Maharashtra Board Class 12 Book Keeping and Accountancy Chapter 4 Retirement of Partner PDF Download

Reconstitution Of Partnership (Retirement Of Partner)

4.1 Introduction

When one member ceases to be a partner and the remaining partners continue to carry on the business of the firm it is called as Retirement of a Partner. It is one of the modes of reconstitution of partnership. The new partnership business will continue with the remaining partners and the retiring partner will get the amount payable to him after considering net balance of Capital and Current Account, his share of Profit or Loss on revaluation of assets and liabilities, his share of accumulated profit, goodwill etc. Partner may retire from the business due to old age, misunderstandings amongst the partners, loss in business or want to start new business venture etc.

A partner may retire

1. By giving notice to remaining partners in the case of partnership at will

2. In accordance with the agreement by the partners

3. With the consent of all partners.

Teacher's Note

When a partner leaves a business, other partners continue it. This is like when a friend leaves a group project but the group keeps working.

Exam Trick

Remember: Retirement = One partner leaves, others stay. Just like when one friend goes home from playing, others keep playing.

Points to Remember

Retirement means one partner leaves the business.
The remaining partners continue the business.
The retiring partner gets money from the business.
Assets and liabilities are revalued when a partner retires.
Goodwill is shared among the partners.

4.2 New Ratio

The ratio in which the continuing partners decide to share the future Profits and Losses is known as New Profit Sharing Ratio.

Illustration 1:

A, B and C share profits and losses in the ratio of 4:2:1, if B retires what will be the new ratio?

Ans. The new ratio of A and C will be 4:1. It is cancelling by canceling B's share.

Illustration 2:

X, Y, and Z share profits and losses equally. Z retires and his share is acquired by X and Y in the ratio of 3:1. Calculate New Profit sharing ratio.

Ans: Calculation of New Profit Sharing Ratio

Old Ratio = X : Y: Z = 1:1:1

Z's share is acquired by X and Y in the ratio of 3:1

X's gain = \(\frac{1}{3} \times \frac{3}{4} = \frac{3}{12}\)

Y's gain = \(\frac{1}{3} \times \frac{1}{4} = \frac{1}{12}\)

X's New Share = \(\frac{1}{3} + \frac{3}{12} = \frac{7}{12}\)

Y's New Share = \(\frac{1}{3} + \frac{1}{12} = \frac{5}{12}\)

New Profit Sharing Ratio of X and Y = 7:5

Teacher's Note

New ratio is how the remaining partners will share profits from now on. If two friends were sharing snacks equally and one goes, the other two decide to share differently.

Exam Trick

Remember: New Ratio = How remaining partners share profits. Add up all remaining shares and divide.

Points to Remember

New ratio is for remaining partners only.
Retiring partner does not get any share after retirement.
Remaining partners decide the new ratio.
New ratio can be equal or unequal.
New ratio must total to 100 percent or 1.

4.3 Gain / Benefit Ratio

The ratio in which the continuing partners acquire the retiring partner's share is called gain ratio. It is normally used to write off goodwill created or raised to the extent of retiring partner's share only.

Gain Ratio = New Ratio - Old Ratio

Illustration 1:

A, B and C are sharing Profits and Losses in the ratio of 4:3: 2. B retires and A and C share future profits equally. Calculate gain ratio.

Gain Ratio = New Ratio - Old Ratio

A's Gain = \(\frac{1}{2} - \frac{4}{9} = \frac{1}{18}\)

C's Gain = \(\frac{1}{2} - \frac{2}{9} = \frac{5}{18}\)

Gain Ratio of A and C is 1:5

Illustration 2:

X, Y and Z are sharing Profits and Losses in the ratio of 4:3:2. Z retires the new ratio of X and Y is 3 :2. Calculate the gain ratio.

X's Gain = \(\frac{3}{5} - \frac{4}{9} = \frac{7}{45}\)

Y's Gain = \(\frac{2}{5} - \frac{3}{9} = \frac{3}{45}\)

Gain Ratio of × and Y is 7:3

Illustration 3:

P, Q, and R and partners sharing Profits in the ratio of 2 :2:1. Q retired. Calculate the gain ratio.

Old Ratio = 2:2:1

New Ratio = 2:1

P' s gain = \(\frac{2}{3} - \frac{2}{5} = \frac{4}{15}\)

R's gain = \(\frac{1}{3} - \frac{1}{5} = \frac{2}{15}\)

Gain Ratio = 4:2 i.e. 2:1

Teacher's Note

Gain ratio shows how much extra profit each remaining partner gets. If one friend stops sharing a pizza, others get more slices.

Exam Trick

Remember: Gain Ratio = New Ratio minus Old Ratio. The partner who gets more share has higher gain.

Points to Remember

Gain ratio is for continuing partners only.
It shows how much more share each partner gets.
Gain ratio is calculated by subtracting old ratio from new ratio.
A partner can have gain or loss or remain same.
Gain ratio is used to write off goodwill.

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