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C H A P T E R

Retirement of a Partner

MEANING OF KEY TERMS USED IN THIS CHAPTER

1. Retirement of a When a partner ceases to be a partner of the firm but the firm continues,
Partner it is known as retirement of a partner.
2. Gaining Ratio The ratio in which the continuing partners acquire the retiring partner’s
profit share is called gaining ratio.
3. New Profit-sharing The ratio in which the continuing partners (i.e., partners other than retiring
Ratio partner) decide to share future profits and losses, is known as new profit-
sharing ratio.

CHAPTER SUMMARY

• Meaning of Retirement of a Partner: When a partner ceases to be partner of the firm but firm continues,
it is termed as retirement of a partner.
• How can a Partner Retire: A partner may retire from the firm:
(i) With the consent of all other partners;
(ii) In accordance with an express agreement by the partners; or
(iii) By giving a written notice to the remaining partners of his intention to retire, in case of ‘Partnership at will’.

• Adjustments at the Time of Retirement of a Partner: Accounting problems that arise and settled are:
calculation of the new profit-sharing ratio and gaining ratio, revaluation of assets and reassessment of
liabilities, adjustment of goodwill, adjustment of reserves, accumulated profits and losses, computation of
share of the retiring partner in profit or loss till the date of retirement.
• New Profit-sharing Ratio: The ratio in which the continuing partners, i.e., partners other than the retiring
partner decide to share future profits and losses, is known as the new profit-sharing ratio.
New Share = Old Share + Acquired Share

• Gaining Ratio: The ratio in which the continuing partners acquire the retiring partner’s profit share is known
as the gaining ratio.
Gain of a Partner = New Share – Old Share

• Accounting Treatment of Goodwill: When a partner retires, his share of profit is taken by the remaining
partners. The remaining partners then compensate the retiring partner in the form of goodwill in their gaining ratio.
The following entry is recorded for this purpose:
Remaining Partners’ Capital/Current* A/cs ...Dr. [In gaining ratio]
To Retiring Partner’s Capital/Current* A/c [Retiring Partner’s Share of Goodwill]