Reconstitution of Partnership: Retirement and Death of a Partner, ISC Class 12

What Reconstitution of Partnership: Retirement and Death of a Partner is about

Weightage: Reconstitution of Partnership: Retirement and Death of a Partner is part of the unit Goodwill; Reconstitution of Partnership: Admission, Retirement and Death of a Partner, which carries 15 of the 80 theory marks, shared with 2 other chapters. It is in the compulsory Section A (60 marks).Source: CISCE ISC Accountancy (Accounts) syllabus, examination year 2027, distribution of marks

Key concepts

New ratio and gaining ratio

Gaining ratio = New share − Old share, for each continuing partner. It decides who pays the outgoing partner for goodwill (and who bears his share of retained losses).

• Nothing said: the continuing partners take the outgoing share in their old ratio; the new ratio is their old ratio and the gaining ratio is also the old ratio.
• Outgoing share taken in a given proportion: add each partner's acquired part to his old share.
• New ratio given: compute new − old; a partner whose share falls has sacrificed and must be compensated.

Read fractions carefully: "half of her share" means half of the outgoing partner's share, not 1/2.

Worked example

Suppose Asha, Bilal and Chitra share profits 3/8, 3/8 and 1/4. Asha retires and gives two-thirds of her share to Bilal and the rest to Chitra. Find the new ratio and the gaining ratio. [2 marks]

Try it first, then show the solutionSolution

1. Bilal gains 2/3 × 3/8 = 2/8 = 1/4; Chitra gains 1/3 × 3/8 = 1/8.
2. Bilal: 3/8 + 2/8 = 5/8; Chitra: 2/8 + 1/8 = 3/8.

Answer: New ratio 5 : 3; gaining ratio 2 : 1 (1/4 : 1/8).

Goodwill on retirement or death, including hidden goodwill

Under AS-26 goodwill is not raised in the books. The outgoing partner's share of the firm's goodwill is credited to him and debited to the gaining partners in the gaining ratio:

Gaining Partners' Capital (or Current) A/cs Dr To Retiring/Deceased Partner's Capital A/c.

• Goodwill already in the Balance Sheet is first written off among all partners (including the outgoing one) in the old ratio.
• Hidden goodwill: if the retiring partner is paid more than his capital after all adjustments, the excess is his share of goodwill, debited to the gaining partners.
• If a continuing partner sacrifices (his new share is less than his old), the gaining partner(s) compensate him as well.

Worked example

Suppose Dev retires. After crediting his share of reserves and revaluation profit, his capital is ₹1,00,000, but the partners agree to pay him ₹1,10,000 in full settlement. The continuing partners Esha and Farid gain in 3 : 2. Pass the entry for goodwill. [2 marks]

Try it first, then show the solutionSolution

1. Excess paid over his capital = 1,10,000 − 1,00,000 = ₹10,000: this is Dev's share of hidden goodwill.

2. Particulars	Dr (₹)	Cr (₹)
   Esha's Capital A/c ... Dr	6,000
   Farid's Capital A/c ... Dr	4,000
   To Dev's Capital A/c		10,000
   (Being Dev's share of goodwill adjusted in gaining ratio 3 : 2)

Answer: Esha ₹6,000 and Farid ₹4,000 debited; Dev credited ₹10,000.

Profit to the date of retirement or death

If a partner dies (or retires) during the year, he is entitled to his share of profit from the last Balance Sheet date to the date of death. It is estimated on:

• Time basis: last year's (or average) profit × months elapsed/12 × his share.
• Turnover basis: profit as a percentage of last year's sales × sales up to the date of death × his share.

Accounting treatment as per the syllabus:

• No change in the ratio of the remaining partners: Profit and Loss Suspense A/c Dr To Deceased Partner's Capital A/c. The suspense account is closed to the P&L A/c at the year-end.
• Change in the ratio of the remaining partners: Gaining Partners' Capital/Current A/cs Dr (in gaining ratio) To Deceased Partner's Capital A/c.

Interest on capital, salary and interest on drawings are also calculated only up to the date of death.

