Big picture
Retirement is admission in reverse. A partner leaves, and the continuing partners take over the leaving partner's share of future profits. Because they gain, they must pay the outgoing partner for that share of goodwill.
Everything that happened while the outgoing partner was still a member (revaluation gains and losses, reserves, accumulated profits and losses) is shared by all partners in the old ratio, including the one who is leaving. After that, the outgoing partner's capital account shows exactly what the firm owes them.
Death is treated the same way, with two additions: the deceased partner's share of profit from the start of the year to the date of death, and settling the amount with the executors (legal representatives) of the deceased partner.
Learning goals
Calculate the new ratio and the gaining ratio of continuing partners.
Adjust the outgoing partner's share of goodwill, including hidden goodwill.
Prepare the Revaluation Account and distribute reserves among all partners.
Find the amount due to a retiring partner and settle it in cash, by loan or in instalments with interest.
Adjust continuing partners' capitals to the new ratio.
Calculate a deceased partner's share of profit up to the date of death, and prepare the Executor's Account.
Core ideas
1. What the outgoing partner is entitled to
The amount due to a retiring or deceased partner is built up in their capital account:
Credit (add) | Debit (deduct) |
|---|---|
Opening capital (and current account balance) | Drawings up to the date of leaving |
Share of goodwill | Interest on drawings |
Share of revaluation profit | Share of revaluation loss |
Share of reserves and accumulated profits | Share of accumulated losses |
Interest on capital, salary, commission up to the date | |
Share of profit up to the date of retirement or death | Share of loss up to the date |
2. New ratio and gaining ratio
Gaining ratio = New share − Old share, for each continuing partner. It decides who pays the outgoing partner for goodwill.
(a) Continuing partners keep their old ratio between themselves. Then the gaining ratio equals their old ratio.
Example. A, B and C share 5:3:2. C retires; A and B continue 5:3. Over 40: A gains 25/40 − 20/40 = 5/40; B gains 15/40 − 12/40 = 3/40. Gaining ratio 5:3, the same as their old ratio.
(b) A new ratio is agreed. Calculate the gain for each partner; do not assume it equals the old ratio.
Example. If A and B agree to share equally after C retires: A gains 1/2 − 5/10 = 0; B gains 1/2 − 3/10 = 2/10. Only B gains, so B alone pays for C's goodwill.
(c) The outgoing share is taken in stated proportions.
Example. A takes 3/4 of C's 2/10 share and B takes 1/4. A gains 3/20 and B gains 1/20. A's new share = 10/20 + 3/20 = 13/20; B's = 6/20 + 1/20 = 7/20. New ratio 13:7; gaining ratio 3:1.
3. Goodwill on retirement or death
The outgoing partner's share of goodwill is credited to them and debited to the gaining partners in the gaining ratio:
Gaining Partners' Capital A/cs Dr, To Retiring (or Deceased) Partner's Capital A/c
Example. In case (a) the firm's goodwill is ₹1,20,000. C's share = 1,20,000 × 2/10 = ₹24,000. A is debited 24,000 × 5/8 = ₹15,000 and B ₹9,000: A's Capital A/c Dr ₹15,000, B's Capital A/c Dr ₹9,000, To C's Capital A/c ₹24,000.
Existing goodwill in the books is written off first among all partners in the old ratio: All Partners' Capital A/cs Dr, To Goodwill A/c.
Hidden goodwill on retirement. If the firm agrees to pay the retiring partner more than the balance in their capital account (after all other adjustments), the excess is their share of goodwill.
Example. After revaluation and reserves, C's capital stands at ₹1,10,000. A and B agree to pay C ₹1,30,000 in full settlement. The excess ₹20,000 is C's share of goodwill, debited to A and B in the gaining ratio (5:3): A ₹12,500, B ₹7,500.
4. Revaluation and reserves on retirement
The Revaluation Account is prepared as on admission, and its profit or loss is shared by all partners, including the outgoing partner, in the old ratio.
