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NCERT Class 12 Accountancy Textbook Chapter 4 With Answer PDF Free Download
Chapter 4: Reconstitution Of A Partnership Firm – Retirement/Death Of A Partner
You have learned that the retirement or death of a partner also leads to the reconstitution of a
partnership firm.
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) after making necessary adjustments in respect of goodwill, revaluation of assets and liabilities, and transfer of accumulated profits and losses.
In addition, we may also have to compute the new profit sharing ratio among the remaining partners and so also their gaining ratio, This covers all these aspects in detail.
4.1 Ascertaining the Amount Due to Retiring/ Deceased Partner
The sum due to the retiring partner (in case of retirement) and to the legal representatives/ executors (in case of death) include:
(i) credit balance of his capital account;
(ii) credit balance of his current account (if any);
(iii) his share of goodwill;
(iv) his share of accumulated profits (reserves);
(v) his share in the gain of revaluation of assets and liabilities;
vi) his share of profits up to the date of retirement/death;
(vii) interest on his capital, if involved, up to the date of retirement/death; and
(viii) 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:
(i) debit balance of his current account (if any);
(ii) his share of goodwill to be written off, if necessary;
(iii) his share of accumulated losses;
(iv) his share of loss on revaluation of assets and liabilities;
(v) his share of loss up to the date of retirement/death;
(vi) his drawings up to the date of retirement/death;
(vii) interest on drawings, if involved, up to the date of retirement/death.
Thus, similar to admission, the various accounting aspects involved on retirement or death of a partner are as follows:
- Ascertainment of new profit sharing ratio and gaining ratio;
- Treatment of goodwill;
- Revaluation of assets and liabilities;
- Adjustment in respect of unrecorded assets and liabilities;
- Distribution of accumulated profits and losses;
- Ascertainment of share of profit or loss up to the date of retirement/death;
- Adjustment of capital, if required;
- Settlement of the amounts due to retired/deceased partner;
4.2 New Profit Sharing Ratio
The 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 partners will consist of his own share in the firm plus the share acquired from the retiring /deceased partner.
| Author | NCERT |
| Language | English |
| No. of Pages | 49 |
| PDF Size | 3.2 MB |
| Category | Accountancy |
| Source/Credits | ncert.nic.in |
NCERT Solutions Class 12 Accountancy Chapter 4 Reconstitution Of A Partnership Firm – Retirement/Death Of A Partner
1. What are the different ways in which a partner can retire from the firm?
Here are the different ways:
1. For a partner to retire consent of the firm’s co-partners is required. A partner can retire if all partners agree with the decision to retire.
2. A partner can express his desire to retire by issuing a notice to the firm in case there is a written agreement.
3. A partner can retire by giving written notice to all other partners in their absence.
2. Write the various matters that need adjustments at the time of retirement of partner/partners.
At the time of retirement of partner/partners, the following matters need adjustment:
1. Determining the new gaining ratio of the partners who are remaining in the firm.
2. Determine the new ratio of firms’ remaining partners.
3. Determine the goodwill of the firm and ensure its proper accounting treatment
4. Revaluating liabilities and assets of the new firm.
5. Distributing among all the partners the accumulated profits and losses, along with reserves.
6. Retiring partner’s settlement
7. Revised calculation of capital accounts of remaining partners and their new and updated profit sharing ratio.
8. Joint life policy treatment.
3. Distinguish between sacrificing ratio and gaining ratio.
| Basis of Difference | Sacrificing ratio | Gaining Ratio |
| 1. Meaning | The ratio is where a partner of a firm agrees to sacrifice the profit share and make it available for a new partner. | That ratio is in which a partner obtains the profit share from the partner who is leaving the firm. |
| 2. Calculation | Calculated as the difference between the old and new ratio | Calculated as the difference between the new and old ratio |
| 3. Time | Calculation is done at the admission of a new partner | The calculation is done at the retirement/death of a partner. |
| 4. Objective | It is used to determine the profit and loss share that is sacrificed by the current partners at the time of joining a new partner. | It is used to determine the profit and loss share that is obtained by the existing partners when a partner retires/becomes deceased |
| 5. Effect | Existing partner’s profit share is reduced | Continuing partner profit share is increased. |
4. Why do firms evaluate assets and reassess their liabilities on retirement or on the event of the death of a partner?
As a partner retires or is taken away by death, it becomes critical to determine the liabilities and assets value on the current date to get a fair idea about its true worth.
Revaluation becomes essential as liabilities and assets may increase or decrease in value as time passes.
It may also happen that certain liabilities and assets had remained unrecorded the last time books are updated.
As a partner retires/ death happens, it may have a positive/negative impact on the value of the firm’s liabilities and assets.
Therefore, it is a good idea to evaluate the value so that the true profit/loss can be determined so that it can be shared among partners as per sharing ratio determined at the time of setting up a partnership.
5. Why a retiring/deceased partner is entitled to a share of the goodwill of the firm?
A firm earns goodwill through the efforts of its partners and is regarded as one of the most important intangible assets.
After a partner retires or is dead, the good work that was done by that partner should be acknowledged and hence proper compensation should be provided to the partner in form of a part of the goodwill of the firm.
Reconstitution Of A Partnership Firm – Retirement/Death Of A Partner NCERT Textbook With Solutions PDF Free Download