deceased partner’s share to their capital account.
Two entry routes exist, and both are acceptable.
Route 1 (most common):
Profit and Loss Suspense A/c Dr.
To Deceased Partner’s Capital A/c
The suspense account is shown on the assets side of the Balance Sheet and is written off against the actual profit at the year-end.
Route 2 (used when the gaining partners are to bear it):
Gaining Partners’ Capital A/cs Dr. (in gaining ratio)
To Deceased Partner’s Capital A/c
How do we estimate the profit? CBSE recognises two bases, and the question will tell you which to use.
| Basis | Formula | When used |
|---|---|---|
| Time basis | Last year’s (or average) profit × deceased partner’s share × months elapsed ÷ 12 | When profits are broadly steady through the year. |
| Sales basis | Sales of the current period × last year’s profit percentage on sales × deceased partner’s share | When sales figures up to the date of death are given — usually a more honest estimate. |
Step 1 — count the months. 1 April 2026 to 31 August 2026 = April, May, June, July, August = 5 months.
Step 2 — apply the formula.
C’s share of profit = ₹3,60,000 × 1/6 × 5/12
₹3,60,000 × 1/6 = ₹60,000 (C’s share for a whole year)
₹60,000 × 5/12 = ₹25,000
Journal Entry
Profit and Loss Suspense A/c Dr. ₹25,000
To C’s Capital A/c ₹25,000
(Being C’s share of profit from 1 April 2026 to the date of death, on the basis of last year’s profit and time)
₹25,000 will appear on the assets side of the Balance Sheet as Profit and Loss Suspense A/c until it is set off against the actual profit on 31 March 2027.
Careful with the months. A partner dying on 31 August has completed five months. A partner dying on 1 August has completed four. Count the months actually lived through, not the number on the calendar.
Step 1 — average profit.
Total = ₹2,40,000 + ₹3,00,000 + ₹2,70,000 + ₹3,30,000 = ₹11,40,000
Average = ₹11,40,000 ÷ 4 = ₹2,85,000
Step 2 — Q’s share. Five partners sharing equally, so Q’s share = 1/5.
Step 3 — period. 1 April 2026 to 30 June 2026 = 3 months.
Step 4 — compute.
= ₹2,85,000 × 1/5 × 3/12
= ₹57,000 × 3/12
= ₹14,250
Journal Entry
Profit and Loss Suspense A/c Dr. ₹14,250
To Q’s Capital A/c ₹14,250
(Being Q’s share of profit up to the date of death on the basis of average profit and time)
Step 1 — last year’s rate of profit on sales.
= (₹3,00,000 ÷ ₹20,00,000) × 100 = 15%
Step 2 — estimated profit for the current period.
= ₹6,50,000 × 15% = ₹97,500
Step 3 — P’s share. Four partners equally, so P’s share = 1/4.
= ₹97,500 × 1/4 = ₹24,375
Journal Entry
Profit and Loss Suspense A/c Dr. ₹24,375
To P’s Capital A/c ₹24,375
(Being P’s share of profit up to the date of death estimated on the basis of sales)
Why the sales basis is often fairer: the time basis silently assumes profit trickles in evenly month by month. For a firm selling woollens or school uniforms, that is nonsense — most of the year’s profit arrives in a couple of months. The sales basis follows the actual trading, so it produces a more truthful figure. Notice, too, that the time period never enters the sales-basis calculation. The sales figure already covers exactly the right period.
Deceased Partner’s Capital Account and Executor’s Account
A deceased partner cannot be paid. So the amount due is transferred to the account of the person who legally represents the estate — the executor. Practically, this is the family. The Executor’s Account is simply a liability of the firm, treated much like the retiring partner’s loan account: it can be paid in cash, kept in the firm, or repaid in instalments carrying interest.
Credit side (amounts owed to the deceased): opening capital balance · share of General Reserve and other accumulated profits · share of revaluation profit · share of goodwill received from gaining partners · share of profit up to the date of death · interest on capital up to the date of death · share of Joint Life Policy proceeds (if applicable) · salary or commission due
Debit side (amounts owed by the deceased): drawings up to the date of death · interest on drawings · share of revaluation loss · share of accumulated losses (P&L Dr. balance, Advertisement Suspense)
Closing entry: Deceased Partner’s Capital A/c Dr. — To Deceased Partner’s Executor’s A/c
Liabilities: Creditors ₹90,000 · General Reserve ₹60,000 · Capitals: Ishaan ₹3,00,000, Jaya ₹2,00,000, Kabir ₹1,00,000 — Total ₹7,50,000
Assets: Bank ₹80,000 · Debtors ₹1,20,000 · Stock ₹1,50,000 · Machinery ₹2,00,000 · Building ₹2,00,000 — Total ₹7,50,000
Kabir died on 31 July 2026. It was agreed that:
(i) Goodwill of the firm is valued at ₹1,50,000. Ishaan and Jaya continue in their old ratio.
