Retirement or Death of a Partner Test - 2

New Ratio of A and C will be 5:2

Old Ratio = 1/2, 3/10 and 1/5 i.e. 5:3:2

Share of B = 3/10

Remaining = 5:2

Gaining ratio is calculated by deducting the old ratio from the new ratio. The following formula is used to calculate the gain ratio.

Gaining ratio = New ratio – old ratio

A partner can get retirement in the following ways:

Section 32 

RETIREMENT OF A PARTNER. 

(1) A partner may retire - 

(a) with the consent of all the otter partners, 

(b) in accordance with an express agreement by the partners, or 

(c) where the partnership is at will, by giving notice in writing to all the other partners of his intention to retire. 

(2) A retiring partner may be discharged from any liability to any third party for acts of the firm done before his retirement by an agreement made by him with such third party and the partners of the reconstituted firm, and such agreement may be implied by a course of dealing between such third party and the reconstituted firm after he had knowledge of the retirement. 

(3) Notwithstanding the retirement of a partner from a firm, he and the partners continue to be liable as partners to third parties for any act done by any of them which would have been an act of the firm if done before the retirement, until public   notice is given of the retirement Provided that a retired partner is not liable to any third party who deals with the firm without knowing that he was a party. 

(4) Notices under sub-section (3) may be given by the retired partner or by any partner of the reconstituted firm.

At the time of death of a partner, a temporary account is opened, which is known as Profit and loss suspense account. The main purpose of this account is to calculate and transfer the share of deceased partner to his account (up to the date of his death). and at the year end it is closed by transfering the balance to profit and loss account.

The amount payable to deceased partner’s executor as profit (up to the date of death) will be transferred to the credit side of deceased partner’s capital account and same will be shown in the assets side of the balance sheet. as P/L Suspense A/c.

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.