Retirement/Death of a Partner + Important Questions 2026
Welcome to the complete guide on Class 12 Accountancy Chapter 3: Reconstitution of a Partnership Firm – Retirement/Death of a Partner. This is a crucial chapter for your 2026 board exams, testing your ability to handle complex accounting adjustments. Master these updated NCERT solutions and important questions to score full marks!
Chapter NameReconstitution of a Partnership Firm – Retirement/Death of a Partner
SubjectAccountancy (Book 1: Accounting for Partnership Firms)
ClassClass 12
BoardCBSE / State Boards
Important TopicsGaining Ratio, Goodwill Treatment, Revaluation, Capital Adjustment, Executor's Account
Difficulty LevelModerate to High
Exam WeightageHigh (6-8 Marks Guaranteed)
Learning Objectives
After completing this chapter, students will be able to:
- Calculate the New Profit-Sharing Ratio and Gaining Ratio of continuing partners.
- Understand and apply the accounting treatment of Goodwill as per AS-26.
- Prepare Revaluation Account to record changes in the value of assets and liabilities.
- Ascertain the total amount payable to a retiring partner or deceased partner's executor.
- Prepare the retiring partner's Loan Account and deceased partner's Executor's Account.
- Adjust the capitals of the continuing partners in the new profit-sharing ratio.
Key Concepts and Definitions
Before jumping into the NCERT solutions, let's clarify the most important terms:
- Retirement of a Partner: When a partner ceases to be a partner of the firm by their own choice, it is called retirement. The partnership is reconstituted.
- Gaining Ratio: The ratio in which the continuing partners acquire the share of the outgoing partner. Formula: Gaining Ratio = New Ratio – Old Ratio.
- Treatment of Goodwill: The retiring/deceased partner is entitled to their share of goodwill. This is compensated by the gaining partners in their gaining ratio. The entry is: Gaining Partners' Capital A/c (Dr.) to Retiring/Deceased Partner's Capital A/c (Cr.).
- Revaluation Account: An account prepared to record the increase or decrease in the value of assets and liabilities at the time of reconstitution. Profit or loss on revaluation is transferred to all partners (including the outgoing one) in their old profit-sharing ratio.
- Joint Life Policy (JLP): An insurance policy taken on the joint lives of partners. On the death of a partner, the full policy amount is received from the insurance company.
- Executor's Account: When a partner dies, the amount due to them is calculated and transferred to an account in the name of their legal representative, called the Executor's Account.
Full NCERT Solutions for Class 12 Accountancy Chapter 3 (Illustrative)
Here are complete, step-by-step solutions for typical NCERT-style questions from Chapter 3.
Question 1: (Calculation of Ratios)
A, B and C are partners sharing profits in the ratio of 3:2:1. B retires from the firm. Calculate the new profit-sharing ratio and gaining ratio of A and C if:
(a) B's share is taken by A and C in their old ratio.
(b) B's share is taken over entirely by A.
Solution:
Old Ratio (A:B:C) = 3:2:1. B's share = 2/6.
Share gained by A = (3/4) of 2/6 = 6/24
Share gained by C = (1/4) of 2/6 = 2/24
Gaining Ratio (A:C) = 6:2 or 3:1.
C's New Share = 1/6 + 2/24 = 4/24 + 2/24 = 6/24
New Ratio (A:C) = 18:6 or 3:1.
Entire share of B (2/6) is gained by A. So, C gains nothing.
Gaining Ratio (A:C) = 1:0.
C's New Share = 1/6 (remains unchanged)
New Ratio (A:C) = 5:1.
Old Ratio (A:B:C) = 3:2:1. B's share = 2/6.
(a) If B's share is taken by A and C in their old ratio (3:1):
Step 1: Calculate the share gained by A and C.Share gained by A = (3/4) of 2/6 = 6/24
Share gained by C = (1/4) of 2/6 = 2/24
Gaining Ratio (A:C) = 6:2 or 3:1.
Step 2: Calculate New Ratio. (New Ratio = Old Ratio + Gained Share)
A's New Share = 3/6 + 6/24 = 12/24 + 6/24 = 18/24C's New Share = 1/6 + 2/24 = 4/24 + 2/24 = 6/24
New Ratio (A:C) = 18:6 or 3:1.
(b) If B's share is taken over entirely by A:
Step 1: Calculate Gaining Ratio.Entire share of B (2/6) is gained by A. So, C gains nothing.
Gaining Ratio (A:C) = 1:0.
Step 2: Calculate New Ratio.
A's New Share = 3/6 + 2/6 = 5/6C's New Share = 1/6 (remains unchanged)
New Ratio (A:C) = 5:1.
