CBSE Class 12 Accountancy Chapter 4: Retirement/Death of a Partner NCERT Solutions
This chapter focuses on the crucial accounting procedures when a partner retires or passes away from a firm. The NCERT Solutions for Class 12 Accountancy, Chapter 4, provide a detailed explanation of the various methods by which a partner can exit the partnership. It elaborates on the essential adjustments required at the time of retirement or death, including the calculation of new profit-sharing ratios and gaining ratios, revaluation of assets and liabilities, and the treatment of goodwill and accumulated profits or losses. The solutions also cover the settlement of the amount due to the retiring or deceased partner and the adjustment of remaining partners' capital accounts. These solutions are designed to help students understand the complexities of partnership reconstitution and prepare effectively for their examinations.
Quick info
| Board | CBSE |
|---|---|
| Class | Class 12 |
| Subject | Accountancy |
| Session | 2026 |
| Language | English |
| Type | NCERT Solutions |
| Chapter | Chapter 4 |
Chapter summary
Chapter 4 of the NCERT Solutions for Class 12 Accountancy deals with the retirement or death of a partner. It outlines the different ways a partner can retire, the necessary adjustments like calculating new ratios and goodwill, revaluing assets/liabilities, and distributing reserves. The solutions also explain how to settle the retiring partner's dues and adjust remaining partners' capital. This chapter is vital for understanding partnership reconstitution.
Learning outcomes
- Understand the different ways a partner can retire from a firm.
- Identify and explain the adjustments needed upon a partner's retirement or death.
- Differentiate between sacrificing ratio and gaining ratio.
- Learn how to calculate new profit-sharing ratios and gaining ratios.
- Understand the accounting treatment for goodwill, revaluation, and reserves.
- Grasp the process of settling the amount due to a retiring partner.
Topics covered
Paper topics
- Retirement of a Partner
- Death of a Partner
- Methods of Retirement
- Adjustments at Retirement/Death
- Calculation of New Profit Sharing Ratio
- Calculation of Gaining Ratio
- Treatment of Goodwill
- Revaluation of Assets and Liabilities
- Distribution of Accumulated Profits, Losses, and Reserves
- Settlement of Amount Due to Retiring Partner
- Adjustment of Capital Accounts
Important topics
- Adjustments at Retirement/Death
- Calculation of New Profit Sharing Ratio
- Calculation of Gaining Ratio
- Treatment of Goodwill
- Revaluation of Assets and Liabilities
- Settlement of Amount Due to Retiring Partner
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Questions and Solutions
Question 1
- With the consent of all other partners: A partner may retire if all the existing partners of the firm unanimously agree to their retirement. This implies a mutual understanding and agreement among all members of the partnership.
- With an express agreement by all the partners: If there is a pre-existing written agreement (partnership deed) that specifies the conditions for retirement, a partner can retire by fulfilling those conditions. This often involves giving a formal notice as stipulated in the agreement.
- By giving a written notice (if partnership is at will): In a partnership 'at will', where there is no fixed term or specific condition for dissolution, any partner can retire by providing a written notice to all other partners, clearly stating their intention to retire. This notice effectively signals the end of their association with the firm.
Question 2
- Calculation of the New Profit-Sharing Ratio: The continuing partners' new ratio needs to be determined after the outgoing partner's share is removed.
- Calculation of the Gaining Ratio: This ratio indicates the proportion in which the continuing partners will acquire the share of profit from the retiring or deceased partner. It is calculated as: Gaining Ratio = New Ratio – Old Ratio.
- Accounting for Goodwill: The firm's goodwill needs to be valued, and the retiring partner's share of goodwill must be accounted for, usually by debiting the gaining partners' capital accounts and crediting the retiring partner's capital account.
- Revaluation of Assets and Liabilities: Assets and liabilities are revalued to their current market values. Any profit or loss arising from revaluation is distributed among all partners (including the retiring one) in their old profit-sharing ratio.
- Distribution of Accumulated Profits, Losses, and Reserves: Undistributed profits, reserves, and accumulated losses existing in the firm's books must be transferred to all partners' capital accounts in their old profit-sharing ratio.
- Treatment of Joint Life Policy: If a Joint Life Policy was taken, its treatment (e.g., surrender value distribution or claim proceeds) needs to be addressed as per the partnership agreement.
