CBSE Class 12 Accountancy: Retirement and Death of a Partner – Complete Notes
Written by: CommerceWallah12 | Based on: NCERT Accountancy Part I & CBSE syllabus | Last updated: October 2026
Retirement and Death of a Partner is one of the highest-scoring chapters of Partnership Accounts in CBSE Class 12 Accountancy. These notes explain it step by step in simple language: new ratio, gaining ratio, goodwill (as per AS 26), revaluation, reserves, joint life policy, hidden goodwill, retiring partner's loan, profit till the date of death, deceased partner's capital account and executor's account. Every topic has journal entries, formats and solved examples, followed by practice questions with answers.
- Meaning of retirement and death of a partner
- New ratio and gaining ratio
- Treatment of goodwill (AS 26)
- Hidden goodwill
- Revaluation of assets and liabilities
- Reserves and accumulated profits/losses
- Joint Life Policy
- Capital adjustment, fixed vs fluctuating capital
- Retiring partner's loan account
- Death of a partner: profit till death, capital account, executor's account
- Solved illustration
- Common mistakes and exam strategy
- Practice questions with answers
- FAQs
1. Meaning of Retirement and Death of a Partner
Retirement of a partner
Retirement means a partner voluntarily leaves the firm with the consent of the other partners. The business continues with the remaining partners.
Example: A, B and C share profits in the ratio 3:2:1. If C retires, the continuing partners are A and B. They acquire C's share, so the profit-sharing ratio must be recalculated.
Death of a partner
When a partner dies, he automatically ceases to be a partner. The surviving partners may continue the business as per the agreement. The amount due to the deceased partner is paid to his executor / legal representative.
In both cases the firm is reconstituted: the old agreement ends and a new profit-sharing ratio begins.
2. New Ratio and Gaining Ratio
The continuing partners acquire the share of the outgoing partner. They are called gaining partners.
Gaining Ratio = New Ratio − Old Ratio
New Share = Old Share + Share Acquired
Example
A, B and C share profits 3:2:1. C retires. A and B acquire C's share in the ratio 2:1.
- C's share = 1/6
- A gains = 1/6 × 2/3 = 2/18 = 1/9
- B gains = 1/6 × 1/3 = 1/18
- Gaining ratio = 1/9 : 1/18 = 2 : 1
- A's new share = 3/6 + 2/18 = 9/18 + 2/18 = 11/18
- B's new share = 2/6 + 1/18 = 6/18 + 1/18 = 7/18
- New ratio = 11 : 7
Exam tip: Do not confuse the gaining ratio with the new ratio. The gaining ratio is the ratio in which the outgoing partner's share is acquired. The new ratio is the ratio in which the continuing partners share future profits.
Common cases for the new ratio
| Situation given in the question | New ratio / gaining ratio |
|---|---|
| Nothing is said about how the share is taken | Continuing partners take it in their old ratio. New ratio = their old ratio. Gaining ratio = old ratio. |
| Share acquired in a given ratio (e.g., 2:1) | Add the acquired share to each old share. Gaining ratio = the given ratio. |
| One partner acquires the whole share | Add the full share to that partner's old share. Only he is the gaining partner. |
| New ratio is given directly | Gaining ratio = New share − Old share for each partner. |
3. Treatment of Goodwill on Retirement or Death
Goodwill is the reputation and earning capacity of a business. The retiring or deceased partner helped build it, so he is entitled to his share of goodwill.
AS 26 point: As per AS 26 (Intangible Assets), internally generated goodwill is not recognised as an asset because its cost cannot be measured reliably. So in most questions, goodwill is not raised in the books. The retiring/deceased partner is compensated by the gaining partners through their capital/current accounts. Always follow the exact instruction given in the question.
Case 1: Goodwill not raised (most common)
Retiring/Deceased Partner's share of goodwill = Total Goodwill × His Old Share
Journal entry:
Gaining Partners' Capital/Current A/c ........ Dr. (in gaining ratio)
To Retiring/Deceased Partner's Capital/Current A/c
Example
A, B and C share profits 3:2:1. C retires. Goodwill of the firm is ₹60,000. A and B gain C's share in the ratio 2:1.
