Retirement and death of a partner

When a partner leaves, the firm must work out everything he is owed up to that day, pay him or his family fairly, and carry on.

What the outgoing partner is entitled to

His capital and current account balance.
His share of goodwill.
His share of reserves and accumulated profits.
His share of profit on revaluation of assets and liabilities.
His share of profit up to the date of leaving.
Interest on capital and salary, if due.
Less: drawings, interest on drawings and his share of any loss.

New ratio and gaining ratio

The remaining partners take over the outgoing partner's share. Gain of a partner = New share − Old share. If nothing is said, the remaining partners continue in their old ratio between themselves, and the gaining ratio equals that ratio.

Example. Prem, Qadir and Rani share 3 : 2 : 1. Qadir retires. Prem and Rani will share 3 : 1.

Partner	New share	Old share	Gain
Prem	3/4 = 9/12	3/6 = 6/12	3/12
Rani	1/4 = 3/12	1/6 = 2/12	1/12

Gaining ratio = 3 : 1.

Treatment of goodwill

The gaining partners pay the outgoing partner for his share of goodwill, through the capital accounts. Goodwill of the firm is valued at ₹1,80,000; Qadir's share is 2/6 = ₹60,000.

Journal
Date	Particulars	Dr. (₹)	Cr. (₹)
Mar 31	Prem's Capital A/c Dr.	45,000
	Rani's Capital A/c Dr.	15,000
	To Qadir's Capital A/c		60,000
	(Qadir's share of goodwill adjusted in the gaining ratio 3 : 1)

Revaluation and reserves

As on any reconstitution, the Revaluation Account balance and all reserves are shared by all partners, including the outgoing one, in the old ratio. Suppose revaluation shows a profit of ₹18,000 and the general reserve is ₹36,000.

Journal
Date	Particulars	Dr. (₹)	Cr. (₹)
Mar 31	Revaluation A/c Dr.	18,000
	To Prem's Capital A/c		9,000
	To Qadir's Capital A/c		6,000
	To Rani's Capital A/c		3,000
	(Profit on revaluation in old ratio 3 : 2 : 1)
Mar 31	General Reserve A/c Dr.	36,000
	To Prem's Capital A/c		18,000
	To Qadir's Capital A/c		12,000
	To Rani's Capital A/c		6,000
	(General reserve distributed in old ratio)
	Total	54,000	54,000

Amount due to the retiring partner

Qadir's capital was ₹1,20,000. The firm pays him ₹48,000 at once and transfers the balance to his loan account.

Dr. Qadir's Capital A/c Cr.
Date	Particulars	₹	Date	Particulars	₹
Mar 31	To Bank A/c	48,000	Mar 31	By Balance b/d	1,20,000
Mar 31	To Qadir's Loan A/c	1,50,000	Mar 31	By Revaluation A/c	6,000
			Mar 31	By General Reserve A/c	12,000
			Mar 31	By Prem's Capital A/c (goodwill)	45,000
			Mar 31	By Rani's Capital A/c (goodwill)	15,000
		1,98,000			1,98,000

Total due to Qadir = ₹1,98,000. How it is settled depends on the agreement:

Paid in full at once: Qadir's Capital A/c Dr. To Bank A/c.
Transferred to a loan account and paid in instalments with interest.
Partly paid and partly transferred to loan, as here.

If there is no agreement on interest, section 37 of the Partnership Act gives the outgoing partner a choice: interest at 6% a year on the amount due, or a share of the profit earned with his money, until he is paid.

Loan paid in instalments

Qadir's loan of ₹1,50,000 is to be repaid in three equal yearly instalments of ₹50,000 with interest at 10% a year on the outstanding balance.

Year	Opening balance	Interest at 10%	Instalment	Total paid	Closing balance
1	1,50,000	15,000	50,000	65,000	1,00,000
2	1,00,000	10,000	50,000	60,000	50,000
3	50,000	5,000	50,000	55,000	0

Adjustment of the remaining partners' capitals

The remaining partners may decide to keep their capitals in the new ratio. Add their adjusted capitals to find the total (or use a stated total), divide it in the new ratio, and compare with what each has. A shortfall is brought in; a surplus is withdrawn or moved to current account.

Death of a partner

The accounting is the same as for retirement, with two differences. First, death can occur on any date, so the deceased partner's share of profit from the last balance sheet to the date of death must be estimated. Second, the amount due is transferred to his Executors' Account and paid to his legal representatives.

Share of profit till the date of death

It is estimated either on the basis of time or on the basis of sales.

Time basis. Qadir (2/6 share) dies on 30 June 2026, three months after the last accounts. Last year's profit was ₹2,40,000. His share = ₹2,40,000 × 3/12 × 2/6 = ₹20,000.

Journal
Date	Particulars	Dr. (₹)	Cr. (₹)
Jun 30	Profit and Loss Suspense A/c Dr.	20,000
	To Qadir's Capital A/c		20,000
	(Share of profit to the date of death)

Sales basis. Last year sales were ₹12,00,000 and profit ₹2,40,000, a rate of 20%. Sales from 1 April to 30 June this year are ₹3,60,000. Estimated profit = 20% of ₹3,60,000 = ₹72,000; Qadir's share = ₹72,000 × 2/6 = ₹24,000.

The Profit and Loss Suspense Account is closed at the year end against the actual profit. If the profit sharing ratio of the remaining partners changes, the entry is made instead through their capital accounts in the gaining ratio.

Deceased partner's capital account

It is credited with his capital, share of goodwill, reserves, revaluation profit, profit to the date of death, interest on capital and salary to that date; debited with drawings, interest on drawings and share of loss. The balance goes to the Executors' Account:

Journal
Date	Particulars	Dr. (₹)	Cr. (₹)
Jun 30	Qadir's Capital A/c Dr.	2,18,000
	To Qadir's Executors' A/c		2,18,000
	(Amount due transferred to executors (₹1,98,000 as worked above plus ₹20,000 profit to the date of death))

Admission and retirement compared

Point	Admission	Retirement or death
Ratio used for goodwill	Sacrificing ratio of old partners	Gaining ratio of remaining partners
Who receives goodwill	Old partners	Outgoing partner
Who pays goodwill	New partner	Remaining partners
Reserves and revaluation	Old partners, old ratio	All partners including outgoing, old ratio

Questions students ask

What is the gaining ratio?

The ratio in which the remaining partners take over the share of the retiring or deceased partner. For each remaining partner it is new share minus old share.

How is a deceased partner's share of profit calculated?

On a time basis, by applying the period up to death to last year's or the average profit, or on a sales basis, by applying last year's rate of profit to sales up to the date of death. His share is then taken at his profit sharing ratio.

What interest is a retiring partner entitled to on the amount left unpaid?

As agreed. If there is no agreement, section 37 of the Partnership Act lets him choose 6% a year on the amount due or a share of the profit earned by using his money.