How to Calculate Gaining Ratio and Goodwill on Retirement or Death of a Partner?
The retirement and death of a partner are core concepts in partnership accounting, affecting profit sharing, asset revaluation, and business continuity. Understanding these topics helps students answer exam questions and manage real business situations effectively. Knowledge of gaining ratio, goodwill, and account settlement is vital for school exams, competitive tests, and practical business scenarios.
| Event | Trigger | Key Accounting Steps |
|---|---|---|
| Retirement of a Partner | Partner leaves by agreement or age | Calculate gaining ratio, adjust goodwill, revalue assets/liabilities, settle the outgoing partner’s account |
| Death of a Partner | Partner passes away | Share of profit till death, asset revaluation, goodwill adjustment, settlement with the deceased’s legal heirs |
What is Retirement and Death of a Partner?
Retirement or death of a partner means a partner leaves the firm due to personal choice or passing away. This changes the profit sharing in the partnership, requiring adjustment of accounts, calculation of the gaining ratio, goodwill, and settlement of capital. The reconstitution of partnership is required as per accounting standards and the Indian Partnership Act.
- Calculate the new or gaining ratio for remaining partners.
- Adjust goodwill among all partners.
- Revalue assets and liabilities.
- Settle the partner’s capital and share of profits/reserves.
Key Concepts: Gaining Ratio, Goodwill & Profit Sharing
When a partner retires or dies, remaining partners gain their share of the profits. The gaining ratio shows how much extra profit each continues partner receives. Goodwill is adjusted to compensate the outgoing/deceased partner. Any revaluation profit or old reserves are split as per the last agreed profit-sharing ratio. Knowing these ensures smooth transition and correct calculation in exams or in business practice.
Important Formulae and Entries
| Concept | Formula / Entry | Description |
|---|---|---|
| New Profit Sharing Ratio | Old Ratio (excluding outgoing partner or adjusting for new gains) | Between remaining partners after change |
| Gaining Ratio | New Share – Old Share (of remaining partners) | Decides share of goodwill payment |
| Goodwill Adjustment | Gaining Partners Dr. (in gaining ratio) To Outgoing Partner |
Outgoing/deceased partner compensated for share of goodwill |
| Share of Profit (Death) | (Past year profit) × (Period up to death / 12 months) × (Deceased partner’s share) | Paid to legal heirs/executors |
| Revaluation Profit/Loss | Distributed in old ratio | Among all partners up to exit event |
MCQs on Retirement and Death of a Partner
- P, Q, and R share profits in 5:3:2. If R retires, how is goodwill adjusted?
- A) In gaining ratio
- B) In sacrificing ratio
- C) Equally
- D) Among all partners
- If goodwill is valued at ₹1,20,000, outgoing partner's share is 1/4, and remaining partners’ gaining ratio is 2:1, the share of goodwill to be contributed by gaining partners is:
- A) ₹60,000 and ₹30,000
- B) ₹40,000 and ₹20,000
- C) ₹30,000 and ₹15,000
- D) ₹24,000 and ₹12,000
- A, B, C are in 3:2:1. B retires. New ratio of A and C is 5:1. What is the gaining ratio?
- A) 2:1
- B) 5:1
- C) 3:1
- D) 1:1
- C dies on June 30. Last year’s profit: ₹1,50,000. Profits shared equally. What is C’s share till June 30?
- A) ₹25,000
- B) ₹37,500
- C) ₹50,000
- D) ₹18,000
- Which account is credited when profit on revaluation arises at retirement?
- A) Partners’ Capital Accounts
- B) Goodwill Account
- C) Revaluation Account
- D) Executor’s Account
- After retirement, the balance of Joint Life Policy Reserve is shared in:
- A) Old Ratio
- B) New Ratio
- C) Gaining Ratio
- D) Equally
- P, Q, R share profits at 3:2:1. Q retires. R’s new share is 2/5. What is A’s new share?
- A) 3/5
- B) 2/3
- C) 3/7
- D) 4/5
- On partner's death, past reserves are distributed:
- A) Among all partners in old ratio
- B) Among continuing partners
- C) Only to legal heirs
- D) Not distributed
- B retires. His capital after adjustments is ₹40,000 plus ₹6,000 profits to date, interest due ₹1,000. Executor is paid:
- A) ₹47,000
- B) ₹46,000
- C) ₹42,000
- D) ₹45,000
- Gaining ratio can be calculated as:
- A) New ratio – Old ratio
- B) Old ratio – New ratio
- C) New ratio / Old ratio
- D) Old ratio / New ratio
Downloadable MCQ PDF and More Practice
For comprehensive practice, access extra MCQs and numericals on Retirement and Death of a Partner from Vedantu. Download question banks and detailed solutions offline for last-minute revision.