- C's share of goodwill = ₹60,000 × 1/6 = ₹10,000
- A bears ₹10,000 × 2/3 = ₹6,667
- B bears ₹10,000 × 1/3 = ₹3,333
A's Capital A/c ........ Dr. ₹6,667
B's Capital A/c ........ Dr. ₹3,333
To C's Capital A/c ₹10,000
Case 2: Goodwill already appears in the balance sheet
Existing goodwill is written off among all old partners in the old ratio. Then the retiring partner's share of goodwill is adjusted through the gaining partners as in Case 1.
All Old Partners' Capital/Current A/c ........ Dr. (old ratio)
To Goodwill A/c
Read the adjustment carefully. The question may say goodwill is to be raised, not raised, written off, or adjusted through capital or current accounts.
4. Hidden Goodwill
Sometimes the value of goodwill is not given directly. It is hidden in the amount paid to the retiring partner.
Type 1: Share of goodwill is stated
Total Goodwill = Retiring Partner's Share of Goodwill ÷ His Profit Share
Example: A partner with a 1/5 share is credited ₹20,000 as goodwill. Total goodwill = ₹20,000 ÷ 1/5 = ₹1,00,000.
Type 2: Amount paid is more than his net share of assets
Example: A, B and C share profits 3:2:1. After all adjustments (excluding goodwill), capitals are A ₹2,40,000, B ₹1,60,000, C ₹80,000, total ₹4,80,000. C is paid ₹1,10,000 in full settlement.
- Amount paid to C = ₹1,10,000
- C's share of net assets/capital = ₹80,000
- C's share of goodwill (hidden) = ₹1,10,000 − ₹80,000 = ₹30,000
- Total goodwill = ₹30,000 × 6/1 = ₹1,80,000
Then adjust goodwill as in Case 1.
5. Revaluation of Assets and Reassessment of Liabilities
Assets and liabilities are revalued so that the outgoing partner gets his fair share of any change in their values. A Revaluation Account is prepared.
| Item | Journal entry |
|---|---|
| Increase in asset | Asset A/c Dr. To Revaluation A/c |
| Decrease in asset | Revaluation A/c Dr. To Asset A/c |
| Increase in liability | Revaluation A/c Dr. To Liability A/c |
| Decrease in liability | Liability A/c Dr. To Revaluation A/c |
| Unrecorded asset | Asset A/c Dr. To Revaluation A/c |
| Unrecorded liability | Revaluation A/c Dr. To Liability A/c |
| Profit on revaluation | Revaluation A/c Dr. To Old Partners' Capital/Current A/c (old ratio) |
| Loss on revaluation | Old Partners' Capital/Current A/c Dr. (old ratio) To Revaluation A/c |
Very important: Revaluation profit or loss is shared by all old partners (including the retiring/deceased partner) in the old ratio.
6. Reserves and Accumulated Profits/Losses
Reserves and undistributed profits belong to the old partners. They are transferred to their accounts in the old ratio.
General Reserve / P&L credit balance
Example: General Reserve ₹90,000, old ratio 3:2:1. A gets ₹45,000, B ₹30,000, C ₹15,000.
General Reserve A/c ........ Dr. ₹90,000
To A's Capital A/c ₹45,000
To B's Capital A/c ₹30,000
To C's Capital A/c ₹15,000
Accumulated loss / P&L debit balance
All Old Partners' Capital A/c ........ Dr. (old ratio)
To Profit and Loss A/c
Workmen Compensation Reserve (WCR)
- If there is no claim: the full reserve is transferred to old partners in the old ratio.
- If there is a claim: the claim is shown as a liability. If the reserve is more than the claim, the excess goes to partners in the old ratio. If the claim is more than the reserve, the shortfall is debited to the Revaluation Account.
Investment Fluctuation Reserve (IFR)
- If the market value of investments is less than book value, the fall is first covered by the reserve. Any excess reserve goes to partners in the old ratio. Any shortfall is debited to the Revaluation Account.
- If there is no fall in value, the entire reserve is transferred to partners in the old ratio.
Which ratio to use? (Table to remember)
| Adjustment | Ratio generally used |
|---|---|
| Revaluation profit/loss | Old ratio |
| Accumulated profits and losses | Old ratio |
| General reserve and other reserves | Old ratio |
| Writing off existing goodwill | Old ratio |
| Goodwill compensation to outgoing partner | Gaining ratio |
| Future profit distribution | New ratio |
7. Joint Life Policy (JLP)
A firm may take a policy on the lives of all partners. When a partner dies, the firm receives the policy amount. A retiring partner may also be given his share of the policy's surrender value.
