Reconstitution of Partnership - Admission, Retirement and Death of a Partner
Reconstitution questions test one skill: who gives up what, and who gains what, when the set of partners changes.
Admission
At admission the new partner acquires his share from the old partners. Sacrifice ratio = old share − new share. The premium for goodwill brought in cash is credited to the sacrificing partners' capital accounts in the sacrifice ratio, never to the new partner. Goodwill already appearing in the books is written off among the old partners in the old ratio before admission, so the incoming partner is not credited with it. Revaluation profit or loss, reserves and accumulated profits on admission belong to the old partners and are distributed in the old ratio.
Retirement and death
Gaining ratio = new share − old share. The retiring or deceased partner's share of goodwill is compensated by the continuing partners in the gaining ratio. On revaluation the retiring partner also takes a share, in the old ratio. On death, the executor is entitled to the capital balance, share of goodwill, share of revaluation and profit to the date of death, the last usually estimated from last year's or average profits or from turnover.
Worked example
A, B and C share 1/2, 1/3 and 1/6. C retires and A and B continue at 3:2. A's old share is 15/30 and new 18/30, a gain of 3/30; B's old share is 10/30 and new 12/30, a gain of 2/30. The gaining ratio is 3:2, so C's goodwill of, say, ₹50,000 is borne ₹30,000 by A and ₹20,000 by B.
Traps
Using the old ratio instead of the gaining ratio to compensate a retiring partner; giving revaluation profit on admission to the new partner; forgetting to raise and then immediately write off goodwill when the premium is not brought in cash; ignoring the deceased partner's share of profit to the date of death.