AccountsISC Class 12 · Reconstitution of Partnership: Retirement and Death

Gaining Ratio and Goodwill on Retirement: ISC Class 12 Accounts

Updated 15 October 2026 · Fact-checked

Gaining ratio is the ratio in which continuing partners acquire a retiring partner's share: new share minus old share for each. The retiring partner's share of goodwill is credited to his capital account and debited to the gaining partners' capital accounts in that ratio. Goodwill already in the books is written off among all partners in the old ratio.

Subtract each continuing partner's old share from the new share: A and B gain 5/40 and 3/40, a gaining ratio of 5:3 (their old ratio).

Illustration drawn for QuestionBuddy.

Understand Gaining Ratio and Goodwill on Retirement

New ratio. When a partner retires, his share is taken over by the others. If the question says nothing, they continue in their old ratio between themselves. If he gives his share in stated fractions, add each fraction of *his share* to the receiver's old share. ISC examiners in 2025 noted candidates treating 'half of her share' as one-half, instead of one-half of her share (for example 1/2 × 4/9).

Gaining ratio = new share − old share for each continuing partner. It is the counterpart of the sacrificing ratio used on admission. Three cases:

No new ratio given: gaining ratio = their old ratio.
New ratio given: compute each partner's gain; it may differ from the old ratio, and one partner may gain nothing.
A partner's new share is below his old share: he sacrifices and must himself be compensated by the partner who gains.

Goodwill on retirement. The retiring partner has helped build the firm's reputation, and the gainers will enjoy his share of future profits. The syllabus treats goodwill through partners' capital accounts:

Gaining Partners' Capital A/cs Dr (gaining ratio); To Retiring Partner's Capital A/c (his share of goodwill).
Existing goodwill in the books is first written off: All Partners' Capital A/cs Dr (old ratio); To Goodwill A/c.

Hidden goodwill. If the retiring partner is paid more than his capital after all other adjustments, the excess is his share of goodwill. Firm's goodwill = excess ÷ his share.

Valuing goodwill. The firm's goodwill may be given or calculated by the average profit, super profit or capitalisation methods covered in the Goodwill chapter. Adjust past profits for abnormal items first, and remember the words 'years' purchase'.

Reserves when the ratio changes. If accumulated profits are to stay in the books, the syllabus allows one entry: Gaining Partners' Capital A/cs Dr; To Sacrificing (retiring) Partner's Capital A/c, for his share.

Gaining Ratio and Goodwill on Retirement: key facts

Gaining ratio: Gain of each continuing partner = New share − Old share; A negative result is a sacrifice.
New share when the retiring share is given in fractions: New share = Old share + (Fraction received × Retiring partner's share); The fraction is of his share, not of the whole firm.
Retiring partner's share of goodwill: Firm's goodwill × Retiring partner's share; Debited to gainers in the gaining ratio.
Hidden goodwill: Firm's goodwill = (Amount paid − Capital after other adjustments) ÷ His share
Goodwill entries: 1.Existing goodwill: All partners Dr (old ratio)
2.Goodwill | His share: Gainers Dr (gaining ratio)
3.Retiring partner

How to answer Gaining Ratio and Goodwill on Retirement questions

Goodwill on retirement is a common 3-mark ISC question and a step in every 6-mark settlement. The ratio comes first; the entry follows.

1Write the old ratio as fractions with a common denominator.
2Find the new ratio: from the question, from the stated fractions, or as the continuing partners' old ratio.
3Compute gain = new − old for each continuing partner; note any partner who gains nothing or sacrifices.
4Value the firm's goodwill if needed, adjusting past profits for abnormal items.
5Write off any goodwill already in the books in the old ratio.
6Pass the compensation entry: gainers Dr, retiring (and any sacrificing continuing) partner Cr.

Gaining Ratio and Goodwill on Retirement in real life

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

Gainers pay the leaver for goodwill

Suppose three friends run a café with equal shares. One friend leaves to study abroad. The café's regular customers and name are valued at ₹90,000.

How much is the leaving friend owed for goodwill, and what does each friend who stays pay?

Try it first, then show the solutionSolution

Her share of goodwill = ₹90,000 × 1/3 = ₹30,000.
Each friend who stays moves from 1/3 to 1/2, gaining 1/6, so the gaining ratio is 1:1 and each pays ₹15,000.

Answer: She receives ₹30,000: ₹15,000 from each friend who stays.

Memory hook: Whoever gains her share pays for it.

