Class 12 Accountancy Chapter 3 explains how a partnership firm is reconstituted when an existing partner retires or passes away. This chapter focuses on how to calculate the retiring or deceased partner’s share in profits, goodwill, and revaluation of assets and liabilities. It also discusses how the remaining partners adjust their capital and profit-sharing ratios after such changes. This chapter is important for understanding how businesses handle partner exits and continue operations smoothly.
I’m writing about this topic because many students find the retirement or death of a partner more complicated than admission. There are multiple calculations and adjustments involved, such as gaining ratios, settlement of the outgoing partner’s account, and treatment of accumulated reserves. It also includes journal entries and preparation of a Revaluation Account and a Memorandum Revaluation Account. All these are crucial for Class 12 board exams and help students understand real-life business scenarios. If you get the concept clear and practise regularly from the NCERT book, this chapter becomes much easier to score in exams.
Key Concepts in Chapter 3 – Retirement/Death of a Partner
A partnership firm goes through reconstitution when a partner retires or dies. In both cases, changes occur in the profit-sharing ratio, goodwill, capital accounts, and other financial adjustments.
Let’s go over the main concepts covered in this chapter.
1. Gaining Ratio
When a partner retires or dies, the remaining partners gain their share. This gained share is divided in a specific ratio known as the Gaining Ratio.
Formula:
Gaining Ratio = New Ratio – Old Ratio
It helps in determining how goodwill should be adjusted among the remaining partners.
2. Treatment of Goodwill
The retiring or deceased partner must be compensated for their share of goodwill. This is done through capital accounts of the remaining partners in their gaining ratio.
Example:
If Partner A retires and B and C continue, they compensate A for his goodwill share.
3. Revaluation of Assets and Liabilities
Just like in the admission of a partner, assets and liabilities are revalued during retirement or death. This is done to reflect the fair value of the firm.
- A Revaluation Account is prepared
- Profit or loss on revaluation is shared among all existing partners in the old ratio
4. Settlement of Retiring/Deceased Partner’s Account
The amount due to the outgoing partner is calculated, which includes:
- Capital balance
- Share of goodwill
- Share in accumulated reserves
- Revaluation profit/loss
- Share of profits up to the date of retirement/death (in case of death)
Payment may be made immediately or transferred to a loan account.
5. Adjustment of Capitals
After retirement or death, the continuing partners may:
- Adjust their capitals according to the new profit-sharing ratio
- Bring in or withdraw capital to maintain balance
6. Journal Entries
Several journal entries are made in this chapter including:
- For revaluation of assets and liabilities
- For goodwill adjustments
- For settlement of the retiring or deceased partner
- For adjusting capitals
7. Special Case – Death of a Partner
In case of death, additional points to note:
- Profit up to the date of death is calculated on a time basis or on the basis of previous year’s profit
- Executor’s account is prepared for the settlement
- Life insurance policies like Joint Life Policy (JLP) may also be adjusted if applicable
Download PDF – NCERT Class 12 Accountancy Chapter 3
To study this chapter in detail, students should always refer to the official NCERT PDF. It contains all the explanations, formats, and questions aligned with the CBSE syllabus.