(ii) Kabir’s share of profit to the date of death is based on last year’s profit of ₹2,40,000 and time.
(iii) Machinery is revalued at ₹2,30,000, stock is reduced to ₹1,38,000, and a provision for doubtful debts of 5% is to be created on debtors.
(iv) Interest on capital is allowed at 6% p.a. up to the date of death.
(v) Kabir had withdrawn ₹15,000 up to the date of death.
(vi) ₹47,400 is paid to his executor immediately; the balance is to be paid in two equal annual instalments on 31 March 2027 and 31 March 2028 with interest at 12% p.a.
Working 1 — Gaining ratio and goodwill.
Ishaan and Jaya continue in the old ratio, so gaining ratio = 5 : 3.
Kabir’s share of goodwill = ₹1,50,000 × 2/10 = ₹30,000
Ishaan’s Capital A/c Dr. ₹30,000 × 5/8 = ₹18,750
Jaya’s Capital A/c Dr. ₹30,000 × 3/8 = ₹11,250
To Kabir’s Capital A/c ₹30,000 ✔
Working 2 — Share of profit to date of death.
Period 1 April to 31 July = 4 months.
= ₹2,40,000 × 2/10 × 4/12 = ₹48,000 × 4/12 = ₹16,000
Working 3 — Revaluation Account.
Credit: Machinery ₹2,30,000 − ₹2,00,000 = ₹30,000
Debit: Stock ₹1,50,000 − ₹1,38,000 = ₹12,000; Provision for doubtful debts ₹1,20,000 × 5% = ₹6,000
Profit = ₹30,000 − ₹18,000 = ₹12,000
Ishaan ₹6,000 · Jaya ₹3,600 · Kabir ₹2,400 (5 : 3 : 2) ✔
Working 4 — General Reserve. ₹60,000 × 2/10 = ₹12,000 to Kabir.
Working 5 — Interest on capital. ₹1,00,000 × 6% × 4/12 = ₹2,000
Kabir’s Capital Account
Debit side:
To Drawings A/c … ₹15,000
To Kabir’s Executor’s A/c (balancing figure) … ₹1,47,400
Total ₹1,62,400
Credit side:
By Balance b/d … ₹1,00,000
By General Reserve A/c … ₹12,000
By Revaluation A/c … ₹2,400
By Ishaan’s Capital A/c (goodwill) … ₹18,750
By Jaya’s Capital A/c (goodwill) … ₹11,250
By Profit and Loss Suspense A/c … ₹16,000
By Interest on Capital A/c … ₹2,000
Total ₹1,62,400
Verification: 1,00,000 + 12,000 + 2,400 + 18,750 + 11,250 + 16,000 + 2,000 = ₹1,62,400; less drawings ₹15,000 = ₹1,47,400 due to the executor ✔
Instalment workings.
Paid immediately ₹47,400 → balance ₹1,00,000, payable ₹50,000 + ₹50,000.
Interest to 31 Mar 2027 (1 Aug 2026 to 31 Mar 2027 = 8 months): ₹1,00,000 × 12% × 8/12 = ₹8,000
Interest to 31 Mar 2028 (full year on ₹50,000): ₹50,000 × 12% = ₹6,000
Kabir’s Executor’s Account
Year ended 31 March 2027
Dr.: 31 Jul 2026 To Bank A/c ₹47,400 · 31 Mar 2027 To Bank A/c ₹58,000 · 31 Mar 2027 To Balance c/d ₹50,000 — Total ₹1,55,400
Cr.: 31 Jul 2026 By Kabir’s Capital A/c ₹1,47,400 · 31 Mar 2027 By Interest A/c ₹8,000 — Total ₹1,55,400
Year ended 31 March 2028
Dr.: 31 Mar 2028 To Bank A/c ₹56,000 — Total ₹56,000
Cr.: 1 Apr 2027 By Balance b/d ₹50,000 · 31 Mar 2028 By Interest A/c ₹6,000 — Total ₹56,000
The account closes to nil. Payment on 31 March 2027 = ₹50,000 principal + ₹8,000 interest = ₹58,000; on 31 March 2028 = ₹50,000 + ₹6,000 = ₹56,000.
