Fundamentals of Accounting · Partnership and LLP Accounts

Retirement and Death of a Partner: Accounting Treatment

Updated 11 October 2026 · Fact-checked

When a partner retires or dies, the firm finds the **gaining ratio**, adjusts goodwill, revalues assets and liabilities, shares reserves, and credits the partner with everything due. The total is paid out or moved to a loan or **executor's account** if the partner has died. Solve it step by step in that order.

Understand Retirement and Death of a Partner

A partnership firm is reconstituted when a partner leaves. The leaving partner is owed their capital plus their share of reserves, goodwill, revaluation profit and profit up to the exit date. The continuing partners take over the leaving partner's share of future profits.

This creates two ratios. The gaining ratio is the new ratio minus the old ratio for each continuing partner. It shows who gains and by how much. The sacrificing ratio is the old ratio minus the new ratio. It is used when a partner is admitted, because existing partners give up a share. In retirement, you use the gaining ratio.

Goodwill must be dealt with because the leaving partner helped build it. The retiring partner is credited with their share of goodwill. The continuing partners pay for it by being debited in the gaining ratio. If goodwill is already in the books, write it off to all partners in the old ratio first.

Assets and liabilities are revalued at the date of exit. Profit or loss on revaluation and old reserves belong to all old partners in the old ratio. The retiring partner's total dues are then settled by cash, by instalments, or by moving the balance to a loan account.

On death, the process is the same, with two additions. You must calculate the deceased partner's share of profit up to the date of death, and any drawings up to that date are deducted. The final amount is moved to the executor's account, because the money is payable to the deceased partner's legal representatives.

Law adds some points. Under the Indian Partnership Act, 1932, a retired partner stays liable to third parties for the firm's acts until public notice of retirement is given (Section 32(3)). If the firm continues after a death or retirement without settling accounts, the outgoing partner or estate may claim either a share of profits attributable to their money or interest at 6% per annum, unless the contract says otherwise (Section 37).

Key rules to remember

Gaining ratio: Gaining ratio = New ratio − Old ratio (for each continuing partner); Used for retirement and death. If the result is positive, the partner gains.
Sacrificing ratio: Sacrificing ratio = Old ratio − New ratio; Used on admission. Do not use it for retirement.
Retiring partner's goodwill share: Goodwill credited = Total goodwill × Retiring partner's old share; Debit the continuing partners' capital accounts in the gaining ratio.
Goodwill already in books: Dr All old partners' capital (old ratio) Cr Goodwill account; Write off the old balance first, then raise the new goodwill share.
Revaluation result: Revaluation profit or loss is shared in the old ratio; Increase in assets or decrease in liabilities is profit. Opposite is loss.
Profit up to date of death: Share of profit = Past profit × (Months elapsed ÷ 12) × Deceased partner's share; Use the basis given: last year's profit, average profit, or sales. Credit it to the deceased partner's capital.
Amount due to retiring or deceased partner: Capital + Share of reserves + Goodwill share + Revaluation profit + Profit till death − Drawings − Revaluation loss − Share of accumulated losses; Paid in cash, or moved to a loan account or executor's account.
Settlement of accounts rule: Pay: (i) outside debts, (ii) partners' advances, (iii) partners' capital, (iv) residue in profit ratio; This is the order in Section 48 of the Indian Partnership Act, which applies on dissolution.

How to solve Retirement and Death of a Partner questions

Use the same order for every retirement or death question. Keep one table with a column for each partner.

1Write the old ratio and the new ratio. If the new ratio is not given and the partners continue in their old relative shares, divide the leaving partner's share among them in proportion to their old shares.
2Find the gaining ratio: new share minus old share for each continuing partner.
3Deal with goodwill. Write off any existing goodwill in the old ratio. Then credit the leaving partner with their share of goodwill and debit the continuing partners in the gaining ratio.
4Prepare the Revaluation Account. Put in changes to assets and liabilities. Share the profit or loss in the old ratio.
5Share reserves, accumulated profits and losses in the old ratio. Add them to the partners' capital accounts.
6For death, add the share of profit up to the date of death and deduct drawings. Use time or sales basis as the question says.
7Prepare the leaving partner's capital account and find the final amount due.
8Settle the amount. Pay it in cash, or move it to the retiring partner's loan account or the executor's account. Then show the capital accounts of the continuing partners and the new Balance Sheet if asked.

Quickest way: One-table method for retirement questions

When to use it: Use it when the exam asks for the amount due to the retiring or deceased partner, or for the new capitals.

Draw columns for all partners and write the old ratio on top.
Enter opening capital in one row, then add rows for reserve, revaluation profit or loss, goodwill and profit till death.
Enter goodwill with a plus for the leaving partner and minus for the continuing partners in the gaining ratio. This row must total zero.
Check that the revaluation and reserve rows total to the full amount given.
Total the leaving partner's column. That is the amount due. Then total the others for their new capitals.

