Reconstitution of Partnership Firms (Admission, Retirement and Death of a Partner)
What the exam tests
This is the highest-weight partnership topic. Questions combine admission, retirement and death with goodwill, revaluation of assets and liabilities, reserves and capital adjustment. You must know which ratio applies at each step.
Core rules
- At admission, the new partner's share comes out of the old partners in the sacrificing ratio: old share minus new share. Goodwill brought in cash or through capital is credited to the sacrificing partners; existing goodwill is written off among the old partners in the old ratio.
- Revaluation profit or loss and accumulated reserves belong to the old partners in the old ratio; the incoming partner does not share in them.
- At retirement or death, the gaining ratio is new share minus old share. The retiring or deceased partner's share of goodwill is credited to him or her, and revaluation and reserves are shared by all partners in the old ratio.
- On death, calculate profit up to the date of death on a time or turnover basis, allow interest on capital to that date, and transfer the balance to the executor's account. Joint Life Policy proceeds are shared in the old ratio.
Worked example
A and B share profits 3:2 and admit C for 1/5, which C acquires 3:2 from A and B. Sacrifice: A 3/25 and B 2/25. New shares: A 15/25 − 3/25 = 12/25; B 10/25 − 2/25 = 8/25; C 5/25, giving 12:8:5. If firm goodwill is ₹50,000, C brings ₹10,000 and it is credited A ₹6,000 and B ₹4,000 in the sacrificing ratio, not equally and not in the new ratio.
Traps
- Using the old ratio instead of the sacrificing ratio for goodwill.
- Giving revaluation profit to the incoming partner.
- Treating goodwill brought in cash as ordinary capital instead of crediting the sacrificing partners.
- On death, forgetting the deceased partner's share of goodwill and profit up to the date of death.
- Omitting adjustment of accumulated reserves before admission.