Financial Accounting · Retirement of Partner

Retirement of a Partner: Meaning and Settlement Basics

Updated 10 October 2026 · Fact-checked

Retirement of a partner means a partner leaves the firm while the remaining partners continue the business. The firm is reconstituted, not closed. To solve a question, revalue assets and liabilities, treat goodwill, distribute reserves, adjust capitals, find the amount due to the retiree, and pay it or transfer it to a loan.

Understand Retirement of a Partner: Meaning and Settlement Basics

A partnership firm is a group of partners doing business together. When one partner leaves and the others carry on, this is retirement. The old partnership ends, but the firm's business goes on under a new agreement among the continuing partners. The books are not closed. You only settle the retiring partner's account.

The legal basis is Section 32 of the Indian Partnership Act, 1932. In plain words, a partner may retire with the consent of all the other partners, or as per an express agreement among the partners, or, where the partnership is at will, by giving written notice of intention to retire to all the other partners. A retiring partner stays liable to third parties for the firm's acts before retirement until public notice is given or the creditors agree to discharge him, so the liability does not end automatically.

The accounting problem is fairness. The retiring partner has built up goodwill, unrecorded gains and reserves during his time in the firm. He must be paid his full share of these. The continuing partners gain his share of profit, so they should compensate him for it. That is why we adjust goodwill, revalue assets and liabilities, and share reserves before he leaves.

The key adjustments are: (1) new profit sharing ratio and gaining ratio, (2) goodwill, (3) revaluation of assets and liabilities, (4) accumulated profits, reserves and losses, (5) joint life policy, if any, (6) profit or loss up to the date of retirement and drawings, and (7) settlement of the amount due, either in cash or as a loan.

Retirement differs from death. In retirement, the partner is alive and the amount is paid to him, often in instalments with interest. On death, the amount goes to the executors, and profit up to the date of death and a joint life policy claim usually come up. The accounting steps are mostly the same.

Key rules to remember

Gaining ratio: Gaining ratio = New share − Old share (for each continuing partner); Used to charge goodwill to the gaining partners. It must be positive for each continuing partner.
Gaining ratio when retiree's share is taken in old ratio: If continuing partners acquire the retiree's share in their old ratio: gaining ratio = old ratio of continuing partners, and their new ratio = their old ratio; This applies only when the question says the retiree's share is acquired in the old ratio. In other cases, find the gaining ratio as New share − Old share.
Retiring partner's goodwill share: Goodwill share = Total goodwill × Retiring partner's old share; Credit the retiree and debit the gaining partners in the gaining ratio.
Amount due to retiring partner: Amount due = Capital + Interest on capital and salary/commission up to date of retirement + Share of reserves and accumulated profits + Share of goodwill (credited to retiree) + Share of revaluation profit + Share of profit up to retirement − Share of revaluation loss − Drawings − Interest on drawings − Share of any losses; The retiree's share of goodwill is credited to him. Drawings, interest on drawings and any share of losses are deducted. Interest on capital and salary or commission are due only up to the date of retirement. Use the adjusted balances after all entries are posted.
Revaluation profit or loss: Profit or loss = Increase in assets + Decrease in liabilities − Decrease in assets − Increase in liabilities; Share it among all old partners in the old ratio, including the retiring partner.
Reserves and accumulated profits: Credit all old partners in the old profit sharing ratio; Applies to General Reserve and Profit and Loss credit balance. Debit balances are shared the same way as losses.

How to solve Retirement of a Partner: Meaning and Settlement Basics questions

Follow this order for any retirement question. It keeps the entries complete and the balance sheet balanced.

1Write the old ratio and find the new ratio and the gaining ratio of the continuing partners.
2Open a Revaluation Account. Adjust assets and liabilities, including unrecorded items. Share the profit or loss in the old ratio.
3Treat goodwill. Find the firm's goodwill and the retiree's share. Debit the gaining partners in the gaining ratio and credit the retiree. If goodwill is already in the books, write it off to all old partners first.
4Distribute reserves, accumulated profits and losses to all old partners in the old ratio.
5Deal with a joint life policy, if given, and with profit up to the date of retirement, drawings and interest.
6Adjust capitals if the question asks for fixed or proportionate capitals for the continuing partners.
7Prepare the Partners' Capital Accounts and find the amount due to the retiree.
8Settle the amount in cash or transfer it to a loan account. Then prepare the new Balance Sheet.

Quickest way: Capital Account Shortcut

When to use it: Use it when the question gives only the final amount due and asks for a retiree's balance, or when time is short in an MCQ.

Take the retiree's capital as per the balance sheet.
Add his share of reserves and profit, using the old ratio.
Add his share of revaluation profit or subtract his share of loss.
Add his goodwill share, either as the total goodwill times his share or as the credit from the gaining partners.
Subtract drawings and his share of any losses.
The result is the amount due to him. Check that the continuing partners' capitals still agree with the balance sheet total.