Case 1: Policy premium charged to P&L (no policy account in books)
On death: the whole policy amount received is distributed among all old partners in the old ratio.
Bank A/c ........ Dr. (policy amount)
To All Old Partners' Capital A/c (old ratio)
Case 2: Policy shown as an asset at surrender value (with or without JLP reserve)
Bank A/c ........ Dr. (policy amount)
To Joint Life Policy A/c (book value)
To All Old Partners' Capital A/c (excess, old ratio)
If a Joint Life Policy Reserve exists, it is transferred to old partners in the old ratio, and the policy asset is then adjusted as above. For retirement, the policy is not received, so the surrender value is accounted for through the reserve or revaluation, as the question states.
Tip: In board questions, always check if the policy is shown at the surrender value or at the premium paid. The treatment differs.
8. Capital Adjustment, Fixed vs Fluctuating Capital
Adjusting capitals of continuing partners
The new firm's capital may be fixed in advance, and partners' capitals are then adjusted in the new ratio.
Example: New firm's total capital = ₹6,00,000; new ratio of A and B = 2:1.
- A's required capital = ₹6,00,000 × 2/3 = ₹4,00,000
- B's required capital = ₹6,00,000 × 1/3 = ₹2,00,000
If a partner's capital is more than required, he withdraws the excess. If it is less, he brings in cash for the deficiency.
When the total capital is not given
Take the adjusted capital of the continuing partners, divide in the new ratio, and compare the result with their actual balances. (Add the retiring partner's loan/payment to the firm's total need as the question requires.)
Fixed capital vs fluctuating capital
| Basis | Fixed capital | Fluctuating capital |
|---|---|---|
| Capital balance | Remains unchanged | Changes with every adjustment |
| Current account | Maintained | Not maintained |
| Goodwill, revaluation, reserves | Through Current A/c | Through Capital A/c |
| Drawings, interest, salary | Current A/c | Capital A/c |
Memory trick: Fixed capital means the Current Account handles the adjustments. Fluctuating capital means the Capital Account handles them. Always check the method first.
9. Settlement of the Retiring Partner and Loan Account
After all adjustments, the amount due to the retiring partner is settled in one of three ways:
- Paid fully in cash/bank.
- Transferred fully to his Loan Account.
- Partly paid and the balance transferred to his Loan Account.
Transfer to loan: Retiring Partner's Capital A/c Dr. To Retiring Partner's Loan A/c
Payment: Retiring Partner's Loan A/c Dr. To Bank A/c
Interest on loan
Interest is paid at the rate given in the question or agreement. Under Section 37 of the Indian Partnership Act, 1932, if the firm continues the business without settling the outgoing partner's account, he (or his estate) can claim either his share of the subsequent profits attributable to his share of the property, or interest at 6% per annum on that share. For CBSE problems, always use the rate in the question; if none is given, 6% p.a. is commonly applied.
Instalment payments
If the loan is paid in equal yearly instalments with interest, interest is calculated on the opening balance of each year. Prepare the Loan Account year by year:
| Dr. | ₹ | Cr. | ₹ |
|---|---|---|---|
| Bank (instalment + interest) | xxx | Balance b/d | xxx |
| Balance c/d | xxx | Interest for the year | xxx |
10. Death of a Partner
Step-by-step order
Ratio → Goodwill → Revaluation → Reserves/Accumulated profits → Joint Life Policy → Profit till date of death → Deceased partner's capital account → Executor's account → Balance sheet.
Profit till the date of death
The deceased partner is entitled to his share of profit from the start of the year to the date of death. As the final profit is not yet known, it is estimated on the basis given in the question.
Time basis
Previous year's profit ₹1,20,000; share 1/4; partner dies after 3 months.
Profit till death = ₹1,20,000 × 3/12 = ₹30,000. Share = ₹30,000 × 1/4 = ₹7,500.
Profit and Loss Suspense A/c ........ Dr. ₹7,500
To Deceased Partner's Capital A/c ₹7,500
Sales basis
Previous year's profit ₹2,00,000; previous year's sales ₹20,00,000; sales till death ₹5,00,000; share 1/5.