Question 2: (Treatment of Goodwill)
P, Q and R are partners sharing profits in the ratio 2:2:1. R retires and on the date of his retirement, goodwill of the firm was valued at ₹ 50,000. P and Q decide to share future profits in the ratio 3:2. Pass the necessary journal entry for the treatment of goodwill.
Step 1: Calculate R's Share of Goodwill.
R's Share = Firm's Goodwill × R's Share
R's Share = ₹ 50,000 × (1/5) = ₹ 10,000.
Q's Gain = 2/5 (New) - 2/5 (Old) = 0
Here, only P is gaining. Therefore, only P will compensate R.
R's Share = Firm's Goodwill × R's Share
R's Share = ₹ 50,000 × (1/5) = ₹ 10,000.
Step 2: Calculate Gaining Ratio of P and Q. (Gaining Ratio = New Ratio - Old Ratio)
P's Gain = 3/5 (New) - 2/5 (Old) = 1/5Q's Gain = 2/5 (New) - 2/5 (Old) = 0
Here, only P is gaining. Therefore, only P will compensate R.
Step 3: Pass the Journal Entry.
The gaining partner's capital account is debited, and the retiring partner's capital account is credited.
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
|
P's Capital A/c Dr. To R's Capital A/c |
10,000 | |||
| 10,000 | ||||
| (Being adjustment for R's share of goodwill on his retirement, compensated by the gaining partner P) |
Question 3: (Comprehensive Question)
X, Y and Z were partners sharing profits and losses in the ratio of 3:2:1. Y retired on 31st March 2023. The Balance Sheet of the firm on that date was as follows:
[Abridged Balance Sheet: Creditors ₹50,000, Capital A/cs (X: 1,20,000, Y: 80,000, Z: 50,000), General Reserve ₹30,000. Assets: Cash ₹20,000, Debtors ₹60,000, Stock ₹70,000, Machinery ₹1,80,000].
Terms of Retirement:
1. Goodwill of the firm is valued at ₹60,000.
2. Stock to be appreciated by 20%.
3. Machinery to be depreciated by 10%.
4. A provision for doubtful debts is to be created at 5% on Debtors.
Prepare Revaluation Account, Partners’ Capital Accounts, and the Balance Sheet of the new firm.
Working Notes:
- Goodwill Adjustment: Y's Share of Goodwill = ₹60,000 × (2/6) = ₹20,000. This will be contributed by X and Z in their gaining ratio (3:1).
X pays = 20,000 × (3/4) = ₹15,000
Z pays = 20,000 × (1/4) = ₹5,000 - General Reserve Distribution: Y's share = ₹30,000 × (2/6) = ₹10,000. X's share = ₹15,000, Z's share = ₹5,000.
Revaluation Account
| Particulars | Amt (₹) | Particulars | Amt (₹) |
|---|---|---|---|
| To Machinery A/c (10% of 1,80,000) | 18,000 | By Stock A/c (20% of 70,000) | 14,000 |
| To Provision for Doubtful Debts (5% of 60,000) | 3,000 | By Loss transferred to: | |
| X's Capital A/c (3/6) 3,500 | |||
| Y's Capital A/c (2/6) 2,333 | |||
| Z's Capital A/c (1/6) 1,167 | 7,000 | ||
| Total | 21,000 | Total | 21,000 |
Partners' Capital Accounts
| Particulars | X (₹) | Y (₹) | Z (₹) | Particulars | X (₹) | Y (₹) | Z (₹) |
|---|---|---|---|---|---|---|---|
| To Revaluation A/c (Loss) | 3,500 | 2,333 | 1,167 | By Balance b/d | 1,20,000 | 80,000 | 50,000 |
| To Y's Capital A/c (Goodwill) | 15,000 | 5,000 | By General Reserve | 15,000 | 10,000 | 5,000 | |
| To Y's Loan A/c | 1,07,667 | By X's Capital A/c | 15,000 | ||||
| To Balance c/d | 1,16,500 | 48,833 | By Z's Capital A/c | 5,000 | |||
| Total | 1,35,000 | 1,10,000 | 55,000 | Total | 1,35,000 | 1,10,000 | 55,000 |
Amount due to Y (₹1,07,667) is transferred to his Loan Account.
Balance Sheet of X and Z as on 31st March 2023
| Liabilities | Amt (₹) | Assets | Amt (₹) |
|---|---|---|---|
| Creditors | 50,000 | Cash | 20,000 |
| Y's Loan Account | 1,07,667 | Debtors | 60,000 |
| Capital Accounts: | Less: Provision | (3,000) 57,000 | |
| X | 1,16,500 | Stock | 84,000 |
| Z | 48,833 1,65,333 | Machinery | 1,62,000 |
| Total | 3,23,000 | Total | 3,23,000 |
Extra Important Questions (Board Style 2026)
Practice these highly expected board exam questions to solidify your preparation.
