ICAI Notes- Unit 4: Retirement of a Partner | Principles and Practice of Accounting - CA Foundation PDF Download

 Page 1


10.119 
PARTNERSHIP AND LLP ACCOUNTS 
 
LEARNING OUTCOMES 
UNIT – 4: RETIREMENT OF A PARTNER 
 
 
 
After studying this unit, you would be able to:  
? Learn how to compute the gaining ratio and observe the use of such 
gaining ratio. 
? Be familiar with the accounting treatment in relation to revaluation 
of assets and liabilities. 
? Learn the accounting entries to be passed for transfer of reserves 
standing in the balance sheet to partners’ capital accounts in a 
manner already discussed for admission of a partner in unit 3 of the 
chapter. 
? Learn the technique of keeping records if the balance due to the 
retiring partner is transferred to loan account. 
? Familiarize with the term Joint Life Policy. 
? Learn how to keep records for payment of premium in relation to 
Joint Life Policy. Also observe the accounting treatment in relation 
to such Joint Life Policy in case of retirement of a partner. 
© The Institute of Chartered Accountants of India
Page 2


10.119 
PARTNERSHIP AND LLP ACCOUNTS 
 
LEARNING OUTCOMES 
UNIT – 4: RETIREMENT OF A PARTNER 
 
 
 
After studying this unit, you would be able to:  
? Learn how to compute the gaining ratio and observe the use of such 
gaining ratio. 
? Be familiar with the accounting treatment in relation to revaluation 
of assets and liabilities. 
? Learn the accounting entries to be passed for transfer of reserves 
standing in the balance sheet to partners’ capital accounts in a 
manner already discussed for admission of a partner in unit 3 of the 
chapter. 
? Learn the technique of keeping records if the balance due to the 
retiring partner is transferred to loan account. 
? Familiarize with the term Joint Life Policy. 
? Learn how to keep records for payment of premium in relation to 
Joint Life Policy. Also observe the accounting treatment in relation 
to such Joint Life Policy in case of retirement of a partner. 
© The Institute of Chartered Accountants of India
  ACCOUNTING 
1.
120 
10.120 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4.1  INTRODUCTION 
A partner may retire from the partnership firm because of old age, illness, etc. Generally, the 
business of the partnership firm may not come to an end when one of the partners retires. 
Other partners may continue to run the business of the firm. Readjustment takes place in case 
of retirement of a partner likewise the case of admission of a partner. Whenever a partner 
retires, the continuing partners make gain in terms of profit sharing ratio. Therefore, the 
remaining partners arrange for the amount to be paid to discharge the claims of the retiring 
partners. Assets and liabilities are revalued, value of goodwill is raised and surrender value of 
joint life policy, if any, is taken into account. Revaluation profit and reserves are transferred to 
capital or current accounts of partners. Lastly, final amount due to the retiring partner is 
determined and discharged. 
UNIT OVERVIEW 
Retirement of 
partner
Revaluation Account 
or Profit and Loss 
Adjustment Account 
for revaluation of 
assets and liabilities
Adjustment of 
goodwill amongst 
the remaining 
partners in their 
profit gaining ratio
Transfer of reserves; 
goodwill, Transfer of 
profit/loss on 
revaluation to 
retiring partner
Profit/loss on 
revaluation account 
is is transfered to 
old partners in their 
old profit sharing 
ratio
© The Institute of Chartered Accountants of India
Page 3


10.119 
PARTNERSHIP AND LLP ACCOUNTS 
 
LEARNING OUTCOMES 
UNIT – 4: RETIREMENT OF A PARTNER 
 
 
 