Common mistakes in Retirement and Death of a Partner

Using the sacrificing ratio for retirement
Students mix up admission and retirement because both involve goodwill.
Fix: On retirement, the continuing partners gain. Always compute new ratio minus old ratio.
Sharing revaluation profit or reserves in the new ratio
Students think only the continuing partners matter after the exit.
Fix: These items belong to the period before the exit. Share them among all old partners in the old ratio.
Forgetting to write off existing goodwill first
Students see a goodwill value in the question and credit it directly.
Fix: If goodwill is in the Balance Sheet, write it off to all old partners in the old ratio, then raise the retiring partner's share.
Ignoring drawings or profit till death
The question gives these facts in the notes and they are overlooked.
Fix: Underline the date of death. Compute time-based profit and subtract drawings made up to that date.
Paying the deceased partner's dues into a personal account
Students treat death like retirement.
Fix: Transfer the amount to the executor's account, since the money is payable to the legal representatives.
Taking the retiring partner's goodwill share from the whole goodwill using the new ratio
Students apply the share after the exit instead of the share before.
Fix: Use the retiring partner's old share of profit to find their goodwill. Use the gaining ratio only to decide who pays.

Worked examples

Example 1

A, B and C share profits in the ratio 5:3:2. On 31 March C retires. A and B will share profits in the ratio 3:2. Capitals: A ₹3,00,000, B ₹2,00,000, C ₹1,50,000. General reserve is ₹50,000. Goodwill of the firm is valued at ₹2,00,000 and is not in the books. Stock is increased by ₹20,000. C is paid in full by cheque. Find the gaining ratio and the amount paid to C, and show the new capitals of A and B.

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: A = 6/10 − 5/10 = 1/10. B = 4/10 − 3/10 = 1/10. Gaining ratio is 1:1.
C's goodwill share = 2/10 × ₹2,00,000 = ₹40,000. A and B each pay ₹20,000. So A's capital is debited ₹20,000, B's capital is debited ₹20,000, and C's capital is credited ₹40,000.
Revaluation profit ₹20,000 is shared 5:3:2: A ₹10,000, B ₹6,000, C ₹4,000.
General reserve ₹50,000 is shared 5:3:2: A ₹25,000, B ₹15,000, C ₹10,000.
C's account: ₹1,50,000 + ₹40,000 + ₹10,000 + ₹4,000 = ₹2,04,000.
A's new capital: ₹3,00,000 + ₹25,000 + ₹10,000 − ₹20,000 = ₹3,15,000.
B's new capital: ₹2,00,000 + ₹15,000 + ₹6,000 − ₹20,000 = ₹2,01,000.

Answer: Gaining ratio is 1:1. C is paid ₹2,04,000. New capitals: A ₹3,15,000 and B ₹2,01,000.

Example 2

A, B and C share profits in the ratio 2:2:1. C dies on 31 July. A and B will continue sharing equally. C's capital is ₹1,00,000. The general reserve is ₹50,000. Profit of the last year was ₹3,00,000, and C's share of profit up to the date of death is to be based on it. The year starts on 1 April. Goodwill of the firm is ₹1,50,000. C's drawings up to death were ₹8,000. Find the amount to be transferred to the executor's account.

Show the solution

Old shares: A 2/5, B 2/5, C 1/5. New shares: A 1/2, B 1/2.
Gain: A = 1/2 − 2/5 = 1/10. B = 1/2 − 2/5 = 1/10. Gaining ratio is 1:1.
C's share of goodwill = 1/5 × ₹1,50,000 = ₹30,000. A and B each bear ₹15,000. C's account is credited ₹30,000.
C's share of reserve = 1/5 × ₹50,000 = ₹10,000.
Profit till death: April to July is 4 months. ₹3,00,000 × 4/12 = ₹1,00,000. C's share = 1/5 × ₹1,00,000 = ₹20,000.
C's account: Capital ₹1,00,000 + reserve ₹10,000 + goodwill ₹30,000 + profit ₹20,000 − drawings ₹8,000 = ₹1,52,000.
The balance of ₹1,52,000 is transferred from C's capital account to the executor's account.

Answer: ₹1,52,000 is transferred to C's executor's account.

Exam tips

Write the gaining ratio as a separate working note, even if the question does not ask for it. Method marks depend on it.
Read the date of death carefully. The number of months decides the share of profit.
Show the Revaluation Account, the Partners' Capital Accounts and the Executor's or Retiring Partner's Account clearly. Examiners award marks for each.
Check that the goodwill row totals to zero in your capital table. If it does not, you have used the wrong ratio.
Remember the legal points for short theory questions: a retired partner stays liable until public notice is given, and an outgoing partner's estate can claim 6% interest or a share of profits if the accounts are not settled.

Practice questions from Partnership and LLP Accounts

Retirement and Death of a 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 and Death of a Partner: frequently asked questions

What is the difference between the sacrificing ratio and the gaining ratio?

The sacrificing ratio is old share minus new share. It is used when existing partners give up a share, usually on admission. The gaining ratio is new share minus old share. It is used when continuing partners take over a share, as on retirement or death.

Who pays for the retiring partner's goodwill?

The continuing partners pay, in their gaining ratio. Their capital accounts are debited and the retiring partner's capital account is credited with their share of the goodwill.

How is death of a partner treated differently from retirement?

The steps are the same, but you also add the deceased partner's share of profit up to the date of death and deduct drawings. The amount due is moved to the executor's account, not paid to the partner.

Is the retiring partner still liable after retirement?

Yes, to outsiders, until public notice of retirement is given. Under Section 32(3) of the Indian Partnership Act, 1932, the retired partner is not liable to a third party who deals with the firm without knowing that he was a partner.

What if the firm keeps the retiring partner's money without settling the account?

Under Section 37 of the Indian Partnership Act, 1932, and unless the contract says otherwise, the outgoing partner or the estate can choose a share of profits attributable to their share of property, or interest at 6% per annum on that share.