How This Topic Supports Students in Exams
Competency in retirement and death of a partner helps students answer accountancy MCQs, case studies, and numericals. These topics often feature in CBSE, ISC, and other commerce exams. Mastery builds confidence for questions involving goodwill, gaining ratio, profit sharing, and revaluation. Vedantu brings clarity for both exams and real-life business transitions.
Related Concepts and Internal Links
- Understand Reconstitution of Partnership Firm
- Master the Sacrificing Ratio for admissions and retirements
- Clarify rules of Reserves on Retirement/Death
- See full workflow on Death of a Partner
- Explore rights of outgoing partners in various scenarios
In summary, the retirement and death of a partner are crucial commerce topics covering reconstitution, profit adjustment, and goodwill calculation. Practicing these helps students score well in exams and tackle real-world business changes. At Vedantu, clear explanations and structured MCQs ensure strong understanding for all commerce learners.
FAQs on Retirement and Death of a Partner: MCQs, Formulas & Solutions
1. What happens to a partner’s share of profit upon retirement?
Upon a partner's retirement, their share of profit is calculated up to the date of retirement. This share is then settled through the payment of their capital and any share in profits, reserves, or goodwill. The remaining partners continue to share profits based on the new profit-sharing ratio.
2. How is the gaining ratio calculated on retirement or death?
The gaining ratio represents the proportion by which the remaining partners increase their share of profits after a partner's retirement or death. It's calculated as the difference between the old and new profit-sharing ratios for each remaining partner. The new ratio is determined as per partnership agreement or law.
3. What is the treatment of goodwill when a partner retires?
When a partner retires, goodwill is usually adjusted. The retiring partner's share of goodwill is calculated based on their share of profits, often using the firm's value. This share is then paid by the remaining partners to the retiring partner. Methods include the gaining ratio or predetermined agreement. Journal entries are made to reflect this.
4. How do you distribute profits to a deceased partner’s executors?
Profits due to a deceased partner are distributed to their executors. The deceased partner's share of profit is calculated up to the date of death. This amount is paid to their estate, along with their capital, share of goodwill, and other entitlements as stipulated in the partnership deed.
5. Where can I download MCQs on retirement and death of a partner with answers?
Downloadable MCQs on retirement and death of a partner, including answer keys and explanations, are available on many educational websites. Look for resources specifically designed for CBSE/ISC Accountancy students, offering practice questions covering gaining ratio, goodwill, and profit sharing calculations.
6. Retirement and death mcqs
MCQs on retirement and death of a partner test understanding of gaining ratio, goodwill adjustments, and profit distribution. Practice questions cover various scenarios, including calculations, journal entries, and interpretation of partnership agreements. These MCQs help prepare students for Accountancy exams.
7. MCQ on death of a partner
MCQs focusing on the death of a partner assess knowledge of the accounting treatment for a deceased partner's share of profits, capital, and goodwill. Questions often involve calculating the deceased partner's share and distributing it to their executors. These questions are crucial for exam preparation.
8. How is goodwill recorded on retirement of a partner?
Goodwill on the retirement of a partner is recorded by crediting the retiring partner's capital account and debiting the remaining partners' capital accounts in their gaining ratio. This reflects the share of goodwill paid to the retiring partner by the continuing partners. The journal entry records the adjustment.
9. How to calculate gaining ratio when partner retires?
The gaining ratio is calculated by finding the difference between the old profit-sharing ratio and the new profit-sharing ratio for each remaining partner. This shows how the profits are redistributed after one partner leaves. The calculation will depend on whether the new ratio is explicitly stated or must be derived.
10. Share of profit to deceased partner—how calculated?
A deceased partner's share of profit is calculated up to the date of their death, usually based on the partnership firm's profit for the accounting period. This profit share, along with their capital and goodwill, is then paid to their executors or legal representatives as outlined in the partnership agreement.
11. mcq on retirement and death of a partner with answers pdf
Many websites offer downloadable PDFs containing MCQs on retirement and death of a partner, complete with answers and detailed explanations. These resources are helpful for self-assessment and exam preparation, particularly for Accountancy students preparing for CBSE/ISC exams. Look for resources that include various question types and cover key concepts such as gaining ratio and goodwill.
