**Reconstitution of a Partnership Firm: Retirement of a Partner**

**Introduction:**
When a partner retires from a partnership firm, it leads to a reconstitution of the firm. The retirement of a partner can occur due to various reasons such as illness, old age, personal reasons, etc. The retirement of a partner affects the existing partnership agreement and requires adjustments to be made in the books of accounts.

**Accounting Treatment:**
The retirement of a partner involves the following accounting treatments:

1. **Calculation of Gaining Ratio:** The gaining ratio is the ratio in which the remaining partners will share the profits and losses after the retirement of a partner. In this case, Pankaj, Naresh, and Saurabh share profits in the ratio of 3:2. As Naresh is retiring, the gaining ratio will be calculated between Pankaj and Saurabh.

2. **Revaluation of Assets and Liabilities:** After retirement, the assets and liabilities of the firm are revalued. Any increase or decrease in the value of assets and liabilities is adjusted in the books of accounts. The revaluation may result in a profit or loss, which is shared by the remaining partners in their gaining ratio.

3. **Settlement of Retiring Partner's Capital:** The retiring partner's capital account is settled by transferring his share of capital, accumulated profits, and drawings to his loan account. The remaining partners may pay the retiring partner in cash or by transferring assets.

4. **Adjustment of Goodwill:** Goodwill is the value of the reputation and customer base of the firm. After the retirement of a partner, the remaining partners may decide to continue the firm with a new goodwill. The existing goodwill is written off or adjusted among the remaining partners in their gaining ratio.

**Conclusion:**
The retirement of a partner requires adjustments to be made in the partnership firm's books of accounts. These adjustments include the calculation of gaining ratio, revaluation of assets and liabilities, settlement of the retiring partner's capital account, and adjustment of goodwill. It is essential to follow the accounting standards and principles to ensure accurate recording and reporting of the reconstitution of the partnership firm.

See dk goel 35 illustration of chapter 4