In this topic
Learning outcomes
- Explain the relevant accounting rule and terminology.
- Prepare a correctly classified calculation or statement.
- Show working notes and verify the debit-credit or balance check.
Key vocabulary
Concepts to know
New share minus old share for each continuing partner.
The amount due that remains unpaid after transfer from the partner’s capital account, subject to the problem’s settlement terms.
A liability account used for the amount payable to the legal representative of a deceased partner.
A policy on partners’ lives; account for proceeds and any existing policy/reserve balance using the treatment specified in the question.
Core notes
Find the gaining ratio
Compare each continuing partner’s new share with the old share. The gainers compensate the outgoing partner for goodwill in the gaining ratio. Revalue assets/liabilities and distribute revaluation profit/loss and accumulated balances among all old partners, including the outgoing partner, in the old ratio.
The outgoing partner’s final capital is calculated after goodwill, revaluation, reserves, salary/interest to date and share of profit up to retirement/death, less drawings and any amounts already paid. Avoid calculating the final amount before completing these adjustments.
Core notes
Goodwill and settlement
If goodwill is adjusted without raising it, debit the gaining partners and credit the outgoing partner’s capital in the gaining ratio. Transfer the final amount due to the outgoing partner’s loan account if not paid immediately. A later payment debits the loan account and credits Bank.
For death, calculate the deceased partner’s share of profit up to the date of death using the method in the question (time basis, sales basis or another agreed basis). Transfer the final amount to Executor’s Account. Interest, insurance proceeds and policy reserve are treated according to the specific facts.
Core notes
Balance sheet after retirement/death
The continuing partners’ capitals reflect all reconstitution adjustments. Include any loan or executor balance as a liability. Check that no outgoing capital remains as partners’ capital once transferred and that the new profit ratio is used for future operations.
At retirement, calculate the gaining ratio as new share minus old share for each continuing partner. Goodwill compensation is borne by gaining partners in that ratio and credited to the retiring partner. At death, calculate the deceased partner’s share of profit up to the date of death using the method stated in the question, then transfer the amount due to the executor’s account. Keep revaluation, reserves, goodwill and settlement entries separate so that the final amount payable can be checked.
Worked example
Step-by-step illustration
A, B and C share 5:3:2. C retires; A and B’s new ratio is 3:2. Old shares: A 1/2, B 3/10; new shares: A 3/5, B 2/5. Gains: A 1/10, B 1/10, so gaining ratio 1:1. If goodwill is ₹50,000, A and B compensate C ₹25,000 each.
| Journal entry | Dr (₹) | Cr (₹) |
|---|---|---|
| A’s Capital A/c Dr. B’s Capital A/c Dr. To C’s Capital A/c (Goodwill adjustment in gaining ratio) | 25,000 25,000 | 50,000 |
| C’s Capital A/c Dr. To C’s Loan A/c (Amount due transferred for later settlement) | [final amount] | [same] |
Board preparation
Original practice questions
- Calculate a retiring partner’s share of goodwill using the gaining ratio.
- List the adjustments needed before determining the final amount due.
- How is a deceased partner’s balance transferred when it is not paid immediately?
Make a partner-by-partner statement: opening capital + credits − debits = final amount due. Separate the amount paid immediately from the amount transferred to loan/executor account.
These are original practice questions, not claimed previous-year questions. Follow the exact method and rounding instructions in your prescribed text and school guidance.
Current syllabus
How this topic fits the course
Accounting for Partnership Firms is part of the CBSE Class XII Accountancy course structure. Computerised Accounting is an alternative to Financial Statement Analysis, not an additional compulsory unit.
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