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WB HS Accountancy study materials
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WB HS Accountancy: Reconstitution of Partnership Firms: Admission, Retirement, Death

WB HS Accountancy · Work through your exam, one topic at a time.

All guide sections

Reconstitution of Partnership Firms: Admission, Retirement, Death

What changes on reconstitution

Admission, retirement, and death change the partner set, so the old agreement ends. The exam tests sacrifice and gain ratios, goodwill, revaluation of assets and liabilities, reserves, and settlement of the outgoing partner.

Admission

  • A new partner's share comes from old partners' sacrifice. Sacrifice ratio = old share − new share; it may differ from the old PSR.
  • Goodwill: if the incoming partner brings premium in cash and it is retained in the firm, credit old partners in sacrifice ratio. If withdrawn, debit cash and credit capital accounts, then debit capital accounts and credit cash. If no premium is brought, debit the incoming partner's capital and credit sacrificing partners.
  • Revalue assets and liabilities; post profit or loss to old partners in old ratio. A Revaluation Account is not opened for mere reclassification.
  • Accumulated reserves are distributed to old partners in old ratio.

Retirement and death

  • Gaining ratio = new share − old share. Goodwill is adjusted by debiting gaining partners and crediting the retiring or deceased partner.
  • Revaluation profit or loss goes to all partners, including the retiring partner, in old ratio.
  • On death, the deceased partner's share of profit till death is usually based on time or turnover. The executor's account is credited with capital, goodwill, revaluation, and profit share.
  • Settlement may be in cash or transferred to a loan account.

Worked example

X and Y share 3:1. Z is admitted for 1/5. Z's share is sacrificed by X and Y in 2:1. Z brings ₹40,000 goodwill. Credit X ₹(2/3 × 40,000) = ₹26,667 and Y ₹13,333. If Z brings only ₹25,000 cash premium, the same ratio applies to ₹25,000; the unpaid ₹15,000 is debited to Z's capital and credited to X and Y in 2:1. Reasoning: goodwill belongs to sacrificing partners, not to the new partner.

Traps

Using the new PSR for pre-admission reserves; crediting all old partners equally when sacrifice ratio is unequal; forgetting that a revaluation loss is debited to old partners; and treating the deceased partner's profit share as a charge against all partners in the new ratio.