Reserves and accumulated profits (General Reserve, Profit and Loss credit balance, unused Workmen Compensation Reserve and Investment Fluctuation Fund) are credited to all partners in the old ratio.
Accumulated losses are debited to all partners in the old ratio.
If the continuing partners want to keep assets and liabilities at old values, or keep reserves in the books, adjust by a single entry: debit the gaining partners and credit the outgoing partner with their share.
5. Settling the amount due
A retiring partner may be paid:
in cash immediately: Retiring Partner's Capital A/c Dr, To Bank A/c;
by transfer to a loan account: Retiring Partner's Capital A/c Dr, To Retiring Partner's Loan A/c;
partly in cash and partly by loan.
Under Section 37 of the Partnership Act, if nothing is agreed, the outgoing partner (or their estate) can choose either interest at 6% p.a. on the amount due or the share of profits earned by using their share of the firm's property, until the amount is paid.
Paying the loan in instalments. The usual exam form is equal instalments of principal plus interest on the outstanding balance.
Example. C's loan of ₹80,000 is repaid in four equal annual instalments of principal, with interest at 10% p.a. on the balance outstanding.
Year | Opening balance | Interest (10%) | Principal paid | Total payment | Closing balance |
|---|---|---|---|---|---|
1 | 80,000 | 8,000 | 20,000 | 28,000 | 60,000 |
2 | 60,000 | 6,000 | 20,000 | 26,000 | 40,000 |
3 | 40,000 | 4,000 | 20,000 | 24,000 | 20,000 |
4 | 20,000 | 2,000 | 20,000 | 22,000 | Nil |
Each year: Interest A/c Dr, To C's Loan A/c (interest added); then C's Loan A/c Dr, To Bank A/c (payment).
6. A complete retirement problem
A, B and C share profits 5:3:2. Their balance sheet on 31 March 2025:
Liabilities | ₹ | Assets | ₹ |
|---|---|---|---|
Creditors | 50,000 | Bank | 40,000 |
General Reserve | 30,000 | Debtors | 70,000 |
A's Capital | 1,50,000 | Stock | 60,000 |
B's Capital | 1,00,000 | Furniture | 40,000 |
C's Capital | 80,000 | Land | 2,00,000 |
Total | 4,10,000 | Total | 4,10,000 |
C retires on that date. Terms: goodwill of the firm is ₹1,20,000; land is appreciated by ₹30,000; furniture is depreciated by 10%; a provision for doubtful debts of 5% is made on debtors; C is paid ₹34,500 in cash and the balance is transferred to his loan account. A and B continue in the ratio 5:3.
Revaluation Account
Particulars | ₹ | Particulars | ₹ |
|---|---|---|---|
Furniture | 4,000 | Land | 30,000 |
Provision for doubtful debts | 3,500 | ||
Profit: A (5/10) | 11,250 | ||
Profit: B (3/10) | 6,750 | ||
Profit: C (2/10) | 4,500 | ||
Total | 30,000 | Total | 30,000 |
Partners' Capital Accounts
Dr Particulars | A | B | C | Cr Particulars | A | B | C |
|---|---|---|---|---|---|---|---|
C's Capital (goodwill) | 15,000 | 9,000 | – | Balance b/d | 1,50,000 | 1,00,000 | 80,000 |
Bank | – | – | 34,500 | Revaluation profit | 11,250 | 6,750 | 4,500 |
C's Loan | – | – | 80,000 | General Reserve | 15,000 | 9,000 | 6,000 |
Balance c/d | 1,61,250 | 1,06,750 | – | A's and B's Capital (goodwill) | – | – | 24,000 |
Total | 1,76,250 | 1,15,750 | 1,14,500 | Total | 1,76,250 | 1,15,750 | 1,14,500 |
Balance Sheet of A and B
Liabilities | ₹ | Assets | ₹ |
|---|---|---|---|
Creditors | 50,000 | Bank (40,000 − 34,500) | 5,500 |
C's Loan | 80,000 | Debtors 70,000 less provision 3,500 | 66,500 |
A's Capital | 1,61,250 | Stock | 60,000 |
B's Capital | 1,06,750 | Furniture | 36,000 |
Land | 2,30,000 | ||
Total | 3,98,000 | Total | 3,98,000 |
Adjusting continuing partners' capitals. If A and B decide that total capital of the new firm will be ₹3,20,000 in their new ratio 5:3, A needs ₹2,00,000 and B ₹1,20,000. A brings in 2,00,000 − 1,61,250 = ₹38,750 and B brings in 1,20,000 − 1,06,750 = ₹13,250. A partner with a surplus would withdraw it instead.
