Retirement or Death of a partner Test - 56

Sacrificing Ratio is calculated by deducting new share from the old share. Gaining ratio is calculated by deducting old share from the new share.

The amount of loss due to the deceased partner (up to the date of his death) will be debited to his capital account and same will be shown in balance sheet also.

When a partner is Retired then New Profit Sharing Ratio will be calculated as it is necessary because there will be changes in the ratio due to sacrifice or gain by partners . Hence, Remaining partner will get a new share in the firm.

After the retirement of Z, new ratio of X and Y will be 5:4.

Simplifying, 1/2, 2/5, 1/10 , L.C.M. is 10

Ratio will be 5:4:1

Hence , If z will retire then new ratio will be 5:4.

If a partnership firm continues its business without adjusting the account of outgoing partner, in such a case Section 37 of the Indian Partnership Act will be applicable. According to that outgoing partner is entitled for interest or profit.

Sec.37

Where any member of a firm has died or otherwise ceased to be a partner, and the surviving or continuing partners carry on the business of the firm with the property

of the firm without any final settlement of accounts as between them and the outgoing partner or his estate, then, in the absence of a contract to the contrary, the

outgoing partner or his estate is entitled at the option of himself or his representatives to such share of the profits made since he ceased to be a partner as

may be attributable to the use of his share of the property of the firm or to interest at the rate of six per cent. per annum on the amount of his share in the property of the firm :

Provided that where by contract between the partners an option is given to surviving or continuing partners to purchase the interest of a deceased or outgoing partner,

and that option is duly exercised, the estate of the deceased partner, or the outgoing partner of his estate, as the case may be, is not entitled to any further or other

share of profits, but if any partner assuming to act in exercise of the option does not in all material respects comply with the terms thereof, he is liable to account under

the foregoing provisions of this section.

Deceased partner’s account can be settled by paying off to his executor:

•Full amount immediately

•In installment with interest

The main purpose of calculating gaining ratio at the time of retirement of a partner is to adjust his amount of goodwill. After calculating his share of goodwill, gainer partners will be debited and outgoing partner will be credited.

In the absence of any information regarding interest on loan to the partner, it should be paid @ 6% per annum.

At the time of retirement or death of a partner we need to calculate the gaining ratio of the existing partners. The main purpose of calculating gaining ratio is to adjust the share of goodwill at the time of retirement or death of a partner. This is true in normal condition, if after retirement, remaining partners changes their ratio then there are chances that some partners has to suffer loss.so gain and sacrifice both ratio is to be calculated.

Gaining Ratio is calculated at the time of retirement or death of partner. It is the excess of new ratio over old ratio of old partners except retire or dead partner.

Gaining Ratio = New Ratio - Old Ratio

Ratio of A and B will be 5:3 (after adjusting the old share and acquired share).