Multiple Choice Questions (MCQs)
Q1. Gaining ratio is calculated to:
(a) Distribute reserves
(b) Ascertain the amount to be paid for goodwill by gaining partners
(c) Revalue assets
(d) Distribute revaluation profit
Correct Answer: (b) Ascertain the amount to be paid for goodwill by gaining partners
Q2. On the death of a partner, the amount due to him will be credited to:
(a) His son's account
(b) All partners' capital accounts
(c) His executor's account
(d) General Reserve
Correct Answer: (c) His executor's account
Q3. Profit or loss on revaluation at the time of retirement of a partner is shared by:
(a) Only the retiring partner
(b) Only the continuing partners
(c) All partners in the old ratio
(d) All partners in the new ratio
Correct Answer: (c) All partners in the old ratio
Short Answer Questions (3-4 Marks)
Q4. Distinguish between Sacrificing Ratio and Gaining Ratio.
| Basis | Sacrificing Ratio | Gaining Ratio |
|---|---|---|
| Meaning | It is the ratio in which old partners sacrifice their share of profit for a new partner. | It is the ratio in which continuing partners gain the share of a retiring/deceased partner. |
| When Calculated | At the time of admission of a new partner. | At the time of retirement or death of a partner. |
| Formula | Old Ratio – New Ratio | New Ratio – Old Ratio |
Q5. Ram, Ghanshyam and Vrinda are partners sharing profits in the ratio of 2:2:1. On Vrinda's retirement, the goodwill was valued at ₹90,000. Ram and Ghanshyam decided to share future profits equally. Pass the necessary journal entry for goodwill.
Step 1: Calculate Vrinda's Share of Goodwill.
Vrinda's Share = ₹90,000 × (1/5) = ₹18,000.
Ghanshyam's Gain = 1/2 - 2/5 = (5-4)/10 = 1/10
Gaining Ratio = 1:1.
Vrinda's Share = ₹90,000 × (1/5) = ₹18,000.
Step 2: Calculate Gaining Ratio. (New Ratio - Old Ratio)
Ram's Gain = 1/2 - 2/5 = (5-4)/10 = 1/10Ghanshyam's Gain = 1/2 - 2/5 = (5-4)/10 = 1/10
Gaining Ratio = 1:1.
Step 3: Pass Journal Entry.
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Ram's Capital A/c Dr. | 9,000 | |
| Ghanshyam's Capital A/c Dr. | 9,000 | |
| To Vrinda's Capital A/c | 18,000 | |
| (Being Vrinda's share of goodwill adjusted in gaining ratio 1:1) |
Long Answer Questions (6 Marks)
Q6. What are the different ways of treating goodwill on the retirement of a partner? Explain with journal entries.
There are two main scenarios for treating goodwill on retirement:
Method 1: Goodwill is adjusted through Partners' Capital Accounts (As per AS-26, this is the preferred method).
In this method, goodwill is not raised in the books. The retiring partner's share is adjusted by debiting the gaining partners' capital accounts and crediting the retiring partner's capital account.
Journal Entry:
Gaining Partners' Capital A/c Dr. (In Gaining Ratio)
To Retiring Partner's Capital A/c (With their share of goodwill)
Method 2: Goodwill is Raised and Written Off (Not preferred now but still tested).
First, goodwill is raised at its full value by crediting all partners in the old ratio. Then, it is written off by debiting the continuing partners in the new ratio. The net effect is the same as Method 1.
Journal Entries:
(i) For raising goodwill at full value:
Goodwill A/c Dr. (Full Value)
To All Partners' Capital A/c (In Old Ratio)
(ii) For writing off goodwill:
Continuing Partners' Capital A/c Dr. (In New Ratio)
To Goodwill A/c (Full Value)
Method 1: Goodwill is adjusted through Partners' Capital Accounts (As per AS-26, this is the preferred method).
In this method, goodwill is not raised in the books. The retiring partner's share is adjusted by debiting the gaining partners' capital accounts and crediting the retiring partner's capital account.
Journal Entry:
Gaining Partners' Capital A/c Dr. (In Gaining Ratio)
To Retiring Partner's Capital A/c (With their share of goodwill)
Method 2: Goodwill is Raised and Written Off (Not preferred now but still tested).
First, goodwill is raised at its full value by crediting all partners in the old ratio. Then, it is written off by debiting the continuing partners in the new ratio. The net effect is the same as Method 1.