A Full Board-Level Question, Start to Finish
This is the shape of the six- or eight-mark question you will meet in the paper. Try it yourself first with a pen and a clean page. Give yourself twenty-five minutes. Then compare, line by line — not just the final answer, but the order in which the working is set out.
Balance Sheet as at 31 March 2026
Liabilities: Creditors ₹1,20,000 · Bills Payable ₹40,000 · General Reserve ₹90,000 · Workmen Compensation Reserve ₹30,000 · Capitals: Aarav ₹3,00,000, Bhavna ₹2,00,000, Chirag ₹1,30,000 — Total ₹9,10,000
Assets: Bank ₹70,000 · Debtors ₹1,60,000 less Provision for Doubtful Debts ₹10,000 = ₹1,50,000 · Stock ₹1,40,000 · Furniture ₹90,000 · Land and Building ₹4,00,000 · Advertisement Suspense A/c ₹60,000 — Total ₹9,10,000
Bhavna retired on 1 April 2026 on the following terms:
(a) Land and Building to be appreciated by 15%.
(b) Stock to be reduced by ₹14,000.
(c) Furniture to be reduced to ₹78,000.
(d) Provision for doubtful debts to be maintained at 7.5% of debtors.
(e) A claim on account of workmen compensation of ₹12,000 is admitted.
(f) An unrecorded investment worth ₹20,000 to be brought into the books.
(g) Creditors include ₹5,000 no longer payable.
(h) Goodwill of the firm is valued at ₹1,80,000.
(i) Aarav and Chirag will share future profits in the ratio 3 : 2.
(j) Bhavna is to be paid ₹50,000 immediately and the balance transferred to her loan account.
Prepare the Revaluation Account, the Partners’ Capital Accounts and the Balance Sheet of the reconstituted firm.
WORKING NOTE 1 — Gaining ratio
Aarav: 3/5 − 3/6 = 18/30 − 15/30 = 3/30
Chirag: 2/5 − 1/6 = 12/30 − 5/30 = 7/30
Gaining ratio = 3 : 7
Check: 3/30 + 7/30 = 10/30 = 1/3 = 2/6 = Bhavna’s old share ✔
WORKING NOTE 2 — Goodwill
Bhavna’s share = ₹1,80,000 × 2/6 = ₹60,000
Aarav’s Capital A/c Dr. ₹60,000 × 3/10 = ₹18,000
Chirag’s Capital A/c Dr. ₹60,000 × 7/10 = ₹42,000
To Bhavna’s Capital A/c ₹60,000 ✔
Note how Chirag pays more than twice what Aarav pays even though Aarav ends with the larger share. That is the gaining ratio doing its job.
WORKING NOTE 3 — Provision for doubtful debts
Required = ₹1,60,000 × 7.5% = ₹12,000. Existing = ₹10,000. Additional charge = ₹2,000
REVALUATION ACCOUNT
Debit side:
To Stock A/c … ₹14,000
To Furniture A/c … ₹12,000
To Provision for Doubtful Debts A/c … ₹2,000
To Profit transferred to Capital A/cs — Aarav ₹28,500 · Bhavna ₹19,000 · Chirag ₹9,500 … ₹57,000
Total ₹85,000
Credit side:
By Land and Building A/c (₹4,00,000 × 15%) … ₹60,000
By Investment A/c (unrecorded) … ₹20,000
By Creditors A/c … ₹5,000
Total ₹85,000
Split working: profit ₹85,000 − ₹28,000 = ₹57,000; ₹57,000 ÷ 6 = ₹9,500 per part. Aarav 3 parts = ₹28,500; Bhavna 2 parts = ₹19,000; Chirag 1 part = ₹9,500 ✔
PARTNERS’ CAPITAL ACCOUNTS
Debit side
To Advertisement Suspense A/c — Aarav ₹30,000 · Bhavna ₹20,000 · Chirag ₹10,000
To Bhavna’s Capital A/c (goodwill) — Aarav ₹18,000 · Chirag ₹42,000
To Bank A/c — Bhavna ₹50,000
To Bhavna’s Loan A/c — Bhavna ₹2,45,000
To Balance c/d — Aarav ₹3,34,500 · Chirag ₹1,05,500
Totals: Aarav ₹3,82,500 · Bhavna ₹3,15,000 · Chirag ₹1,57,500
