Reconstitution of Partnership: Admission, Retirement and Death of a Partner
One template, three events
Admission, retirement and death all reconstitute the firm, and the same five adjustments recur: goodwill, revaluation of assets and liabilities, distribution of reserves and accumulated profits, adjustment of capitals, and the new profit-sharing ratio.
Goodwill
- Admission: the premium brought in by the new partner is credited to the sacrificing partners in the sacrificing ratio (old share − new share). If the new partner cannot bring cash, his Capital or Current Account is debited, the sacrificing partners are credited, and goodwill is then written off among all partners in the new ratio.
- Retirement or death: the outgoing partner's share of goodwill is credited to him and debited to the gaining partners in the gaining ratio = new share − old share.
Revaluation and reserves
Profit or loss on revaluation, and the General Reserve or accumulated profits, belong to the old partners alone, in the old ratio. Only after that does the new partner enter the equity.
Worked example
A, B and C share 5:3:2. C retires; A and B agree on 3:2. Gaining ratio: A = 3/5 − 5/10 = 1/10; B = 2/5 − 3/10 = 1/10. Goodwill is valued at ₹60,000, so C's share is ₹6,000: debit A ₹3,000 and B ₹3,000, credit C ₹6,000. If C's dues are not paid immediately, the balance is transferred to C's Loan Account and interest is allowed until payment.
Marks-losing traps
- Crediting goodwill to all old partners in the old ratio instead of only to the sacrificing partners.
- Giving the new partner a share of revaluation profit or of the general reserve.
- Ignoring the deceased partner's share of profit up to the date of death (calculated on turnover or last year's profit).
- Forgetting to adjust capitals to the agreed ratio through cash or Current Accounts.