Worked example

Suppose Kavya, Laksh and Mehul share profits equally. Mehul dies on 31st August 2025. (i) Average profit of the last three years is ₹1,44,000 (time basis). (ii) Alternatively, last year's sales were ₹24,00,000 and profit ₹3,60,000, and sales from 1st April to 31st August 2025 were ₹6,00,000 (turnover basis). Find Mehul's share of profit both ways and pass the entry if Kavya and Laksh continue to share equally. [3 marks]

Try it first, then show the solutionSolution

1. (i) 1,44,000 × 5/12 × 1/3 = ₹20,000.
2. (ii) Profit rate = 3,60,000 ÷ 24,00,000 = 15%; profit to date = 6,00,000 × 15% = ₹90,000; Mehul's share = ₹30,000.
3. The remaining partners' ratio is unchanged, so: Profit and Loss Suspense A/c Dr To Mehul's Capital A/c (₹20,000 on time basis, or ₹30,000 on turnover basis).

Answer: Time basis ₹20,000; turnover basis ₹30,000; entry through the Profit and Loss Suspense A/c.

Revaluation, reserves and accumulated losses

The Revaluation A/c is prepared exactly as on admission (decrease in assets and increase in liabilities on the debit side; increases in assets and decreases in liabilities on the credit side), but the profit or loss is shared by all partners, including the outgoing partner, in the old ratio.

Reserves and accumulated profits (General Reserve, Contingency Reserve, P&L credit balance, excess of Workmen Compensation Reserve over the claim, balance of Investment Fluctuation Reserve after meeting any fall in the value of investments) are credited to all partners in the old ratio. Accumulated losses (P&L debit balance, Advertisement Suspense / Deferred Revenue Expenditure) are debited to all partners in the old ratio.

One-entry method (when reserves are to remain in the books): only the outgoing partner's share is adjusted: Gaining Partners' Capital/Current A/cs Dr To Outgoing Partner's Capital A/c (for profits; reversed for losses).

Worked example

Suppose Pooja, Qasim and Ritu share profits 2 : 2 : 1 and Qasim retires. The General Reserve of ₹30,000 is to be retained in the books. The new ratio of Pooja and Ritu is 3 : 2. Pass the single entry. [2 marks]

Try it first, then show the solutionSolution

1. Qasim's share = 30,000 × 2/5 = ₹12,000. Gaining ratio: Pooja 3/5 − 2/5 = 1/5; Ritu 2/5 − 1/5 = 1/5, so 1 : 1.

2. Particulars	Dr (₹)	Cr (₹)
   Pooja's Capital A/c ... Dr	6,000
   Ritu's Capital A/c ... Dr	6,000
   To Qasim's Capital A/c		12,000
   (Being Qasim's share of retained General Reserve adjusted)

Answer: Pooja and Ritu debited ₹6,000 each; Qasim credited ₹12,000.

Adjustment of capitals and cash to pay the retiring partner

After settlement the continuing partners may adjust capitals:

• (a) Readjust existing adjusted capitals to the new ratio: take the total of their adjusted capitals; find each one's share in the new ratio; surplus withdrawn or deficit brought in.
• (b) Total capital of the new firm given: required capital = total × new share; compare with adjusted capital.
• (c) Bring in cash to pay off the retiring partner: cash required = amount payable + minimum bank balance to be kept − existing bank balance; brought in by the continuing partners in the new ratio (or as agreed).

Always adjust capitals after goodwill, revaluation and reserves have been posted.

Worked example

Suppose ₹84,000 is due to retiring partner Bilal. The firm's bank balance is ₹30,000. Asha and Chitra (new ratio 3 : 1) will bring enough cash to pay Bilal in full and leave a bank balance of ₹10,000. How much does each bring? [2 marks]

Try it first, then show the solutionSolution

1. Cash required = 84,000 + 10,000 − 30,000 = ₹64,000.
2. Asha 3/4 = ₹48,000; Chitra 1/4 = ₹16,000.

Answer: Asha ₹48,000; Chitra ₹16,000.