Profit = ₹2,00,000 × 5,00,000/20,00,000 = ₹50,000. Share = ₹50,000 × 1/5 = ₹10,000.
If there is a loss
Deceased Partner's Capital A/c ........ Dr.
To Profit and Loss Suspense A/c
Other bases include average profit of the past few years, or the profit of the previous year.
Interest on drawings in the year of death
If the deceased partner withdrew regularly, interest on drawings is calculated for the average period up to the date of death, and debited to his capital account.
Deceased Partner's Capital Account (format)
| Dr. | ₹ | Cr. | ₹ |
|---|---|---|---|
| Drawings | xxx | Balance b/d (capital) | xxx |
| Interest on Drawings | xxx | Goodwill (from gaining partners) | xxx |
| Revaluation Loss | xxx | Revaluation Profit | xxx |
| Accumulated Losses | xxx | General Reserve / Accumulated Profits | xxx |
| Profit and Loss Suspense A/c (if loss) | xxx | P&L Suspense A/c (profit till death) | xxx |
| Executor's A/c (balancing figure) | xxx | Interest on Capital, Salary/Commission due, share of JLP | xxx |
| Total | xxx | Total | xxx |
Transfer to Executor's Account
Deceased Partner's Capital A/c ........ Dr.
To Deceased Partner's Executor's A/c
(On payment) Executor's A/c ........ Dr.
To Bank A/c
Executor's Account (format)
The Executor's Account is a liability account. The amount transferred and the interest accrued are shown on the credit side. Payments made are shown on the debit side.
| Dr. | ₹ | Cr. | ₹ |
|---|---|---|---|
| Bank (instalment paid) | xxx | Deceased Partner's Capital A/c | xxx |
| Balance c/d | xxx | Interest (on opening balance) | xxx |
| Total | xxx | Total | xxx |
If the full amount is paid immediately, the Executor's Account closes at once. If it is payable in instalments, the balance appears in the balance sheet under liabilities as "Executor's Loan".
11. Solved Illustration: Retirement of a Partner
A, B and C share profits 3:2:1. C retires. Agreed adjustments: goodwill ₹60,000; building increased by ₹30,000; stock decreased by ₹10,000; General Reserve ₹30,000; A and B gain C's share in the ratio 2:1. Capitals are fluctuating.
- Goodwill: C's share = ₹60,000 × 1/6 = ₹10,000. A bears ₹6,667 and B bears ₹3,333.
- Revaluation: Profit = ₹30,000 − ₹10,000 = ₹20,000. Shared in old ratio 3:2:1: A ₹10,000, B ₹6,667, C ₹3,333.
- General Reserve: A ₹15,000, B ₹10,000, C ₹5,000.
- Amount due to C: C's capital + ₹3,333 + ₹5,000 + ₹10,000 − any drawings/losses. This balance is paid in cash or transferred to C's Loan Account.
Balance sheet after retirement: check
Total Assets = Total Liabilities + Partners' Capital. If it does not tally, recheck goodwill, revaluation, reserves, drawings, capital adjustment, loan and cash/bank entries.
12. Common Mistakes and Exam Strategy
- Using the new ratio for revaluation: wrong. Use the old ratio.
- Charging goodwill to all partners: wrong in the usual method. Only gaining partners bear it.
- Confusing gaining ratio with new ratio.
- Forgetting profit till the date of death in death questions.
- Forgetting the Executor's Account after finding the final amount.
- Ignoring fixed vs fluctuating capital.
- Ignoring Joint Life Policy and WCR/IFR details given in the adjustments.
Board exam order of solving
Ratio → Goodwill → Revaluation → Reserves → Profit till death (death only) → Capital → Loan/Executor → Balance Sheet
Memory trick: R G R R P C L/E B (Ratio, Goodwill, Revaluation, Reserves, Profit till death, Capital, Loan or Executor, Balance sheet).
