Skip to content

CMA Intermediate · Financial Accounting

Retirement of Partner: CMA Inter Chapter Guide

Retirement of a partner means a partner leaves and the firm continues with the remaining partners. You find the gaining ratio, treat goodwill, revalue assets and liabilities, share reserves and profit up to the retirement date, then settle the retiring partner's amount in cash or as a loan, and prepare the new balance sheet.

What this chapter covers

This chapter deals with a firm that continues after one partner leaves. The old partnership ends only in respect of the retiring partner. The remaining partners carry on under a new profit sharing ratio. Your job is to work out what the retiring partner is owed and to record the changes in the books.

The work follows a fixed sequence. You find the new ratio and the gaining ratio. You bring goodwill into account. You revalue assets and liabilities and distribute reserves. You adjust capitals if the question asks, and treat a joint life policy. Then you settle the amount due, either by payment or by transferring it to a loan account, and prepare the final balance sheet. Many questions also ask for profit up to the date of retirement.

The chapter builds directly on admission of a partner and on partnership basics, which are in the same paper. The same ideas of revaluation account, goodwill and capital accounts are used again. If admission is strong, this chapter is mostly a matter of handling the gaining ratio and the settlement correctly. It also leads naturally into death of a partner and dissolution, where the same tools are applied.

Partnership accounts are a regular source of long numerical questions, and retirement is a common form of them. A full question has many steps, so you earn step marks even if one figure goes wrong. The chapter also supports MCQs on gaining ratio, goodwill adjustment and the amount payable. Once the format is clear, it is one of the more scoring numericals in the paper, because the method never changes.

Retirement of Partner: topics in the order to study them

  1. 1Retirement of a Partner: Meaning and Settlement BasicsStart here to understand what retirement means, what the retiring partner is entitled to, and the overall steps.
  2. 2New Profit Sharing Ratio and Gaining RatioEvery later adjustment, especially goodwill, depends on the gaining ratio, so fix it first.
  3. 3Valuation and Treatment of Goodwill on RetirementGoodwill uses the gaining ratio and is the most tested adjustment, so learn it right after the ratios.
  4. 4Revaluation of Assets and Liabilities and ReservesNext you adjust values and share reserves and profits among the old partners in the old ratio, unless the partnership deed or agreement provides otherwise.
  5. 5Adjustment of Capitals and Joint Life PolicyThese are special adjustments that come after the main entries and need the earlier figures.
  6. 6Settlement of Retiring Partner's Amount and LoanOnce the capital account balance is known, you decide how to pay it: cash, instalments or loan.
  7. 7Profit Treatment up to Date of Retirement and Final Balance SheetThis final topic combines everything into a complete question with the closing balance sheet.

How to prepare Retirement of Partner

Treat this chapter as one fixed procedure. Practise it until the order of steps is automatic.

  1. Read the meaning and rights of a retiring partner, then write a one-page checklist of the steps in order.
  2. Practise ratio problems alone: old ratio, new ratio, gaining ratio, using the formula gaining ratio = new share − old share for each continuing partner.
  3. Solve goodwill questions in three forms: goodwill already in the books, goodwill raised and written off, and goodwill adjusted only through partners' capital accounts.
  4. Do full revaluation and capital account problems. Always post the revaluation result to all old partners in the old ratio, and distribute reserves the same way.
  5. Practise settlement in each form: full cash payment, part payment with the balance as a loan, and instalments with interest where stated.
  6. Finish with complete questions that end in a balance sheet. Check that assets equal liabilities, and write each working note clearly so you earn step marks.
  7. For MCQs, drill quick calculations of gaining ratio, goodwill share and amount due. There is no negative marking, so always attempt every one.

Common mistakes in Retirement of Partner

  • Using the old ratio instead of the gaining ratio for goodwill compensation.

    Fix: Remind yourself that the gainers pay. Compute new share minus old share first and use that ratio.

  • Sharing revaluation profit or reserves in the new ratio.

    Fix: These belong to the period before retirement. Always use the old ratio among all old partners, including the retiree.

  • Forgetting existing goodwill in the books or double counting it.

    Fix: Write off the old goodwill to all old partners in the old ratio first, then deal with the agreed value.

  • Wrong amount due because drawings, interest or profit up to retirement are ignored.

    Fix: Use a capital account format with fixed columns and tick each adjustment from the question before totalling.

  • Not showing the loan account and interest treatment properly.

    Fix: State clearly how much is paid and how much moves to loan. Show the loan on the liabilities side of the final balance sheet.

  • Balance sheet that does not tally.

    Fix: Rebuild the balance sheet from the closed accounts and check cash after every payment before finalising.

Last-day revision: Retirement of Partner

  • Retirement: the firm continues, only the retiring partner leaves.
  • Gaining ratio = new share − old share of each continuing partner.
  • The gaining partners compensate the retiring partner for goodwill, in the gaining ratio.
  • Goodwill share of the retiring partner = total goodwill × retiring partner's old share.
  • Revaluation profit or loss, reserves and accumulated profits go to all old partners in the old ratio, unless the partnership deed or agreement provides otherwise.
  • Revaluation account is prepared before the retiring partner's settlement.
  • Joint life policy: transfer the JLP reserve to the old partners' capital accounts in the old ratio. If the policy is shown as an asset and its surrender value differs from its book value, adjust the difference (profit or loss) through the old partners' capital accounts in the old ratio. If the JLP is not shown as an asset, credit the surrender value to the old partners in the old ratio. The surrender value is then treated as an asset or cash.
  • Amount due = capital ± share of revaluation profit/loss + share of reserves and undistributed profits − share of accumulated losses + share of goodwill (if credited to the retiring partner's account) + interest on capital + salary/commission due − drawings − interest on drawings + share of profit up to retirement (or − share of loss). Add interest on capital, salary or commission only to the extent not already credited to the capital account, to avoid double counting.
  • Unpaid balance is moved to the retiring partner's loan account and carries interest as agreed.
  • Profit up to retirement is calculated by time or on sales basis, as the question says.
  • If the continuing partners acquire the retiring partner's share in their existing ratio, or no new ratio is given, the new ratio is the old ratio among the continuing partners, and the gaining ratio equals that ratio.
  • Check the balance sheet totals at the end.

Retirement of Partner practice questions

Retirement of Partner in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Retirement of Partner: frequently asked questions

What is the gaining ratio and why does it matter?

The gaining ratio is the ratio in which the continuing partners gain the retiring partner's share. You find it by subtracting each continuing partner's old share from the new share. It decides how goodwill compensation is borne.

Who bears the retiring partner's goodwill share?

The continuing partners who gain bear it, in the gaining ratio. They compensate the retiring partner for the share of goodwill that he or she gives up. This is often done by adjusting capital accounts.

How is revaluation profit shared on retirement?

It is shared among all the old partners, including the retiring partner, in the old profit sharing ratio. This is because the change in value arose during the old partnership. The same applies to reserves and accumulated profits.

What happens if the retiring partner is not paid in full at once?

The unpaid amount is transferred to the retiring partner's loan account. It stays as a liability of the firm and interest is paid as agreed. Where the deed is silent, follow what the question states or the rule it gives for such cases.

Are there MCQs from this chapter?

Yes. Section A has 15 MCQs of 2 marks each across the paper, and they can be drawn from any chapter. Expect short calculations like gaining ratio or amount due. There is no negative marking, so attempt all.