Retiring partner's Loan A/c and executor's Loan A/c with interest

The amount due may be paid at once, transferred in full to a Loan A/c, or partly paid with the rest transferred. On death the amount goes to the Deceased Partner's Executor's A/c, and if not paid at once, to the Executor's Loan A/c.

In the Loan A/c:

• Credit the loan on the date of retirement with only the unpaid balance (if part is paid at once, pay that from the Capital A/c).
• At each year-end credit interest from the last date to the year-end: interest accrued but not due (it becomes payable only on the instalment date).
• On each instalment date credit interest from the year-end to that date (interest accrued and due), then debit the payment of the instalment plus all interest due.
• Carry the balance forward with dates; the account closes on the last payment.

Interest is at the agreed rate; if the deed is silent, the Act gives the outgoing partner (at his option) 6% p.a. on the unpaid amount or a share of profits earned with his money.

Worked example

Suppose Neha retires on 30th June 2025 and ₹1,20,000 is due to her. 40% is paid immediately; the balance carries interest at 8% p.a. and is paid in two equal annual instalments with interest, on 30th June 2026 and 30th June 2027. The firm closes its books on 31st March. Prepare Neha's Loan A/c until it is closed. [6 marks]

Try it first, then show the solutionSolution

1. Paid at once ₹48,000; loan ₹72,000.
2. Neha's Loan Account (2025-26)

   Dr: Particulars	₹	Cr: Particulars	₹
   31.3.2026 To Balance c/d	76,320	30.6.2025 By Neha's Capital A/c	72,000
   		31.3.2026 By Interest on Loan A/c (accrued but not due)	4,320
   Total	76,320	Total	76,320

3. Neha's Loan Account (2026-27)

   Dr: Particulars	₹	Cr: Particulars	₹
   30.6.2026 To Bank A/c (instalment 36,000 + interest 5,760)	41,760	1.4.2026 By Balance b/d	76,320
   31.3.2027 To Balance c/d	38,160	30.6.2026 By Interest on Loan A/c (accrued and due)	1,440
   		31.3.2027 By Interest on Loan A/c (accrued but not due)	2,160
   Total	79,920	Total	79,920

4. Neha's Loan Account (2027-28)

   Dr: Particulars	₹	Cr: Particulars	₹
   30.6.2027 To Bank A/c (instalment 36,000 + interest 2,880)	38,880	1.4.2027 By Balance b/d	38,160
   		30.6.2027 By Interest on Loan A/c (accrued and due)	720
   Total	38,880	Total	38,880

Answer: Payments: ₹41,760 on 30.6.2026 and ₹38,880 on 30.6.2027; total interest ₹8,640.

Reconstitution of Partnership: Retirement and Death of a Partner in real life

Each concept, met in an everyday situation. Read the situation, answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

Topics in this chapter

• Amount Due to a Retiring Partner
• Deceased Partner's Share and Executor's Account
• Gaining Ratio and Goodwill on Retirement

Reconstitution of Partnership: Retirement and Death of a Partner: key facts

Gaining ratio

New share − Old share (for each continuing partner)

Outgoing partner's share of goodwill

Firm's goodwill × his old share; debited to gainers in gaining ratio

Profit to date (time basis)

Profit of last year (or average) × months to date of death/12 × his share

Profit to date (turnover basis)

Sales to date × (last year's profit ÷ last year's sales) × his share

Cash to be brought in

Amount payable + minimum bank balance − existing bank balance

Shared by continuing partners in the new ratio unless stated.

Interest on loan

Balance × rate × months/12

Year-end: accrued but not due. Instalment date: accrued and due; pay instalment + interest.

How the board asks Reconstitution of Partnership: Retirement and Death of a Partner

The question patterns to expect, and the method that works for each.

Tricks to remember Reconstitution of Partnership: Retirement and Death of a Partner

Short memory aids. Say each one aloud once, then use it on a question the same day.

• Admission sacrifices, retirement gains

  Admission: old partners sacrifice and receive. Retirement: continuing partners gain and pay.

