Reconstitution of Partnership: Admission, Retirement and Death of a Partner
This section covers Reconstitution of Partnership: Admission, Retirement and Death of a Partner. The exam tests sacrificing and gaining ratios, revaluation, treatment of reserves and goodwill, and the deceased partner’s executor account.
Core rules
- Admission: new partner’s share comes from old partners; sacrificing ratio = old share − new share. Revaluation profit/loss, reserves and accumulated profits belong to old partners.
- Retirement: gaining ratio = new share − old share. The retiring partner is paid his capital, goodwill share, revaluation share and share of reserves; the gaining partners compensate him for goodwill.
- Death: profit up to death is estimated from time or turnover; goodwill and accrued profit are credited to the deceased partner’s executor account. If the deed is silent, the Indian Partnership Act, 1932 gives the estate the share of profit up to death plus 6% interest if accounts are not settled.
Worked example
A and B share 3:2. C is admitted for 1/4; A sacrifices 1/5 and B sacrifices 1/20, totalling 1/4. New shares: A = 3/5 − 1/5 = 2/5 = 8/20; B = 2/5 − 1/20 = 7/20; C = 5/20. If C brings ₹50,000 premium, it is shared in sacrificing ratio 1/5 : 1/20 = 4:1. A gets ₹40,000 and B gets ₹10,000.
Traps
Do not credit premium in new profit ratio. Revaluation and reserves go to old partners, not the new partner. Use book values before revaluation. On death, do not credit full year’s profit if death occurs mid-year. Distinguish goodwill compensation from goodwill already appearing in books.