Tricks to remember Gaining Ratio and Goodwill on Retirement

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

New minus old
Gain = new − old. Positive: pays goodwill. Zero: no entry. Negative: receives goodwill.
Use it when: Any change in ratio on retirement.
Fraction of a fraction
'Half of her share' means 1/2 × her share, never 1/2 of the firm.
Use it when: Retiring share given in parts.
Old goodwill out, old ratio
Goodwill already in the books is written off by everyone, including the leaver, in the old ratio.
Use it when: Questions where goodwill appears in the Balance Sheet.

Gaining Ratio and Goodwill on Retirement: solved examples

Ordered from board level to HOTS. Try each one before you open the solution.

Example 1: Defining gaining ratio · 1 mark · MCQBoard level

Gaining ratio of a continuing partner on retirement is calculated as:
(a) New ratio − Old ratio
(b) Old ratio − New ratio
(c) New ratio ÷ Old ratio
(d) Old ratio × New ratio

Try it first, then show the solutionSolution

A continuing partner's share rises after a retirement.
The rise is new share minus old share.

Answer: (a) New ratio − Old ratio

Example 2: Goodwill when no new ratio is given · 3 marks · Short answerBoard level

Jaya, Kabir and Lina share profits 3:3:2. Kabir retires. The firm's goodwill is valued at ₹1,60,000. No new ratio is given. Calculate the gaining ratio and pass the goodwill entry. (3 marks)

Try it first, then show the solutionSolution

Jaya and Lina continue 3:2, so the gaining ratio is 3:2.
Kabir's share of goodwill = 1,60,000 × 3/8 = ₹60,000.
Jaya's Capital Dr 36,000; Lina's Capital Dr 24,000; To Kabir's Capital 60,000.

Answer: Gaining ratio 3:2; Jaya ₹36,000 and Lina ₹24,000 Dr; Kabir ₹60,000 Cr.

Example 3: Retiring share given in fractions · 3 marks · Short answerHarder board level

Mira, Nikhil and Ojas share profits 2/5, 1/3 and 4/15. Mira retires and gives three-quarters of her share to Nikhil and the rest to Ojas. Calculate the new ratio and the gaining ratio. (3 marks)

Try it first, then show the solutionSolution

Nikhil gains 3/4 × 2/5 = 3/10; Ojas gains 1/4 × 2/5 = 1/10.
New: Nikhil 1/3 + 3/10 = 19/30; Ojas 4/15 + 1/10 = 11/30; new ratio 19:11.
Gaining ratio 3/10 : 1/10 = 3:1.

Answer: New ratio 19:11; gaining ratio 3:1.

Example 4: Valuing goodwill, then one partner gains nothing · 6 marks · Long answerHarder board level

Pooja, Raj, Sana and Tanvi share profits 3:2:2:1. Raj retires. Goodwill is valued at two and a half years' purchase of average profits of three years: ₹96,000; ₹1,28,000 (including an abnormal gain of ₹8,000); and ₹1,14,000 (after an abnormal loss of ₹6,000). Pooja, Sana and Tanvi will share 3:3:2. Calculate goodwill, the gaining ratio and the entry. (6 marks)

Try it first, then show the solutionSolution

Adjusted profits: 96,000; 1,28,000 − 8,000 = 1,20,000; 1,14,000 + 6,000 = 1,20,000. Total ₹3,36,000; average ₹1,12,000.
Goodwill = 1,12,000 × 2.5 = ₹2,80,000; Raj's share 2/8 = ₹70,000.
Gains: Pooja 3/8 − 3/8 = 0; Sana 3/8 − 2/8 = 1/8; Tanvi 2/8 − 1/8 = 1/8; gaining ratio Sana:Tanvi 1:1.
Sana's Capital Dr 35,000; Tanvi's Capital Dr 35,000; To Raj's Capital 70,000.

Answer: Goodwill ₹2,80,000; Raj's share ₹70,000 borne equally by Sana and Tanvi; Pooja is not debited.

Example 5: A continuing partner who sacrifices · 6 marks · Long answerHOTS / competency

Uma, Vir and Wren share profits 2:2:1. Wren retires and Uma and Vir agree to share 4:1 in future. Goodwill is valued at ₹75,000. Calculate each continuing partner's gain or sacrifice and pass one entry for goodwill. (6 marks)

Try it first, then show the solutionSolution

Uma: 4/5 − 2/5 = +2/5 (gain). Vir: 1/5 − 2/5 = −1/5 (sacrifice).
Wren's share = 75,000 × 1/5 = ₹15,000; Vir's sacrifice = 75,000 × 1/5 = ₹15,000.
Uma's gain = 75,000 × 2/5 = ₹30,000.
Uma's Capital Dr 30,000; To Wren's Capital 15,000; To Vir's Capital 15,000.