  Use it when: Choosing sacrificing or gaining ratio.

• Credits to the outgoer: G-R-R-P-I

  Goodwill, Revaluation profit, Reserves, Profit to date, Interest on capital (and salary). Debits: drawings, interest on drawings, losses.

  Use it when: Retiring or deceased partner's Capital A/c.

• Loan dates: year-end and due date

  At 31st March: accrued, not due. On the instalment date: accrued and due, then pay.

  Use it when: Loan A/c with interest.

Reconstitution of Partnership: Retirement and Death of a Partner: board-level solved questions

Ordered from board level to HOTS. Cover the solution, write your own, then compare step by step.

Case-study practice (Section A style)

Read the situation, then answer every part. In the board paper this is a 6-mark question split into 1 + 2 + 1 + 2 marks.

Where the marks are

How a typical answer is split into step marks. Show every step: a right final answer alone rarely earns full marks.

Where students lose marks in Reconstitution of Partnership: Retirement and Death of a Partner

The slips examiners see most often, and what to write instead.

• ✗Mistake: Crediting the Loan A/c with the whole amount due

  CISCE examiners' comments, 2024: "Credited Loan A/c with the total amount due instead of 50% of it"; also "Prepared the Loan A/c without recording dates of transactions".

  ✓Do this: Credit only the unpaid balance; every line of a Loan A/c needs a date.

  Usually costs: 1 mark.

• ✗Mistake: Mixing up accrued-but-not-due and accrued-and-due interest

  CISCE examiners' comments, 2024: "Could not calculate interest accrued but not due on 31.3.24 and accrued and due on 30.6.24".

  ✓Do this: Split interest at the year-end: up to 31st March (not due), from 1st April to the instalment date (due).

  Usually costs: 1 mark.

• ✗Mistake: Wrong period or wrong share in a death problem

  CISCE examiners' comments, 2025: "Calculated salary and interest for 12 months instead of 4 months."; "Debited full goodwill ₹24,000 in Uma's account instead of her share."

  ✓Do this: Count months only to the date of death; write off existing goodwill in the old ratio so each partner bears only his share.

  Usually costs: 1-2 marks.

• ✗Mistake: Writing "By Goodwill" or reversing the goodwill compensation entry

  CISCE examiners' comments, 2025: "Wrote 'By Goodwill ₹8,000' instead of 'By Aman's Capital A/c'."; "Reversed goodwill compensation entry."

  ✓Do this: The deceased or retiring partner's account shows By [Gaining Partner]'s Capital A/c; the gainers are debited.

  Usually costs: 1 mark.

• ✗Mistake: Misreading "half of her share"

  CISCE examiners' comments, 2025: "Took 'half of her share' as 1/2 instead of 1/2 of 4/9."

  ✓Do this: Multiply the fraction by the outgoing share before adding it to a continuing partner.

  Usually costs: 1 mark and every later figure.

• ✗Mistake: Cash brought in miscalculated; revaluation loss credited

  CISCE examiners' comments, 2025: "Could not calculate cash brought in by Ravi and Siya."; "Credited instead of debiting partners for loss on revaluation."

  ✓Do this: Cash needed = amount payable + minimum balance − bank balance; a revaluation loss is debited to partners.

  Usually costs: 1-2 marks.

Practice questions on Reconstitution of Partnership: Retirement and Death of a Partner

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

1. Q1 · 1 mark · MCQBoard level

   A, B and C share 3 : 2 : 1. B retires; A and C take his share equally. The gaining ratio is:
   (a) 3 : 1
   (b) 1 : 1
   (c) 2 : 1
   (d) 3 : 2

   Hint

   Equally means equal gains.

   Answer

   (b) 1 : 1.

2. Q2 · 1 mark · Very short answerBoard level

   Give the entry to write off goodwill of ₹30,000 appearing in the Balance Sheet on the retirement of Z (old ratio 2 : 2 : 1).

   Hint

   All partners, old ratio.

