Dear Teachers,
These slides have been prepared based on the NCERT syllabus to support you in teaching Plus One and Plus Two Accountancy and Computerised Accounting.
Please review and verify the content before using it in your classrooms. If you find any errors or have feedback, please let me know.
Mujeeb Rahiman C
HSST Commerce
GHSS Pattikkad
Malappuram Dt.
✉️ mujeebchemmala@gmail.com
9995983075 �
Chapter - 3
Reconstitution of a Partnership Firm
Retirement / Death of a Partner
Retirement / Death of a Partner
On the retirement or death of a partner, the existing partnership deed comes to an end, and in its place, a new partnership deed needs to be framed whereby, the remaining partners continue to do their business on changed terms and conditions.
There is not much difference in the accounting treatment at the time of retirement or in the event of death. In both the cases, we are required to determine the sum due to the retiring partner (in case of retirement) and to the legal representatives (in case of deceased partner).
The sum due to the retiring partner (in case of retirement) and to the
legal representatives / executors (in case of death) includes:
01
02
03
04
his share of goodwill
credit balance of his capital account / current account
his share of accumulated profits (reserves)
his share in the gain of revaluation of assets and liabilities
05
his share of profits up to the date of retirement / death
06
interest on his capital, if involved, up to the date of retirement / death
07
Salary / commission, if any, due to him up to the date of retirement / death
The following deductions, if any, may have to be made from his share
01
02
03
04
his share of goodwill to be written off, if necessary
debit balance of his current account (if any)
his share of accumulated losses
his share of loss on revaluation of assets and liabilities
05
his share of loss up to the date of retirement / death
06
his drawings up to the date of retirement / death
07
interest on drawings, if involved, up to the date of retirement / death
Various accounting aspects involved on retirement / death of a partner
01
02
03
04
Treatment of goodwill
Ascertainment of new profit sharing ratio and gaining ratio
Revaluation of assets and liabilities
Adjustment in respect of unrecorded assets and liabilities
05
Distribution of accumulated profits and losses
06
Ascertainment of share of profit or loss up to the date of retirement / death
07
Adjustment of capital, if required
08
Settlement of the amounts due to retired / deceased partner
Ascertainment of new profit sharing ratio
New profit sharing ratio is the ratio in which the remaining partners will share future profits after the retirement or death of any partner. The new share of each of the remaining partner will consist of his own share in the firm plus the share acquired from the retiring /deceased partner.
Consider the following situations :
(a) normally, the continuing partners acquire the share of retiring or deceased partners in the old profit sharing ratio, and there is no need to compute the new profit sharing ratio among them, as it will be same as the old profit sharing ratio among them.
For example,
Asha, Deepti and Nisha are partners in a firm sharing profits and losses in the ratio of 3:2:1. If Deepti retires, the new profit sharing ratio between Asha and Nisha will be 3:1
(b) The continuing partners may acquire the share in the profits of the retiring/deceased partner in a proportion other than their old ratio, In that case, there is need to compute the new profit sharing ratio among them.
For example:
Naveen, Suresh and Tarun are partners sharing profits and losses in the ratio of 5:3:2. Suresh retires from the firm and his share was required by Naveen and Tarun in the ratio 2:1.
Naveen, Suresh and Tarun Existing Ratio 5:3:2. Suresh retires
Share was required by Naveen and Tarun in the ratio 2:1.
New share of Continuing Partner = Old Share + Acquired share from
the Outgoing Partner
Gaining Ratio = 2:1
Share acquired by Naveen =
2
3
3
10
x
=
6
30
Share acquired by Tarun =
1
3
3
10
x
=
3
30
2
10
or
1
10
or
Share Naveen =
2
10
5
10
+
=
7
10
Share Tarun =
1
10
2
10
+
=
3
10
New Profit Sharing Ratio = 7:3
(c) The continuing partners may agree on a specified New Ratio:
In that case the ratio so specified will be the new profit sharing ratio.
Mujeeb Rahiman C
HSST Commerce
GHSS Pattikkad
Malappuram Dt.
Gaining Ratio
Gaining Ratio
The ratio in which the continuing partners have acquired the share from the retiring/deceased partner is called the gaining ratio.