7. Death of a partner: profit up to the date of death
Accounts are not usually closed in the middle of the year, so the deceased partner's share of profit up to the date of death is estimated.
Time basis (based on last year's or an average profit):
Share of profit = Base profit × Months up to death ÷ 12 × Deceased partner's share
Example. The year starts on 1 April. D dies on 30 June. Last year's profit was ₹2,40,000 and D's share is 1/4. Profit to date = 2,40,000 × 3/12 × 1/4 = ₹15,000.
Sales (turnover) basis (assumes profit keeps the same percentage of sales):
Last year: Sales 20,00,000 Profit 2,00,000 Profit rate 10%
This year up to the date of death: Sales 6,00,000
Estimated profit = 6,00,000 x 10% = 60,000
D's share (1/5) = 12,000Entry: Profit and Loss Suspense A/c Dr, To Deceased Partner's Capital A/c. The suspense account is closed when the year's profit is shared at year end. (If the question says the continuing partners bear it, debit their capital accounts in the gaining ratio instead.)
8. The deceased partner's executors
After all adjustments (goodwill, revaluation, reserves, profit to date, interest on capital, drawings), the balance of the deceased partner's capital account is transferred to their Executor's Account: Deceased Partner's Capital A/c Dr, To Deceased Partner's Executor's A/c. The executor is then paid in cash, or the amount is kept as a loan with interest and paid in instalments, exactly as for a retiring partner.
A reliable problem-solving routine
Find the new ratio and the gaining ratio (new − old for each continuing partner).
Write off existing goodwill in the old ratio among all partners.
Credit the outgoing partner's share of goodwill and debit the gaining partners.
Prepare the Revaluation Account; share the result among all partners in the old ratio.
Distribute reserves and accumulated profits or losses among all partners in the old ratio.
For death: add profit to date, interest on capital and salary to date; deduct drawings.
Close the outgoing partner's account to Bank, Loan or Executor's Account. Prepare any instalment schedule.
Adjust continuing partners' capitals if asked, and prepare the new balance sheet.
Connections that matter
Admission uses the sacrificing ratio; retirement and death use the gaining ratio. The goodwill entry is the mirror image.
Goodwill and change in profit sharing supplies goodwill valuation and the Revaluation Account.
Dissolution is different: the whole firm closes, not just one partner's membership.
Common mistakes
Using the old ratio of continuing partners as the gaining ratio when a new ratio is given. Calculate new − old.
Leaving the outgoing partner out of revaluation and reserves. They share in the old ratio.
Debiting goodwill to all partners, including the retiring one. Only the gaining partners pay.
Taking the full year for profit to the date of death, or forgetting to multiply by the partner's share.
Calculating interest on instalments on the original loan every year. Interest is on the outstanding balance.
Forgetting the Executor's Account for a deceased partner.
Revision checklist
I can find the gaining ratio in all three forms.
I can record the outgoing partner's share of goodwill, including hidden goodwill.
I can prepare the Revaluation Account and distribute reserves among all partners.
I can settle the amount due by cash, loan or instalments with interest.
I can calculate profit to the date of death on the time and sales basis.
I can prepare the Executor's Account and the new balance sheet.