Credit side
By Balance b/d — Aarav ₹3,00,000 · Bhavna ₹2,00,000 · Chirag ₹1,30,000
By General Reserve A/c — Aarav ₹45,000 · Bhavna ₹30,000 · Chirag ₹15,000
By Workmen Compensation Reserve A/c — Aarav ₹9,000 · Bhavna ₹6,000 · Chirag ₹3,000
By Revaluation A/c — Aarav ₹28,500 · Bhavna ₹19,000 · Chirag ₹9,500
By Aarav’s Capital A/c (goodwill) — Bhavna ₹18,000
By Chirag’s Capital A/c (goodwill) — Bhavna ₹42,000
Totals: Aarav ₹3,82,500 · Bhavna ₹3,15,000 · Chirag ₹1,57,500
Workmen Compensation Reserve working: ₹30,000 − claim ₹12,000 = ₹18,000 distributable → ₹9,000 : ₹6,000 : ₹3,000 ✔
Bhavna’s settlement: ₹3,15,000 − ₹20,000 (Advertisement Suspense) = ₹2,95,000 due; less ₹50,000 cash = ₹2,45,000 to her loan account ✔
BALANCE SHEET OF AARAV AND CHIRAG AS AT 1 APRIL 2026
Liabilities:
Creditors (₹1,20,000 − ₹5,000) … ₹1,15,000
Bills Payable … ₹40,000
Workmen Compensation Claim … ₹12,000
Bhavna’s Loan A/c … ₹2,45,000
Capitals: Aarav ₹3,34,500 · Chirag ₹1,05,500 … ₹4,40,000
Total ₹8,52,000
Assets:
Bank (₹70,000 − ₹50,000) … ₹20,000
Debtors ₹1,60,000 less Provision ₹12,000 … ₹1,48,000
Stock (₹1,40,000 − ₹14,000) … ₹1,26,000
Furniture … ₹78,000
Land and Building (₹4,00,000 + ₹60,000) … ₹4,60,000
Investment … ₹20,000
Total ₹8,52,000
It balances at ₹8,52,000. Notice that the Advertisement Suspense A/c and both reserves have vanished from the Balance Sheet — they were fully distributed. Notice also that the ₹12,000 claim survives as a genuine liability. If your Balance Sheet does not balance, check these three things in order: (1) did you distribute every reserve? (2) did you remove Advertisement Suspense from the assets? (3) did you use the revised asset values, not the old ones?
Practice Worksheet with Answers
Ten original questions, arranged easy to hard. Attempt each one fully on paper before you open the answer. Reading a solution feels productive and teaches you almost nothing; struggling for four minutes and then reading it teaches you a great deal.
Q1. Lakshmi, Meera and Nandini share profits 5 : 4 : 3. Meera retires and Lakshmi and Nandini acquire her share in the ratio 3 : 1. Calculate the new profit-sharing ratio and the gaining ratio. (Show Answer)
Lakshmi acquires 3/4 of it = 3/4 × 4/12 = 12/48 = 1/4 = 3/12
Nandini acquires 1/4 of it = 1/4 × 4/12 = 4/48 = 1/12
Lakshmi’s new share = 5/12 + 3/12 = 8/12
Nandini’s new share = 3/12 + 1/12 = 4/12
New ratio = 8 : 4 = 2 : 1
Gaining ratio = 3/12 : 1/12 = 3 : 1
Check: 8/12 + 4/12 = 1 ✔ and 3/12 + 1/12 = 4/12 = Meera’s old share ✔
Q2. Xavier, Yusuf and Zoya share profits 3 : 3 : 2. Yusuf retires and Xavier and Zoya decide to share future profits in the ratio 5 : 3. Calculate the gaining ratio. (Show Answer)
Xavier: gain = 5/8 − 3/8 = 2/8
Zoya: gain = 3/8 − 2/8 = 1/8
Gaining ratio = 2 : 1
Check: 2/8 + 1/8 = 3/8, which is exactly Yusuf’s old share ✔
Q3. Ravi, Sunita and Tarun share profits 5 : 3 : 2. Tarun retires. Ravi and Sunita will share future profits 2 : 1. Goodwill of the firm is valued at ₹1,20,000. Pass the journal entry. (Show Answer)
Ravi: 2/3 − 5/10 = 20/30 − 15/30 = 5/30