Gaining Ratio
Normally, the continuing partners acquire the share of retiring/deceased partner in their old profit sharing ratio, In that case, the gaining ratio of the remaining partners will be the same as their old profit sharing ratio among them and there is no need to compute the gaining ratio.
For example :-
Madhu, Neha and Tina are partners sharing profits in the ratio of 5:3:2. Calculate new profit sharing ratio and gaining ratio if
1. Madhu retires
2. Neha retires
3. Tina retires
1. If Madhu retires, new profit sharing Ratio between Neha and Tina will be
New Ratio = 3:2 Gaining Ratio =3:2
2. If Neha retires new profit sharing Ratio between Madhu and Tina will be
New Ratio = 5:2 Gaining Ratio = 5:2
3. If Tina retires, new profit sharing ratio between Madhu and Neha will be:
New Ratio = 5:3 Gaining ratio = 5:3
Gaining Ratio
Alternatively, proportion in which they acquire the share of the retiring/deceased partner may be duly specified. In that case, again, there is no
need to calculate the gaining ratio as it will be the ratio in which they have acquired the share of profit from the retiring deceased partner.
A,B and C are partners sharing profits in the ratio of 3:2:1. A retires and his share is taken up by B and C in the ratio of 3:2.
Here Gaining Ratio = 3:2
Gaining Ratio
The problem of calculating gaining ratio arises primarily when the new profit sharing ratio of the continuing partners is specified.
In such a situation, the gaining ratio should be calculated by, deducting the old share of each continuing partners from his new share.
Gaining share of Continuing Partner = New share – Old share
For example,
Amit, Dinesh and Gagan are partners sharing profits in the ratio of 5:3:2. Dinesh retires. Amit and Gagan decide to share the profits of the new firm in the ratio of 3:2. The gaining ratio will be calculated as follows :
Amit’s Gaining share =
5
10
3
5
-
=
Gaining Ratio = 1:2
Old Ratio 5:3:2 New Ratio 3:2
Gaining share of Continuing Partner = New share – Old share
5
10
6
10
-
=
1
10
Gagan’s Gaining share =
2
10
2
5
-
=
2
10
4
10
-
=
2
10
This implies Amit gains
and Gagan gains
1
10
of Dinesh’s share of profit
2
10
Illustration 1
Murali, Naveen and Omprakash are partners sharing profits in the ratio of 3/8, 1/2 and 1/8. Murali retires and surrenders 2/3rd of his share in favour of Naveen and the remaining share in favour of Omprakash. Calculate new profit sharing and the gaining ratio of the remaining partners.
Old Share Murali 3/8, Naveen 1/2 and Omprakash 1/8
Murali retires and surrenders 2/3rd of his share in favour of Naveen
and the remaining share in favour of Omprakash ie 1/3
Share acquired by Naveen =
2
3
3
8
x
=
6
24
Share acquired by Omprakash =
1
3
3
8
x
=
3
24
New Share Naveen =
6
24
1
2
+
=
12 + 6
24
New Share Omprakash =
3
24
1
8
+
=
3 + 3
24
New Profit Sharing Ratio = 3:1
=
18
24
=
6
24
3
4
or
1
4
or
Gaining Ratio = 6:3 or 2:1
Illustration 2
Kumar, Lakshya, Manoj and Naresh are partners sharing profits in the ratio of 3 : 2 : 1 : 4. Kumar retires and his share is acquired by Lakshya and Manoj in the ratio of 3:2. Calculate new profit sharing ratio and gaining ratio of the remaining partners.
Old Share Kumar 3/10, Lakshya 2/10, Manoj 1/10 and Naresh 4/10
Kumar retires and his share is acquired by Lakshya and Manoj in the ratio of 3:2.
Share acquired by Lakshya =
3
5
3
10
x
=
9
50
Share acquired by Manoj =
2
5
3
10
x
=
6
50
New Share Lakshya =
9
50
2
10
+
=
10 + 9
50
New Share Manoj =
6
50
1
10
+
=
5 + 6
50
New Profit Sharing Ratio = 19:11:20
=
19
50
=
11
50
New Share Naresh =
4
10
20
50
or
Gaining Ratio = 9:6 or 3:2
Mujeeb Rahiman C
HSST Commerce
GHSS Pattikkad
Malappuram Dt.