After studying this unit, you would be able to:  
? Learn how to compute the gaining ratio and observe the use of such 
gaining ratio. 
? Be familiar with the accounting treatment in relation to revaluation 
of assets and liabilities. 
? Learn the accounting entries to be passed for transfer of reserves 
standing in the balance sheet to partners’ capital accounts in a 
manner already discussed for admission of a partner in unit 3 of the 
chapter. 
? Learn the technique of keeping records if the balance due to the 
retiring partner is transferred to loan account. 
? Familiarize with the term Joint Life Policy. 
? Learn how to keep records for payment of premium in relation to 
Joint Life Policy. Also observe the accounting treatment in relation 
to such Joint Life Policy in case of retirement of a partner. 
© The Institute of Chartered Accountants of India
  ACCOUNTING 
1.
120 
10.120 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4.1  INTRODUCTION 
A partner may retire from the partnership firm because of old age, illness, etc. Generally, the 
business of the partnership firm may not come to an end when one of the partners retires. 
Other partners may continue to run the business of the firm. Readjustment takes place in case 
of retirement of a partner likewise the case of admission of a partner. Whenever a partner 
retires, the continuing partners make gain in terms of profit sharing ratio. Therefore, the 
remaining partners arrange for the amount to be paid to discharge the claims of the retiring 
partners. Assets and liabilities are revalued, value of goodwill is raised and surrender value of 
joint life policy, if any, is taken into account. Revaluation profit and reserves are transferred to 
capital or current accounts of partners. Lastly, final amount due to the retiring partner is 
determined and discharged. 
UNIT OVERVIEW 
Retirement of 
partner
Revaluation Account 
or Profit and Loss 
Adjustment Account 
for revaluation of 
assets and liabilities
Adjustment of 
goodwill amongst 
the remaining 
partners in their 
profit gaining ratio
Transfer of reserves; 
goodwill, Transfer of 
profit/loss on 
revaluation to 
retiring partner
Profit/loss on 
revaluation account 
is is transfered to 
old partners in their 
old profit sharing 
ratio
© The Institute of Chartered Accountants of India
10.121 
PARTNERSHIP AND LLP ACCOUNTS 
4.2  CALCULATION OF GAINING RATIO  
On retirement of a partner, the continuing partners will gain in terms of profit sharing ratio. 
For example, if A, B and C were sharing profits and losses in the ratio of 5:3: 2 and B retires, 
then A and C have to decide at which ratio they will share profits and losses in future. If it is 
decided that the continuing partners will share profits and losses in future at the ratio of 3:2, 
then A gains 1/10th [(3/5)-(5/10)] and C gains 2/10 [(2/5)-(2/10)]. So the gaining ratio between 
A and C is 1:2. If A and C decide to continue at the ratio 5:2, this indicates that they are dividing 
the gained share in the previous profit sharing ratio. 
Example: Amir, Jamir and Samir are in partnership sharing profits and losses at the ratio of 
3:2:1. Now Amir wants to retire and Jamir and Samir want to continue at the ratio of 3:2. In 
this case, Jamir gains 8/30th of share of partnership (3/5 less 2/6) whereas Samir gains 7/30th 
(2/5 less 1/6) share of the partnership. So gaining ratio between Jamir and Samir is 8:7. On 
the other hand, if Jamir and Samir would decide to continue sharing profits and losses at the 
ratio of 2:1, then Jamir would gain 2/6th share of partnership i.e. [(2/3)–(2/6)], and Samir would 
gain 1/6th share of partnership i.e. [(1/3)–(1/6)]. So it appears that in such a case gaining ratio 
of Jamir and Samir would be 2:1. i.e., the existing profit sharing ratio between them.
Thus, on the retirement or death of a partner, his share in the profit would be taken by the 
remaining partners. In other words, they get additional share which is obviously a gain or 
benefit. The calculation of gaining ratio or benefit ratio is done as follows: 
(i) When the new ratio is given, gaining ratio is calculated by deducting their new share 
of profits from the old share. 
(ii) When the new profit sharing ratio is not given and the remaining partners share the 
future profits in the same ratio as before, the gaining ratio would be the old profit 
sharing ratio. 
Observe the following table: 
Ratio between Remaining Partners 
  
New Ratio Gaining or Benefit Ratio 
1. When new ratio is given As given in the examination 
problem 
New Ratio minus Old ratio
2. When the new Ratio is 
not given 
The same old ratios between 
them 
The same old ratios 
between them 
3. When gaining or 
benefit ratio is given 
Old ratio + Gaining ratio As given in the question 
 
© The Institute of Chartered Accountants of India
Page 4


10.119 
PARTNERSHIP AND LLP ACCOUNTS 
 
LEARNING OUTCOMES 
UNIT – 4: RETIREMENT OF A PARTNER 
 
 
 