Common mistakes in Retirement of a Partner: Meaning and Settlement Basics

Charging the full goodwill to the continuing partners.
Students forget that the continuing partners only compensate for the share they gain.
Fix: Find the retiree's goodwill share first, then divide only that amount in the gaining ratio.
Sharing revaluation profit or loss in the new ratio.
Students confuse revaluation with goodwill.
Fix: Revaluation and reserves belong to the period before retirement, so use the old ratio and include the retiree.
Leaving the retiree out of the reserve distribution.
Students think a leaving partner has no claim on reserves.
Fix: Reserves are accumulated profits of all old partners. Credit every old partner in the old ratio.
Calculating the gaining ratio by subtracting the wrong way round.
Students reverse the old and new shares.
Fix: Use New share − Old share. A positive result means the partner gains. Add up the gains and check that the total equals the retiree's old share.
Showing the retiree's balance as paid when the question says it is transferred to a loan.
Students do not read the settlement clause carefully.
Fix: If it is transferred to a loan, credit Retiring Partner's Loan Account. Cash is reduced only for the amount actually paid.
Ignoring unrecorded assets or liabilities.
Students look only at the balance sheet.
Fix: Read the additional information line by line. Record unrecorded items through the Revaluation Account.

Worked examples

Example 1

A, B and C share profits in the ratio 5:3:2. C retires. A and B decide to share future profits in the ratio 3:2. Goodwill of the firm is valued at ₹1,00,000 and is not in the books. Find the gaining ratio and pass the goodwill entry.

Show the solution

Old shares: A = 5/10, B = 3/10, C = 2/10.
New shares: A = 3/5 = 6/10, B = 2/5 = 4/10.
Gain of A = 6/10 − 5/10 = 1/10. Gain of B = 4/10 − 3/10 = 1/10.
Gaining ratio = 1:1. Check: total gain 2/10 equals C's old share 2/10.
C's share of goodwill = ₹1,00,000 × 2/10 = ₹20,000.
A and B each bear ₹10,000, since the gaining ratio is 1:1.

Answer: Gaining ratio of A and B = 1:1. Entry: A's Capital A/c Dr ₹10,000, B's Capital A/c Dr ₹10,000 to C's Capital A/c ₹20,000.

Example 2

X, Y and Z share profits equally. Z retires. Balance Sheet figures: fixed Capitals X ₹1,00,000, Y ₹80,000, Z ₹60,000; General Reserve ₹30,000, shown separately from the capital accounts. Land (book value ₹50,000) is revalued at ₹80,000. Goodwill is not to be raised. There are no drawings, interest or salary adjustments. Find the amount due to Z.

Show the solution

Capitals are fixed, so the General Reserve is not included in them and must be distributed separately.
Revaluation profit = ₹80,000 − ₹50,000 = ₹30,000.
Z's share of revaluation profit = ₹30,000 × 1/3 = ₹10,000.
Z's share of General Reserve = ₹30,000 × 1/3 = ₹10,000.
Goodwill is not raised, so no goodwill is credited to Z.
Amount due to Z = ₹60,000 + ₹10,000 + ₹10,000 = ₹80,000.

Answer: Amount due to Z = ₹80,000 (fixed capital ₹60,000 + reserve share ₹10,000 + revaluation profit share ₹10,000, with no goodwill raised). It is paid in cash or transferred to Z's Loan Account, as the question requires.

Exam tips

Read the settlement line first. Whether the amount is paid at once, in instalments or as a loan decides the last entry and the balance sheet.
Draw a small ratio table for old, new and gaining ratios. Marks are often given for it, and it prevents arithmetic errors.
Show Revaluation Account, Partners' Capital Accounts and Balance Sheet separately. Step marks are awarded for each.
In MCQs, check whether the retiree's share was acquired in the old ratio, in equal shares or in a stated ratio. The gaining ratio changes with it.
For theory, quote Section 32 of the Indian Partnership Act, 1932, and mention that the retiree remains liable to third parties until notice is given.

Practice questions from Retirement of Partner

Retirement of a Partner: Meaning and Settlement Basics 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 a Partner: Meaning and Settlement Basics: frequently asked questions

What does Section 32 of the Indian Partnership Act say about retirement?

It says a partner may retire with the consent of all other partners, in accordance with an express agreement, or by written notice if the partnership is at will. The retiring partner remains liable for acts done before retirement until proper notice is given or creditors discharge him.

What is the difference between retirement and death of a partner?

In retirement, the partner leaves by choice and receives the amount himself, often in instalments. On death, the amount goes to his legal representatives or executors, and profit up to the date of death and a joint life policy claim usually come up. The basic adjustments are otherwise similar.

Why do we need to revalue assets and liabilities on retirement?

Book values may not reflect true values. Revaluation makes sure the retiree gets his fair share of any gain and bears his fair share of any loss that arose while he was a partner.

Who bears the retiring partner's goodwill?

The continuing partners who gain share bear it, in the gaining ratio. The retiring partner's account is credited with his share of goodwill.