Sunita: 1/3 − 3/10 = 10/30 − 9/30 = 1/30
Gaining ratio = 5 : 1
Check: 5/30 + 1/30 = 6/30 = 2/10 = Tarun’s old share ✔
Step 2 — Tarun’s share of goodwill = ₹1,20,000 × 2/10 = ₹24,000
Step 3 — split in 5 : 1
Ravi = ₹24,000 × 5/6 = ₹20,000
Sunita = ₹24,000 × 1/6 = ₹4,000
Journal Entry
Ravi’s Capital A/c Dr. ₹20,000
Sunita’s Capital A/c Dr. ₹4,000
To Tarun’s Capital A/c ₹24,000
(Being Tarun’s share of goodwill adjusted in the gaining ratio 5 : 1)
Q4. Anil, Bimal and Chetan share profits 2 : 2 : 1. Chetan retires. After all adjustments his capital account shows ₹2,40,000, but the partners agree to pay him ₹2,88,000 in full settlement. Anil and Bimal continue in their old ratio. Find the firm’s goodwill and pass the entry. (Show Answer)
₹2,88,000 − ₹2,40,000 = ₹48,000 = Chetan’s share of goodwill
Step 2 — firm’s goodwill
Chetan’s share of profit = 1/5, so firm’s goodwill = ₹48,000 × 5 = ₹2,40,000
Step 3 — gaining ratio
Anil and Bimal continue in the old ratio 2 : 2 = 1 : 1
Step 4 — split ₹48,000 equally = ₹24,000 each
Journal Entry
Anil’s Capital A/c Dr. ₹24,000
Bimal’s Capital A/c Dr. ₹24,000
To Chetan’s Capital A/c ₹48,000
(Being Chetan’s share of hidden goodwill adjusted in the gaining ratio 1 : 1)
Proof: ₹2,40,000 + ₹48,000 = ₹2,88,000, the agreed settlement ✔
Q5. Deepa, Esha and Farhan share profits 3 : 2 : 1. Esha retires. Building ₹5,00,000 is appreciated by 12%; machinery ₹3,00,000 is depreciated by 8%; stock ₹1,50,000 is revalued at ₹1,38,000; bad debts of ₹6,000 are written off from debtors of ₹1,26,000 and a provision of 5% is created on the balance; an outstanding salary of ₹8,000 is unrecorded; and an investment worth ₹14,000 is not in the books. Prepare the Revaluation Account. (Show Answer)
Building: ₹5,00,000 × 12% = ₹60,000 gain
Machinery: ₹3,00,000 × 8% = ₹24,000 loss
Stock: ₹1,50,000 − ₹1,38,000 = ₹12,000 loss
Bad debts written off = ₹6,000; remaining debtors ₹1,26,000 − ₹6,000 = ₹1,20,000; provision ₹1,20,000 × 5% = ₹6,000. Combined debtors charge = ₹12,000
Outstanding salary = ₹8,000 loss
Unrecorded investment = ₹14,000 gain
REVALUATION ACCOUNT
Debit side:
To Machinery A/c … ₹24,000
To Stock A/c … ₹12,000
To Bad Debts A/c … ₹6,000
To Provision for Doubtful Debts A/c … ₹6,000
To Outstanding Salary A/c … ₹8,000
To Profit transferred — Deepa ₹9,000 · Esha ₹6,000 · Farhan ₹3,000 … ₹18,000
Total ₹74,000
Credit side:
By Building A/c … ₹60,000
By Investment A/c … ₹14,000
Total ₹74,000
Profit = ₹74,000 − ₹56,000 = ₹18,000, shared 3 : 2 : 1 → ₹9,000, ₹6,000, ₹3,000 ✔
Q6. Gaurav, Harsh and Ipsita share profits 4 : 3 : 3. Harsh retires. The books show General Reserve ₹1,20,000; Workmen Compensation Reserve ₹40,000 (claim ₹16,000); Investment Fluctuation Reserve ₹25,000 (investments cost ₹1,00,000, market value ₹90,000); Profit and Loss A/c (Dr.) ₹50,000. Calculate the net amount credited to each partner. (Show Answer)
General Reserve ₹1,20,000 → Gaurav ₹48,000 · Harsh ₹36,000 · Ipsita ₹36,000
Workmen Compensation Reserve: ₹40,000 − claim ₹16,000 = ₹24,000 distributable → Gaurav ₹9,600 · Harsh ₹7,200 · Ipsita ₹7,200. (₹16,000 stays as a liability.)