After studying this unit, you would be able to:  
? Learn how to compute the gaining ratio and observe the use of such 
gaining ratio. 
? Be familiar with the accounting treatment in relation to revaluation 
of assets and liabilities. 
? Learn the accounting entries to be passed for transfer of reserves 
standing in the balance sheet to partners’ capital accounts in a 
manner already discussed for admission of a partner in unit 3 of the 
chapter. 
? Learn the technique of keeping records if the balance due to the 
retiring partner is transferred to loan account. 
? Familiarize with the term Joint Life Policy. 
? Learn how to keep records for payment of premium in relation to 
Joint Life Policy. Also observe the accounting treatment in relation 
to such Joint Life Policy in case of retirement of a partner. 
© The Institute of Chartered Accountants of India
  ACCOUNTING 
1.
120 
10.120 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4.1  INTRODUCTION 
A partner may retire from the partnership firm because of old age, illness, etc. Generally, the 
business of the partnership firm may not come to an end when one of the partners retires. 
Other partners may continue to run the business of the firm. Readjustment takes place in case 
of retirement of a partner likewise the case of admission of a partner. Whenever a partner 
retires, the continuing partners make gain in terms of profit sharing ratio. Therefore, the 
remaining partners arrange for the amount to be paid to discharge the claims of the retiring 
partners. Assets and liabilities are revalued, value of goodwill is raised and surrender value of 
joint life policy, if any, is taken into account. Revaluation profit and reserves are transferred to 
capital or current accounts of partners. Lastly, final amount due to the retiring partner is 
determined and discharged. 
UNIT OVERVIEW 
Retirement of 
partner
Revaluation Account 
or Profit and Loss 
Adjustment Account 
for revaluation of 
assets and liabilities
Adjustment of 
goodwill amongst 
the remaining 
partners in their 
profit gaining ratio
Transfer of reserves; 
goodwill, Transfer of 
profit/loss on 
revaluation to 
retiring partner
Profit/loss on 
revaluation account 
is is transfered to 
old partners in their 
old profit sharing 
ratio
© The Institute of Chartered Accountants of India
10.121 
PARTNERSHIP AND LLP ACCOUNTS 
4.2  CALCULATION OF GAINING RATIO  
On retirement of a partner, the continuing partners will gain in terms of profit sharing ratio. 
For example, if A, B and C were sharing profits and losses in the ratio of 5:3: 2 and B retires, 
then A and C have to decide at which ratio they will share profits and losses in future. If it is 
decided that the continuing partners will share profits and losses in future at the ratio of 3:2, 
then A gains 1/10th [(3/5)-(5/10)] and C gains 2/10 [(2/5)-(2/10)]. So the gaining ratio between 
A and C is 1:2. If A and C decide to continue at the ratio 5:2, this indicates that they are dividing 
the gained share in the previous profit sharing ratio. 
Example: Amir, Jamir and Samir are in partnership sharing profits and losses at the ratio of 
3:2:1. Now Amir wants to retire and Jamir and Samir want to continue at the ratio of 3:2. In 
this case, Jamir gains 8/30th of share of partnership (3/5 less 2/6) whereas Samir gains 7/30th 
(2/5 less 1/6) share of the partnership. So gaining ratio between Jamir and Samir is 8:7. On 
the other hand, if Jamir and Samir would decide to continue sharing profits and losses at the 
ratio of 2:1, then Jamir would gain 2/6th share of partnership i.e. [(2/3)–(2/6)], and Samir would 
gain 1/6th share of partnership i.e. [(1/3)–(1/6)]. So it appears that in such a case gaining ratio 
of Jamir and Samir would be 2:1. i.e., the existing profit sharing ratio between them.
Thus, on the retirement or death of a partner, his share in the profit would be taken by the 
remaining partners. In other words, they get additional share which is obviously a gain or 
benefit. The calculation of gaining ratio or benefit ratio is done as follows: 
(i) When the new ratio is given, gaining ratio is calculated by deducting their new share 
of profits from the old share. 
(ii) When the new profit sharing ratio is not given and the remaining partners share the 
future profits in the same ratio as before, the gaining ratio would be the old profit 
sharing ratio. 
Observe the following table: 
Ratio between Remaining Partners 
  
New Ratio Gaining or Benefit Ratio 
1. When new ratio is given As given in the examination 
problem 
New Ratio minus Old ratio
2. When the new Ratio is 
not given 
The same old ratios between 
them 
The same old ratios 
between them 
3. When gaining or 
benefit ratio is given 
Old ratio + Gaining ratio As given in the question 
 