Answer: Uma's Capital A/c Dr ₹30,000; To Wren's Capital A/c ₹15,000; To Vir's Capital A/c ₹15,000.

Example 6: Hidden goodwill with an unequal gain · 3 marks · Short answerHOTS / competency

Xena, Yash and Zoya share profits 3:4:3. Xena retires and Yash and Zoya will share equally. Xena's capital after all adjustments except goodwill is ₹1,05,000; she is paid ₹1,32,000 in full settlement. Find the firm's goodwill and pass the entry. (3 marks)

Try it first, then show the solutionSolution

Hidden goodwill (her share) = 1,32,000 − 1,05,000 = ₹27,000; firm's goodwill = 27,000 ÷ 3/10 = ₹90,000.
Gains: Yash 5/10 − 4/10 = 1/10; Zoya 5/10 − 3/10 = 2/10; gaining ratio 1:2.
Yash's Capital Dr 9,000; Zoya's Capital Dr 18,000; To Xena's Capital 27,000.

Answer: Firm's goodwill ₹90,000; Yash ₹9,000 and Zoya ₹18,000 Dr; Xena ₹27,000 Cr.

Where students lose marks in Gaining Ratio and Goodwill on Retirement

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

Mistake: Reading 'half of her share' as one-half
Skipping the multiplication by her share.
Wrong working
Nikhil gains 3/4
Right working
Nikhil gains 3/4 × 2/5 = 3/10
Do this: Multiply the fraction by the retiring share; ISC examiners in 2025 reported this error.
Usually costs: 1-2 marks.
Mistake: Writing goodwill without 'years' purchase'
Multiplying average profit by the number of years averaged.
Wrong working
Goodwill = 1,12,000 × 3
Right working
Goodwill = 1,12,000 × 2.5 years' purchase
Do this: Use the years' purchase stated, not the number of years averaged; 2025 examiners flagged this.
Usually costs: 1 mark.
Mistake: Reversing the compensation entry
Debiting the retiring partner.
Wrong working
Raj's Capital Dr 70,000; To Sana and Tanvi
Right working
Sana's and Tanvi's Capitals Dr; To Raj's Capital 70,000
Do this: The leaver is credited; 2025 examiners noted reversed entries.
Usually costs: 1-2 marks.
Mistake: Using the old ratio when a new ratio is given
Assuming gaining ratio = old ratio in all cases.
Wrong working
Pooja, Sana, Tanvi Dr in 3:2:1
Right working
Sana and Tanvi Dr in 1:1; Pooja nil
Do this: Compute new − old whenever the new ratio is stated.
Usually costs: 1-2 marks.

Exam tips

Show old, new and gain in a three-row working note; it earns the method mark even if later figures slip.
Adjust abnormal gains (subtract) and abnormal losses (add back) before averaging profits.
Mention 'gaining ratio' in the narration of the goodwill entry.
If a continuing partner sacrifices, credit him in the same entry as the retiring partner.

