Question

Outgoing partner is compensated for parting with firm's future profits in favour of remaining partners. In what ratio do the remaining partners contribute to such compensation amount?

• A. Gaining Ratio.
• B. Capital Ratio.
• C. Sacrificing Ratio.
• D. Profit Sharing Ratio.

Answer 1

Answer: (A)

Gaining Ratio.

A Partner has the right to retire from the firm after giving due notice in advance.

A new partnership comes into existence between the remaining partners.

A retiring partner is entitled to get the following:

1)Share in goodwill; Goodwill of the firm is valued and the retiring partners share of goodwill is credited to his capital account.

2)Share in Reserves: Reserves are the undistributed profits and it is also credited to the capital account of retiring partner.

3)Share in revaluation of assets and liabilities: Assets and liabilities are revalued on the date of retirement and retiring partner’s share of profit is credited or the loss is debited to his capital account.

Accounting Treatment of Goodwill:

1) Remaining partner’s capital A/c Dr. (In gaining ratio)

To Retiring/Deceased partner’s capital A/c (with his share of goodwill)

2) When the goodwill A/c is already appearing in the books:

i) All partner’s capital A/c Dr. (In old ratio )

To Goodwill A/c (goodwill existing in the books)

ii) Remaining partner’s capital A/c Dr. (In the gaining ratio)

To Retiring/Deceased partner’s capital A