- Settlement of Amount Due to the Retiring Partner: The total amount payable to the retiring partner (including their capital balance, share of profit/loss, goodwill, reserves, etc.) must be calculated and settled either by immediate payment or by transferring it to their loan account.
- Adjustment of Capital Accounts: The capital accounts of the remaining partners are often adjusted to reflect their new profit-sharing ratio, ensuring their capital balances are proportionate to their future profit shares.
Question 3
Sacrificing Ratio:
- Meaning: It is the ratio in which the old partners agree to give up their share of profit in favour of a new partner or in the event of a change in the profit-sharing ratio among existing partners where some partners reduce their share.
- Calculation: Sacrificing Ratio = Old Ratio – New Ratio.
- Timing: It is primarily calculated at the time of admission of a new partner or when the profit-sharing ratio among existing partners changes, and some partners' shares decrease.
Gaining Ratio:
- Meaning: It is the ratio in which the continuing partners acquire the share of profit from the outgoing partner (who is retiring or has died).
- Calculation: Gaining Ratio = New Ratio – Old Ratio.
- Timing: It is calculated at the time of retirement or death of an old partner, as it determines how the remaining partners benefit from the outgoing partner's share.
In essence, sacrificing ratio deals with partners giving up a part of their share, while the gaining ratio deals with partners increasing their share due to another partner's exit.
Common mistakes
- Confusing sacrificing ratio with gaining ratio.
- Incorrect calculation of new profit-sharing ratio.
- Errors in revaluing assets and liabilities.
- Improper distribution of accumulated profits, losses, or reserves.
- Mistakes in calculating the final amount due to the retiring partner.
Revision tips
- Clearly understand the conditions under which a partner can retire.
- Memorize the formulas for calculating sacrificing and gaining ratios.
- Practice revaluation of assets and liabilities with various scenarios.
- Ensure you can correctly distribute accumulated profits/losses and reserves.
- Focus on the step-by-step settlement of the retiring partner's final dues.
Practice MCQs
Q1. Which of the following is NOT a way for a partner to retire from a firm?
Explanation: A partner can retire with mutual consent, by giving notice if the partnership is at will, or as per an express agreement. Expulsion is a forced removal, not a retirement.
Q2. What is the primary purpose of calculating the gaining ratio?
Explanation: The gaining ratio specifically shows how the continuing partners will acquire the share of profit from the retiring or deceased partner.
Q3. At the time of retirement, which of the following needs adjustment?
Explanation: Retirement necessitates adjustments for goodwill, revaluation of assets and liabilities, distribution of accumulated profits/losses, and reserves.
Q4. Sacrificing Ratio is calculated as:
Explanation: The sacrificing ratio represents the portion of profit old partners give up, hence it's calculated by subtracting the new ratio from the old ratio.
Q5. When is the gaining ratio typically calculated?
Explanation: The gaining ratio is relevant when one or more partners leave the firm, as it reflects how the remaining partners' shares increase.
Frequently asked questions
What are the primary ways a partner can retire from a firm according to NCERT?
A partner can retire from a firm with the consent of all other partners, through an express agreement among partners, or by giving a written notice if the partnership is at will.
What key adjustments are necessary when a partner retires?
Key adjustments include calculating the new gaining ratio, revaluing assets and liabilities, accounting for goodwill, distributing accumulated profits/losses and reserves, and settling the amount due to the retiring partner.
How is the gaining ratio different from the sacrificing ratio?
The gaining ratio is calculated by continuing partners to determine how they acquire the outgoing partner's share (New Ratio – Old Ratio). The sacrificing ratio is calculated by old partners when a new partner is admitted, showing the share they give up (Old Ratio – New Ratio).
Why is revaluation of assets and liabilities important during retirement?
Revaluation ensures that the assets and liabilities are shown at their current market values, allowing for a fair distribution of profits or losses arising from these changes between the continuing partners and the outgoing partner.
How is the amount due to a retiring partner settled?
The amount due is settled by paying the retiring partner in full, transferring it to their loan account, or a combination of both, as agreed upon by the partners.
What is the purpose of adjusting capital accounts at the time of retirement?
Adjusting capital accounts ensures that the remaining partners' capital balances are in proportion to their new profit-sharing ratio, reflecting the firm's new structure after the partner's exit.
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