Practice questions on Gaining Ratio and Goodwill on Retirement

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

Q1 · 1 mark · MCQBoard level
On a partner's retirement, goodwill already appearing in the books is:
(a) credited to the retiring partner only
(b) written off among all partners in the old ratio
(c) written off among continuing partners in the new ratio
(d) left in the books
Hint
It was built while all were partners.
Answer
(b) written off among all partners in the old ratio
Q2 · 1 mark · MCQBoard level
If the new ratio of the continuing partners is not given, their gaining ratio is:
(a) equal
(b) their old ratio
(c) the retiring partner's ratio
(d) their capital ratio
Hint
They take his share as they share now.
Answer
(b) their old ratio
Q3 · 3 marks · Short answerBoard level
Ana, Ben and Cal share profits 7:5:3. Ben retires; no new ratio is given. The firm's goodwill is ₹1,35,000. Pass the goodwill entry. (3 marks)
Hint
Gaining ratio 7:3.
Answer
Ben's share = 1,35,000 × 5/15 = ₹45,000. Ana's Capital Dr 31,500; Cal's Capital Dr 13,500; To Ben's Capital 45,000.
Q4 · 3 marks · Short answerHarder board level
Dia, Eli and Fay share profits 1/2, 1/3 and 1/6. Dia retires; Eli takes one-fifth of her share and Fay the rest. Calculate the new ratio and gaining ratio. (3 marks)
Hint
One-fifth of 1/2.
Answer
Eli gains 1/10; Fay gains 4/10. New: Eli 13/30, Fay 17/30, ratio 13:17. Gaining ratio 1:4.
Q5 · 3 marks · Short answerHarder board level
A firm's average profit is ₹1,10,000; capital employed ₹6,00,000; normal rate of return 12%. Goodwill is three years' purchase of super profit. A partner with a one-third share retires and the others gain equally. Calculate his share of goodwill and each gainer's debit. (3 marks)
Hint
Normal profit ₹72,000.
Answer
Super profit = 1,10,000 − 72,000 = ₹38,000; goodwill = ₹1,14,000; his share ₹38,000; each gainer Dr ₹19,000.
Q6 · 1 mark · Assertion-reasonHarder board level
Assertion (A): On retirement, the gaining ratio may differ from the continuing partners' old ratio.
Reason (R): Continuing partners may agree on a new ratio of their own.
(a) Both A and R are true, and R is the correct explanation of A.
(b) Both A and R are true, but R is not the correct explanation of A.
(c) A is true, but R is false.
(d) A is false, but R is true.
Hint
When is gaining ratio = old ratio?
Answer
(a) Both A and R are true, and R is the correct explanation of A.
Q7 · 6 marks · Long answerHarder board level
Gita, Hari and Ira share profits 2:1:1. Ira retires; Gita and Hari will share equally. A General Reserve of ₹48,000 is to remain in the books. Pass a single entry for Ira's share of the reserve. (6 marks)
Hint
Only the gainer pays.
Answer
Gains: Gita 1/2 − 2/4 = 0; Hari 1/2 − 1/4 = 1/4. Ira's share = ₹12,000. Hari's Capital A/c Dr 12,000; To Ira's Capital A/c 12,000.
Q8 · 6 marks · Long answerHarder board level
Profits for three years were ₹70,000, ₹90,000 and ₹1,10,000. Goodwill is three years' purchase of average profit. A partner with a two-ninths share retires and the others gain equally. Calculate goodwill and the entry. (6 marks)
Hint
Average ₹90,000.
Answer
Goodwill = 90,000 × 3 = ₹2,70,000; his share = ₹60,000; each gainer's Capital Dr ₹30,000; To retiring partner's Capital ₹60,000.
Q9 · 6 marks · Long answerHOTS / competency
Kian, Lara and Moe share profits 3/7, 2/7 and 2/7. Kian retires and gives two-thirds of his share to Lara and the rest to Moe. Goodwill is ₹1,05,000. Calculate the new ratio, gaining ratio and goodwill entry. (6 marks)
Hint
Two-thirds of 3/7.
Answer
Lara gains 2/7, Moe 1/7; new ratio 4:3; gaining ratio 2:1. Kian's share ₹45,000: Lara's Capital Dr 30,000; Moe's Capital Dr 15,000; To Kian's Capital 45,000.
Q10 · 3 marks · Short answerHOTS / competency
Nia, Oli and Pia share profits 3:2:1. Pia retires and Nia and Oli will share 2:1. Goodwill is ₹72,000. Who pays Pia for goodwill, and how much? (3 marks)
Hint
Check Oli's gain.
Answer
Nia gains 2/3 − 3/6 = 1/6; Oli gains 1/3 − 2/6 = 0. Nia alone pays Pia's share of ₹12,000: Nia's Capital Dr 12,000; To Pia's Capital 12,000.

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.Old 2/5, new 1/2: gain?Show answer
1/10.
2.Who bears goodwill already in the books on retirement?Show answer
All partners, including the retiring partner, in the old ratio.
3.Excess paid ₹10,000; retiring share 1/5: firm's goodwill?Show answer
₹50,000.
4.A continuing partner whose share falls: debited or credited for goodwill?Show answer
Credited; he sacrifices.
5.Gaining ratio on retirement is the counterpart of which ratio on admission?Show answer
Sacrificing ratio.

Gaining Ratio and Goodwill on Retirement: frequently asked questions

Is goodwill raised in the books on retirement?

Not under the capital adjustment approach the ISC syllabus uses; the gainers compensate the retiring partner through capital accounts.

What if the gaining ratio works out the same as the old ratio?

That happens when the continuing partners keep their old ratio; the working is still worth showing.

Can a continuing partner's share remain unchanged after a retirement?

Yes, if the new ratio gives him the same share; he then neither pays nor receives goodwill.

Is the treatment of goodwill on death the same?

Yes. The deceased partner's share is credited to his capital and debited to the gaining partners.