Investment Fluctuation Reserve: fall in value = ₹1,00,000 − ₹90,000 = ₹10,000, absorbed first. ₹25,000 − ₹10,000 = ₹15,000 distributable → Gaurav ₹6,000 · Harsh ₹4,500 · Ipsita ₹4,500. (Investments now shown at ₹90,000.)
Profit and Loss A/c (Dr.) ₹50,000 — a loss, so debited → Gaurav ₹20,000 · Harsh ₹15,000 · Ipsita ₹15,000
Net credit to each partner
Gaurav: 48,000 + 9,600 + 6,000 − 20,000 = ₹43,600
Harsh: 36,000 + 7,200 + 4,500 − 15,000 = ₹32,700
Ipsita: 36,000 + 7,200 + 4,500 − 15,000 = ₹32,700
Check: total = ₹1,09,000, and independently ₹1,20,000 + ₹24,000 + ₹15,000 − ₹50,000 = ₹1,09,000 ✔
Q7. Jatin, Kavya and Lalit share profits 3 : 2 : 1. Lalit retires and his dues of ₹2,10,000 are transferred to his loan account. Adjusted capitals are Jatin ₹4,50,000 and Kavya ₹2,70,000. They will share future profits 3 : 2 and the total capital of the new firm is fixed at ₹6,00,000. Calculate the cash to be brought in or withdrawn. (Show Answer)
Jatin = ₹6,00,000 × 3/5 = ₹3,60,000
Kavya = ₹6,00,000 × 2/5 = ₹2,40,000
Comparison
Jatin has ₹4,50,000, needs ₹3,60,000 → withdraws ₹90,000
Kavya has ₹2,70,000, needs ₹2,40,000 → withdraws ₹30,000
Journal entries
Jatin’s Capital A/c Dr. ₹90,000 — To Bank A/c ₹90,000
Kavya’s Capital A/c Dr. ₹30,000 — To Bank A/c ₹30,000
(Being excess capital withdrawn to bring capitals into the new profit-sharing ratio)
Note: Lalit’s loan of ₹2,10,000 is a liability, not capital, so it plays no part in the ₹6,00,000. Check: ₹3,60,000 : ₹2,40,000 = 3 : 2 ✔
Q8. On 1 April 2026, ₹4,00,000 due to Mohan on his retirement was transferred to his loan account, repayable in four equal annual instalments plus interest at 9% p.a. on the outstanding balance, each 31 March. Prepare Mohan’s Loan Account for the first two years. (Show Answer)
Year 1 interest = ₹4,00,000 × 9% = ₹36,000 → cash paid ₹1,36,000
Year 2 interest = ₹3,00,000 × 9% = ₹27,000 → cash paid ₹1,27,000
MOHAN’S LOAN ACCOUNT
Year ended 31 March 2027
Dr.: 31 Mar 2027 To Bank A/c ₹1,36,000 · To Balance c/d ₹3,00,000 — Total ₹4,36,000
Cr.: 1 Apr 2026 By Mohan’s Capital A/c ₹4,00,000 · 31 Mar 2027 By Interest on Loan A/c ₹36,000 — Total ₹4,36,000
Year ended 31 March 2028
Dr.: 31 Mar 2028 To Bank A/c ₹1,27,000 · To Balance c/d ₹2,00,000 — Total ₹3,27,000
Cr.: 1 Apr 2027 By Balance b/d ₹3,00,000 · 31 Mar 2028 By Interest on Loan A/c ₹27,000 — Total ₹3,27,000
(For completeness, year 3 interest would be ₹18,000 and year 4 ₹9,000, closing the account exactly.)