   Answer

   X's Capital Dr 12,000; Y's Capital Dr 12,000; Z's Capital Dr 6,000; To Goodwill A/c 30,000.

3. Q3 · 2 marks · Short answerBoard level

   Last year's sales were ₹20,00,000 and profit ₹2,00,000. A partner with 1/4 share dies; sales to the date of death were ₹8,00,000. Find his share of profit on turnover basis.

   Hint

   Profit is 10% of sales.

   Answer

   8,00,000 × 10% × 1/4 = ₹20,000.

4. Q4 · 2 marks · Short answerHarder board level

   After all adjustments, the continuing partners M and N (new ratio 2 : 1) have capitals of ₹2,50,000 and ₹1,10,000. Readjust their capitals to the new ratio on the basis of their total capital.

   Hint

   Total stays the same.

   Answer

   Total ₹3,60,000: M ₹2,40,000 (withdraws ₹10,000), N ₹1,20,000 (brings ₹10,000).

5. Q5 · 2 marks · Short answerHarder board level

   A retiring partner is paid ₹1,25,000 in full settlement although his capital after adjustments is ₹1,10,000. Continuing partners gain in 3 : 2. Pass the entry for the excess.

   Hint

   Hidden goodwill.

   Answer

   Gainers' Capital A/cs Dr ₹9,000 and ₹6,000 To Retiring Partner's Capital A/c ₹15,000.

6. Q6 · 3 marks · Short answerHOTS / competency

   P&L A/c (Dr) of ₹24,000 is to remain in the books on the retirement of R (old ratio 3 : 2 : 1). P and Q will share 1 : 1. Pass the single entry.

   Hint

   Losses reverse the profit entry; who gains?

   Answer

   R's share of loss = 24,000 × 1/6 = ₹4,000. Gains: P 1/2 − 3/6 = 0; Q 1/2 − 2/6 = 1/6. Q alone gains, so R's Capital A/c Dr ₹4,000 To Q's Capital A/c ₹4,000.

7. Q7 · 2 marks · Short answerHarder board level

   Explain why a firm prefers to transfer a retiring partner's dues to a Loan A/c rather than pay at once, and what the Act provides if nothing is agreed about interest.

   Hint

   Liquidity; Section 37.

   Answer

   Paying a large sum at once may drain working capital. If there is no agreement, the outgoing partner is entitled, at his option, to interest at 6% p.a. on the unpaid amount or to the share of profits earned with his money.

8. Q8 · 2 marks · Short answerHOTS / competency

   A student credited a retiring partner's Loan A/c with ₹1,60,000 (the full amount due) although ₹80,000 had been paid on the date of retirement. Identify the error and give the correct opening entry in the Loan A/c.

   Hint

   Only the unpaid amount becomes a loan.

   Answer

   Only the balance ₹80,000 is a loan. Retiring Partner's Capital A/c Dr 1,60,000 To Bank 80,000 and To Retiring Partner's Loan A/c 80,000.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1. 1.Gaining ratio?Show answer

   New share − Old share.

2. 2.Who is debited for the outgoing partner's goodwill?Show answer

   The gaining partners, in the gaining ratio.

3. 3.Profit to date when the remaining ratio is unchanged?Show answer

   P&L Suspense A/c Dr To Deceased Partner's Capital A/c.

4. 4.Interest from the last instalment to 31st March?Show answer

   Accrued but not due.

5. 5.Act rule on unpaid dues if nothing is agreed?Show answer

   6% p.a. interest or share of profits earned with his money, at his option.

Quick revision checklist

The night before the exam: can you do each of these without looking?

• ☐Gainers pay outgoing partner for goodwill in gaining ratio.
• ☐Existing goodwill and reserves: all partners, old ratio.
• ☐Profit to date: P&L Suspense (ratio unchanged) or gainers (ratio changed).
• ☐Interest, salary to date of death only.
• ☐Loan A/c: unpaid balance; accrued not due at year-end; accrued and due on instalment date.
• ☐Cash in = payable + minimum balance − bank.

Reconstitution of Partnership: Retirement and Death of a Partner: frequently asked questions