Journal Entries:
(i) For raising goodwill at full value:
Goodwill A/c Dr. (Full Value)
To All Partners' Capital A/c (In Old Ratio)
(ii) For writing off goodwill:
Continuing Partners' Capital A/c Dr. (In New Ratio)
To Goodwill A/c (Full Value)
Assertion-Reason Questions
Q7. Assertion (A): On retirement of a partner, the retiring partner is compensated for his share of goodwill.
Reason (R): The continuing partners gain the retiring partner's share of future profits, hence they compensate him.
Correct Answer: Both (A) and (R) are true, and (R) is the correct explanation of (A). The very basis of goodwill compensation is the gain in future profit share by continuing partners.
Common Mistakes Students Make in Board Exams
- Incorrect Ratio Calculation: Confusing the formula for Gaining Ratio (New - Old) with Sacrificing Ratio (Old - New). Always double-check.
- Forgetting to Write Off Existing Goodwill: If the old Balance Sheet shows Goodwill, it MUST be written off among all old partners in the old ratio before any other adjustment.
- Revaluation Errors: Passing entries for revaluation loss on the credit side and profit on the debit side. Remember: Debit all expenses and losses, Credit all incomes and gains.
- Ignoring Narrations: Not writing narrations for journal entries can lead to a loss of marks. Keep them brief but clear.
- Incorrect Transfer of Amount: Forgetting to transfer the final amount due to the retiring partner to their Loan Account or to the deceased partner's Executor's Account.
Exam Preparation Tips for Class 12 Accountancy
- Master the Formats: Be perfect with the formats of Revaluation Account, Capital Accounts, and Balance Sheet. Use rulers in the exam for clean presentation.
- Working Notes are Key: Show all your calculations for gaining ratio, goodwill, etc., in clear working notes. They carry marks.
- Practice One Comprehensive Question Daily: This chapter requires stamina. Practicing a full 6-mark question daily builds speed and accuracy.
- Solve Past Year Papers (PYQs): Questions on retirement/death are very common. Solving PYQs will give you a clear idea of the board's pattern and difficulty level.
- Focus on Capital Adjustments: The most complex questions involve adjusting the capital of the new firm. Practice these variations thoroughly.
Frequently Asked Questions (FAQs)
Q1. Is Chapter 3 of Class 12 Accountancy important for the 2026 board exams?
Yes, it is extremely important. This chapter carries a high weightage, typically between 6 to 8 marks. Expect one long-answer comprehensive question involving the preparation of Revaluation Account, Partners' Capital Accounts, and the Balance Sheet.
Q2. How is goodwill treated on the retirement of a partner?
On retirement, the retiring partner's share of goodwill is compensated by the gaining partners in their gaining ratio. The journal entry is: Gaining Partners' Capital A/c (Dr.) to Retiring Partner's Capital A/c (Cr.). Existing goodwill in the books must be written off.
Q3. What is the formula for Gaining Ratio?
The formula for Gaining Ratio is: New Profit-Sharing Ratio – Old Profit-Sharing Ratio. It is the proportion in which the continuing partners acquire the share of the retiring partner.
Q4. What is the difference in accounting treatment for retirement vs. death of a partner?
The core accounting treatment (revaluation, goodwill, ratio calculation) is very similar. The main difference is that in retirement, the amount due is transferred to the retiring partner's Loan Account. In case of death, the amount is transferred to the deceased partner's Executor's Account. Also, for a deceased partner, profit up to the date of death needs to be calculated.
Q5. What is Section 37 of the Indian Partnership Act, 1932?
Section 37 gives the outgoing partner's legal heirs the option to either receive interest @ 6% p.a. on the amount due OR a share of the profit earned by the firm using that amount, until the final settlement is made. This is important for preparing the Loan/Executor's account.
Conclusion: Chapter 3 is a cornerstone of partnership accounting and a high-scoring area in the CBSE Class 12 Accountancy exam. Consistent practice is the only way to master the intricate adjustments. Use these NCERT solutions and extra questions to build a strong foundation, avoid common mistakes, and confidently tackle any problem in your 2026 board exam. Happy accounting!
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Part A Ch 1: Accounting for Partnership – Basic Concepts
Part A Ch 2: Reconstitution – Admission of a Partner
Part A Ch 3: Reconstitution – Retirement/Death of a Partner
Part A Ch 4: Dissolution of Partnership Firm
Part B Ch 1: Accounting for Share Capital
Part B Ch 2: Issue & Redemption of Debentures
Part B Ch 3: Financial Statements of a Company
Part B Ch 4: Analysis of Financial Statements
Part B Ch 5: Accounting Ratios
Part B Ch 6: Cash Flow Statement
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