Q9. Naina, Omkar and Pooja share profits 4 : 3 : 3 and close books on 31 March. Pooja died on 30 September 2026. Calculate her share of profit up to the date of death on three bases: (a) last year’s profit of ₹4,80,000 and time; (b) average of the last three years’ profits of ₹3,60,000, ₹4,20,000 and ₹4,80,000, and time; (c) sales, given last year’s sales of ₹30,00,000 with profit ₹4,80,000, and sales up to the date of death of ₹11,00,000. (Show Answer)
(a) Time basis on last year’s profit
= ₹4,80,000 × 3/10 × 6/12
= ₹1,44,000 × 6/12 = ₹72,000
(b) Time basis on average profit
Average = (₹3,60,000 + ₹4,20,000 + ₹4,80,000) ÷ 3 = ₹12,60,000 ÷ 3 = ₹4,20,000
= ₹4,20,000 × 3/10 × 6/12 = ₹1,26,000 × 6/12 = ₹63,000
(c) Sales basis
Rate of profit on sales = (₹4,80,000 ÷ ₹30,00,000) × 100 = 16%
Estimated profit for the period = ₹11,00,000 × 16% = ₹1,76,000
Pooja’s share = ₹1,76,000 × 3/10 = ₹52,800
In each case the entry is: Profit and Loss Suspense A/c Dr. — To Pooja’s Capital A/c. Note there is no time fraction in (c); the sales figure already covers the right period.
Q10. Qadir, Riya and Sameer share profits 2 : 2 : 1 and close books on 31 March. Sameer died on 30 June 2026. His capital on 1 April 2026 was ₹2,00,000. Interest on capital is allowed at 6% p.a.; goodwill of the firm is ₹2,50,000; his share of profit is based on last year’s profit of ₹3,00,000 and time; General Reserve is ₹75,000; his drawings to the date of death were ₹18,000. His executor was paid ₹65,000 at once and the balance in two equal annual instalments with interest at 10% p.a. on 30 June 2027 and 30 June 2028. Prepare the Executor’s Account. (Show Answer)
Interest on capital = ₹2,00,000 × 6% × 3/12 = ₹3,000
Share of goodwill = ₹2,50,000 × 1/5 = ₹50,000 (borne by Qadir and Riya in their gaining ratio 2 : 2 = 1 : 1, i.e. ₹25,000 each)
Share of profit = ₹3,00,000 × 1/5 × 3/12 = ₹60,000 × 3/12 = ₹15,000
Share of General Reserve = ₹75,000 × 1/5 = ₹15,000
Drawings = ₹18,000 (debit)
Amount due = ₹2,00,000 + ₹3,000 + ₹50,000 + ₹15,000 + ₹15,000 − ₹18,000 = ₹2,65,000
Instalment workings
Paid at once ₹65,000 → balance ₹2,00,000 → two instalments of ₹1,00,000
Interest to 30 Jun 2027 = ₹2,00,000 × 10% = ₹20,000 → cash ₹1,20,000
Interest to 30 Jun 2028 = ₹1,00,000 × 10% = ₹10,000 → cash ₹1,10,000
SAMEER’S EXECUTOR’S ACCOUNT
Period to 30 June 2027
Dr.: 30 Jun 2026 To Bank A/c ₹65,000 · 30 Jun 2027 To Bank A/c ₹1,20,000 · 30 Jun 2027 To Balance c/d ₹1,00,000 — Total ₹2,85,000
Cr.: 30 Jun 2026 By Sameer’s Capital A/c ₹2,65,000 · 30 Jun 2027 By Interest A/c ₹20,000 — Total ₹2,85,000
Period to 30 June 2028
Dr.: 30 Jun 2028 To Bank A/c ₹1,10,000 — Total ₹1,10,000
Cr.: 1 Jul 2027 By Balance b/d ₹1,00,000 · 30 Jun 2028 By Interest A/c ₹10,000 — Total ₹1,10,000
The account closes to nil. Total paid to the executor = ₹65,000 + ₹1,20,000 + ₹1,10,000 = ₹2,95,000, being ₹2,65,000 principal plus ₹30,000 interest ✔
One Last Thing Before You Close This Page
If this chapter felt heavy the first time through, that is completely normal — and it is not a verdict on you. It is a long chapter with a lot of moving parts, and nobody absorbs it in one reading. What separates the students who end up scoring well is not talent; it is the quiet habit of coming back tomorrow.
So here is the only instruction that really matters. Do not try to master everything tonight. Aim for one more correct question than yesterday. One extra gaining ratio worked out right. One Revaluation Account that balances on the first attempt. One Executor’s Account closed to nil without peeking. That is it. Ten small improvements, and by the time the board exam arrives you will open this question in the paper and feel something close to relief — because you have already done it, over and over, one question at a time.
You have got this. Go get a glass of water, then come back and do Q1 again with the answer covered.