© The Institute of Chartered Accountants of India
  ACCOUNTING 
1.
122 
10.122 
Calculation of New Profit Sharing Ratio 
Case 1 When nothing is given about the new profit sharing ratio of the remaining partners: Under 
this situation the calculation of new ratio is done by striking out the share of the retiring partner. 
Example : Alok, Bhaskar and Chetan are partners sharing in the ratio 3:2:1. Calculate new ratio 
if: 
(a) If Alok retires.
(b)  If Bhaskar retires. 
(c)  If Chetan retires. 
Solution
Old Profit ratio = 3:2:1 
(a)  If Alok retires new profit ratio will be 2:1 
(b) If Bhaskar retires new profit ratio will be 3:1
(c)  If Chetan retires new profit ratio will be 3:2 
Case 2: When gains of the continuing partners are specifically given in the question: In such 
a case, the new shares of the continuing partners are calculated by adding their respective 
gain to their old share. 
New share = Old share + Gain 
Example
Aarav, Banta and Chunmun are partners sharing in the ratio 3:2:1. Aarav retires and his share 
is taken over by the remaining partners as follow 
Banta takes 2/6th from Aarav.
Chunmun takes 1/6th from Aarav. 
Calculate new ratio. 
Solution
Banta’s New Share = Banta’s old share + Banta’s gain = 2/6 + 2/6 = 4/6 
Chunmun’s New Share = Chunmun’s old share + Chunmun’s gain = 1/6 + 1/6 = 2/6 
So the new share = 4/6: 2/6 = 2:1
Case 3: When the ratio in which the remaining partners acquire the share of the outgoing 
partner is given:  
 
© The Institute of Chartered Accountants of India
Page 5


10.119 
PARTNERSHIP AND LLP ACCOUNTS 
 
LEARNING OUTCOMES 
UNIT – 4: RETIREMENT OF A PARTNER 
 
 
 
After studying this unit, you would be able to:  
? Learn how to compute the gaining ratio and observe the use of such 
gaining ratio. 
? Be familiar with the accounting treatment in relation to revaluation 
of assets and liabilities. 
? Learn the accounting entries to be passed for transfer of reserves 
standing in the balance sheet to partners’ capital accounts in a 
manner already discussed for admission of a partner in unit 3 of the 
chapter. 
? Learn the technique of keeping records if the balance due to the 
retiring partner is transferred to loan account. 
? Familiarize with the term Joint Life Policy. 
? Learn how to keep records for payment of premium in relation to 
Joint Life Policy. Also observe the accounting treatment in relation 
to such Joint Life Policy in case of retirement of a partner. 
© The Institute of Chartered Accountants of India
  ACCOUNTING 
1.
120 
10.120 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
4.1  INTRODUCTION 
A partner may retire from the partnership firm because of old age, illness, etc. Generally, the 
business of the partnership firm may not come to an end when one of the partners retires. 
Other partners may continue to run the business of the firm. Readjustment takes place in case 
of retirement of a partner likewise the case of admission of a partner. Whenever a partner 
retires, the continuing partners make gain in terms of profit sharing ratio. Therefore, the 
remaining partners arrange for the amount to be paid to discharge the claims of the retiring 
partners. Assets and liabilities are revalued, value of goodwill is raised and surrender value of 
joint life policy, if any, is taken into account. Revaluation profit and reserves are transferred to 
capital or current accounts of partners. Lastly, final amount due to the retiring partner is 
determined and discharged. 
UNIT OVERVIEW 
Retirement of 
partner
Revaluation Account 
or Profit and Loss 
Adjustment Account 
for revaluation of 
assets and liabilities
Adjustment of 
goodwill amongst 
the remaining 
partners in their 
profit gaining ratio
Transfer of reserves; 
goodwill, Transfer of 
profit/loss on 
revaluation to 
retiring partner
Profit/loss on 
revaluation account 
is is transfered to 
old partners in their 
old profit sharing 
ratio
© The Institute of Chartered Accountants of India
10.121 
PARTNERSHIP AND LLP ACCOUNTS 
4.2  CALCULATION OF GAINING RATIO  
On retirement of a partner, the continuing partners will gain in terms of profit sharing ratio. 
For example, if A, B and C were sharing profits and losses in the ratio of 5:3: 2 and B retires, 
then A and C have to decide at which ratio they will share profits and losses in future. If it is 
decided that the continuing partners will share profits and losses in future at the ratio of 3:2, 
then A gains 1/10th [(3/5)-(5/10)] and C gains 2/10 [(2/5)-(2/10)]. So the gaining ratio between 
A and C is 1:2. If A and C decide to continue at the ratio 5:2, this indicates that they are dividing 
the gained share in the previous profit sharing ratio. 
Example: Amir, Jamir and Samir are in partnership sharing profits and losses at the ratio of 
3:2:1. Now Amir wants to retire and Jamir and Samir want to continue at the ratio of 3:2. In 
this case, Jamir gains 8/30th of share of partnership (3/5 less 2/6) whereas Samir gains 7/30th 
(2/5 less 1/6) share of the partnership. So gaining ratio between Jamir and Samir is 8:7. On 
the other hand, if Jamir and Samir would decide to continue sharing profits and losses at the 
ratio of 2:1, then Jamir would gain 2/6th share of partnership i.e. [(2/3)–(2/6)], and Samir would 
gain 1/6th share of partnership i.e. [(1/3)–(1/6)]. So it appears that in such a case gaining ratio 
of Jamir and Samir would be 2:1. i.e., the existing profit sharing ratio between them.
Thus, on the retirement or death of a partner, his share in the profit would be taken by the 
remaining partners. In other words, they get additional share which is obviously a gain or 
benefit. The calculation of gaining ratio or benefit ratio is done as follows: 
(i) When the new ratio is given, gaining ratio is calculated by deducting their new share 
of profits from the old share. 
(ii) When the new profit sharing ratio is not given and the remaining partners share the 
future profits in the same ratio as before, the gaining ratio would be the old profit 
sharing ratio. 
Observe the following table: 
Ratio between Remaining Partners 
  