Quick revision of all entries
| Transaction | Entry |
|---|---|
| Goodwill compensation | Gaining Partners' Capital A/c Dr. To Outgoing Partner's Capital A/c |
| Write off existing goodwill | Old Partners' Capital A/c Dr. To Goodwill A/c |
| Revaluation profit | Revaluation A/c Dr. To Old Partners' Capital A/c |
| Revaluation loss | Old Partners' Capital A/c Dr. To Revaluation A/c |
| Transfer of reserve | Reserve A/c Dr. To Old Partners' Capital A/c |
| Accumulated loss | Old Partners' Capital A/c Dr. To P&L A/c |
| Retiring partner's loan | Retiring Partner's Capital A/c Dr. To Retiring Partner's Loan A/c |
| Profit till death | P&L Suspense A/c Dr. To Deceased Partner's Capital A/c |
| Transfer to executor | Deceased Partner's Capital A/c Dr. To Executor's A/c |
| Payment to executor | Executor's A/c Dr. To Bank A/c |
13. Practice Questions with Answers
Q1. A, B and C share profits 5:3:2. C retires and his share is taken by A and B equally. Find the new ratio and gaining ratio.
Answer: C's share = 2/10. A and B each gain 1/10.
A = 5/10 + 1/10 = 6/10; B = 3/10 + 1/10 = 4/10.
New ratio = 3 : 2. Gaining ratio = 1 : 1.
Q2. X, Y and Z share profits 2:2:1. Z dies. The firm's goodwill is ₹1,00,000. X and Y share the future profits equally. Pass the goodwill entry.
Answer: Z's share = 1/5. New share of X = Y = 1/2.
X gains = 1/2 − 2/5 = 1/10; Y gains = 1/10. Gaining ratio 1:1.
Z's goodwill = ₹1,00,000 × 1/5 = ₹20,000.
X's Capital A/c Dr. ₹10,000; Y's Capital A/c Dr. ₹10,000; To Z's Capital A/c ₹20,000.
Q3. A partner with a 1/6 share retires. He is paid ₹50,000 as his share of goodwill. Find the total goodwill.
Answer: Total goodwill = ₹50,000 ÷ 1/6 = ₹3,00,000.
Q4. P, Q and R share profits 3:2:1. R dies on 30th September. Profit for the previous year was ₹1,80,000. Find R's share of profit till death (time basis; year ends 31st March).
Answer: Period = 6 months. Profit = ₹1,80,000 × 6/12 = ₹90,000. R's share = ₹90,000 × 1/6 = ₹15,000.
Entry: P&L Suspense A/c Dr. ₹15,000; To R's Capital A/c ₹15,000.
Q5. Joint Life Policy appears at ₹40,000 (surrender value). A, B, C share profits 3:2:1. C dies and the firm receives ₹1,20,000. Pass the entry.
Answer: Bank A/c Dr. ₹1,20,000; To JLP A/c ₹40,000; To A's Capital A/c ₹40,000; To B's Capital A/c ₹26,667; To C's Capital A/c ₹13,333 (the excess ₹80,000 is shared 3:2:1).
14. Frequently Asked Questions (FAQs)
What is retirement of a partner?
It is when a partner voluntarily leaves the firm with the consent of the other partners, and the remaining partners continue the business.
What is gaining ratio?
It is the ratio in which the continuing partners acquire the share of the retiring or deceased partner. Gaining ratio = New ratio − Old ratio.
Why is goodwill adjusted at retirement or death?
Because the outgoing partner contributed to the firm's reputation and is entitled to his share of goodwill.
In which ratio is revaluation profit or loss shared?
Among all old partners in the old profit-sharing ratio.
In which ratio are reserves and accumulated profits distributed?
In the old profit-sharing ratio.
What is the Profit and Loss Suspense Account?
It records the deceased partner's estimated share of profit or loss from the start of the year to the date of death, when actual annual profit is not yet known.
What is an executor's account?
It is the account of the deceased partner's legal representative, showing the amount payable to him by the firm and the payments made.
What is the difference between retirement and death of a partner?
In retirement, the partner leaves voluntarily and may be paid immediately or through a loan account. In death, the amount due is paid to his executor or legal representative, and profit till the date of death must be calculated.
Conclusion
Retirement and death of a partner follows a clear pattern. Understand which adjustment is made and which ratio is used, remember the entries, and practise numericals regularly. Start with the sequence R-G-R-R-P-C-L/E-B, and even long board questions become easy.
Sources: NCERT Accountancy Part I (Class 12), CBSE Accountancy syllabus, AS 26 (ICAI), Indian Partnership Act, 1932.
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