Retirement or Death of a Partner Test - 4

The main effect of retirement of a partner is that the combined share of remaining partners increases due to the reason that the remaining partner gets the share given by the retiring partner.

Outgoing partner cannot take complete goodwill of the firm. Outgoing partner is entitled for the followings:

(i) His capital account balance

(ii) His share of profit reserves & gains etc.

(iii) Revaluation profit or loss

(iv) His share of goodwill

Note: outgoing partner is entitled for his share of goodwill only and not the complete goodwill of the firm.

Retirement or death of a partner will create a situation for the continuing partners, which is known as Reconstitution.

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.

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

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.

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.

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).

Goodwill given in the old balance sheet will be written off by all the partners (including retiring partner) at the time of retirement of a partner. Goodwill will be written off in the old ratio of all the partners.

As it is fictitious assets so we write it on debit side of partners capital account and reduce partners capital with that effect. So asset goddiwll gone and liabilities capital reduce. debit =credit.

If any partner sacrificing instead of gaining at the time of retirement or death, in such a case that partner’s capital account should be credited for the adjustment of goodwill amount.

At the time of retirement or death of a partner, gain ratio of remaining partners is calculated as follows:

New Ratio – Old Ratio = Gain Ratio

Goodwill earned by the firm is the effort of all the partners. When a partner retires from the firm, he should get his share of goodwill other than his capital amount (adjusted).

At the time of retirement, goodwill given in the balance sheet should be debited to the partners in their old profit sharing ratio (including the outgoing partner).

To calculate the new profit sharing ratio at the time of retirement, following formula should be used: New Share = Old Share + Acquired Share.

Sometimes these acquired share is in negative. it means that there is some sacrifice by the partner and some other partner is gaining more share in the future profit.

When a partner retires from the firm, his share will be acquired by the continuing partners. The ratio in which they acquire the share of retired partner, is known as gaining ratio.

X:Y:Z = 8:7:5
so, If Z Retires then Gaining Ratio will be:-

 Hence, New Ratio will be :-

 New Ratio = X : Y =21:19

The profit should be distributed among the Land N in Ratio 3:1. Profits cannot be shared equally because there is partnership deed and profit should be distributed accordingly.