New Ratio Gaining or Benefit Ratio 
1. When new ratio is given As given in the examination 
problem 
New Ratio minus Old ratio
2. When the new Ratio is 
not given 
The same old ratios between 
them 
The same old ratios 
between them 
3. When gaining or 
benefit ratio is given 
Old ratio + Gaining ratio As given in the question 
 
© The Institute of Chartered Accountants of India
  ACCOUNTING 
1.
122 
10.122 
Calculation of New Profit Sharing Ratio 
Case 1 When nothing is given about the new profit sharing ratio of the remaining partners: Under 
this situation the calculation of new ratio is done by striking out the share of the retiring partner. 
Example : Alok, Bhaskar and Chetan are partners sharing in the ratio 3:2:1. Calculate new ratio 
if: 
(a) If Alok retires.
(b)  If Bhaskar retires. 
(c)  If Chetan retires. 
Solution
Old Profit ratio = 3:2:1 
(a)  If Alok retires new profit ratio will be 2:1 
(b) If Bhaskar retires new profit ratio will be 3:1
(c)  If Chetan retires new profit ratio will be 3:2 
Case 2: When gains of the continuing partners are specifically given in the question: In such 
a case, the new shares of the continuing partners are calculated by adding their respective 
gain to their old share. 
New share = Old share + Gain 
Example
Aarav, Banta and Chunmun are partners sharing in the ratio 3:2:1. Aarav retires and his share 
is taken over by the remaining partners as follow 
Banta takes 2/6th from Aarav.
Chunmun takes 1/6th from Aarav. 
Calculate new ratio. 
Solution
Banta’s New Share = Banta’s old share + Banta’s gain = 2/6 + 2/6 = 4/6 
Chunmun’s New Share = Chunmun’s old share + Chunmun’s gain = 1/6 + 1/6 = 2/6 
So the new share = 4/6: 2/6 = 2:1
Case 3: When the ratio in which the remaining partners acquire the share of the outgoing 
partner is given:  
 
© The Institute of Chartered Accountants of India
10.123 
PARTNERSHIP AND LLP ACCOUNTS 
Example 
Deepu, Tasha and Honey are partners sharing profits in the ratio 3:2:1. Tasha retires and his 
share was acquired by deepu and honey in the ratio 2:1. Calculate new ratio.
Solution 
Share acquired by Deepu = 2/6 × 2/3 = 4/18 
Share acquired by Honey = 2/6 × 1/3 = 2/18
Deepu’s new Share = Deepu ‘s old share + Deepu’s gain = 3/6 + 4/18 = 13/18 
Honey’s new Share = Honey’s old share + Honey’s gain = 1/6+ 2/18 = 5/18 
New Ratio = 13:5
Calculation of Gaining Ratio 
Case – 1 
A, B and C are partners sharing profits and losses in the ratio of 1/2, 3/10 and 1/5 respectively. 
B retires from the firm and A&C decide to share future profits and losses in the ratio of 3:2.   
   A  C 
 Their new shares (a) 3/5  2/5 
 Their old shares (b) 1/2 1/5 
 Difference being gain  (a –b) 1/10
 2/10 
 Gaining ratio of A and C  = 1/10 : 2/10  = 1 : 2 
Case – 2 
W, A , B and C are partners sharing profits and losses in the ratio of 1/3, 1/6, 1/3 and 1/6 
respectively. B retires and W, A and C decide to share future profits and losses equally. 
   W A C 
 Their new shares (a) 1/3 1/3 1/3 
 Their old shares (b) 1/3      1/6 1/6 
 Difference being gain  (a –b)                        -
 1/6 1/6 
 Gaining ratio of A and C  = 1/6 : 1/6  = 1 : 1 
  
© The Institute of Chartered Accountants of India