Partnership Accounts: Admission, Retirement, Death of Partner and Goodwill Treatment (Basics) Questions

Question 1

If the amount due to an outgoing partner is not paid immediately, what account is opened?

Accepted Answer

If not paid immediately, the amount is transferred to the outgoing partner’s **Loan Account**.

Question 2

Define sacrificing ratio.

Accepted Answer

**Sacrificing ratio** is the ratio in which old partners sacrifice their share of profit in favour of a new partner at the time of admission.

Question 3

Define gaining ratio.

Accepted Answer

**Gaining ratio** is the ratio in which remaining partners gain the outgoing partner’s share of profit at retirement or death.

Question 4

What is goodwill?

Accepted Answer

**Goodwill** is the value of a firm’s reputation and earning capacity arising from factors like customer loyalty, brand, location and efficient management.

Question 5

What is partnership deed?

Accepted Answer

**Partnership deed** is a written agreement among partners that states terms of partnership like capital, profit-sharing, interest, salary, admission/retirement rules, etc.

Question 6

State one reason for admission of a partner.

Accepted Answer

One reason is requirement of **additional capital** for expansion of business.

Question 7

Explain sacrificing ratio and its importance (any three points) with a mini table.

Accepted Answer

Sacrificing ratio is used at admission because old partners give up part of their profit share.

Points (any three):
- **Sacrifice = Old share − New share** for each old partner.
- It is used to distribute **goodwill premium** brought by new partner.
- It ensures fair compensation to partners who actually sacrifice.

Mini table:

| Item | Formula |
|---|---|
| Sacrifice | old share − new share |
| Use | goodwill adjustment |

Thus, correct sacrificing ratio is essential for correct goodwill distribution.

Question 8

Explain gaining ratio and its importance at retirement/death (any three points) with a table.

Accepted Answer

Gaining ratio is used when a partner retires/dies because remaining partners gain his share.

Points (any three):
- **Gain = New share − Old share** for each remaining partner.
- Used to adjust **goodwill** payable to outgoing partner.
- Shows who benefits more from outgoing partner’s share.

Table:

| Item | Formula |
|---|---|
| Gain | new share − old share |
| Use | goodwill compensation |

Hence, goodwill burden at retirement is borne in gaining ratio.

Question 9

Explain goodwill treatment at admission (any three methods) with a summary table.

Accepted Answer

Goodwill is adjusted at admission to compensate old partners for sacrifice.

Methods (any three):
- **Premium method**: new partner brings goodwill in cash; credited to old partners’ capital in **sacrificing ratio**.
- **Revaluation of goodwill**: goodwill account is raised/written off as per changed value.
- **Hidden goodwill**: implied total capital differs from actual; goodwill adjusted through partners’ capital accounts.

Summary table:

| Method | Key idea |
|---|---|
| Premium | cash/premium credited to sacrificing partners |
| Revaluation | goodwill account raised/written off |
| Hidden goodwill | implied capital basis |

Thus, goodwill can be adjusted in cash or through capital adjustments as per method.

Question 10

Explain revaluation account and its purpose at admission/retirement (any three points).

Accepted Answer

Revaluation A/c is prepared to adjust asset and liability values to current values.

Points (any three):
- it records increase/decrease in **assets** and **liabilities**.
- profit/loss on revaluation is transferred to partners’ capital accounts as per applicable ratio (often **old ratio**).
- it ensures the firm’s balance sheet reflects **true values** at the date of change.

Thus, revaluation ensures fairness between old and new/remaining partners.

Question 11

Explain distribution of reserves/accumulated profits at admission (any three points) with an example table.

Accepted Answer

Reserves and accumulated profits/losses belong to old partners up to the date of admission.

Points (any three):
- **General Reserve** and P&L credit balance are distributed to old partners in **old ratio**.
- It ensures the new partner does not share past profits/reserves created before admission.
- Similarly, accumulated losses are also borne by old partners in old ratio.

Example table (distribution in old ratio):

| Item | Distributed among |
|---|---|
| General Reserve | old partners (old ratio) |
| P&L (credit) | old partners (old ratio) |
| P&L (debit) / losses | old partners (old ratio) |

Thus, reserve distribution is a key adjustment at admission.

Question 12

Explain goodwill adjustment at retirement/death (any three points) with a table showing gaining ratio logic.

Accepted Answer

At retirement/death, the outgoing partner is entitled to his share of **goodwill** because remaining partners will enjoy future profits.

Points (any three):
- goodwill is adjusted because remaining partners **gain** the outgoing partner’s share.
- compensation is borne by remaining partners in **gaining ratio**.
- goodwill may be adjusted through capital accounts (without maintaining goodwill account) or by raising/writing off goodwill.

Mini table:

| Ratio | Used when | Reason |
|---|---|---|
| Sacrificing ratio | admission | old partners sacrifice |
| **Gaining ratio** | retirement/death | remaining partners gain |

Thus, at retirement/death, goodwill burden is shared in gaining ratio.

Question 13

Explain admission of a partner: adjustments to be made (exam-style) with a flowchart/checklist.

Accepted Answer

### **Admission of a Partner — Exam-Style**

At admission, the firm must adjust accounts so that old partners are treated fairly and the new partner enters on correct terms.

**Main adjustments (write in points):**
- compute **new profit-sharing ratio**.
- compute **sacrificing ratio** of old partners.
- adjust **goodwill** (premium brought / goodwill raised / hidden goodwill).
- prepare **Revaluation A/c** for change in values of assets & liabilities.
- distribute **reserves/accumulated profits or losses** among old partners in old ratio.
- adjust partners’ capitals if required (fixed/fluctuating capital system).

Flowchart:

```text
Admission → New ratio → Sacrifice → Goodwill → Revaluation → Reserves → Capital adjustments
```

**Conclusion:** Correct sequence and ratios (especially sacrificing ratio) are key to scoring full marks.

Question 14

Explain retirement/death of a partner: adjustments and settlement (exam-style) with a table of amounts due.

Accepted Answer

### **Retirement/Death of a Partner — Exam-Style**

When a partner retires/dies, the firm must calculate the amount due to the outgoing partner and adjust ratios.

**Main adjustments:**
- compute **new ratio** among remaining partners.
- compute **gaining ratio**.
- adjust **goodwill** in gaining ratio (remaining partners compensate outgoing partner).
- revalue assets & liabilities (Revaluation A/c).
- distribute **reserves/accumulated profits/losses**.
- calculate and settle amount due.

**Amount due to outgoing partner (table):**

| Particulars | Treatment |
|---|---|
| Capital balance | add |
| Share of goodwill | add |
| Share of reserves/profits | add |
| Share of revaluation profit | add |
| Drawings / share of losses | less |

Settlement:
- pay immediately, or transfer to **Loan A/c** if not paid.

**Conclusion:** Retirement/death accounting ensures fair settlement and correct future profit sharing among remaining partners.

Question 15

Explain hidden goodwill with a worked illustration (exam-style) and show computation in a table.

Accepted Answer

### **Hidden Goodwill — Exam-Style**

Hidden goodwill arises when the new partner’s capital and profit share imply a total firm value that is different from the actual capital of the firm.

**Worked illustration:**
- A and B’s combined capital (before admission) = Rs. 2,00,000
- New partner C brings capital = Rs. 80,000 for **1/4** share

Implied total capital of firm:
- Total capital = 80,000 ÷ (1/4) = Rs. 3,20,000

Hidden goodwill:
- Hidden goodwill = 3,20,000 − 2,80,000 (actual total capital after adding C’s capital)
- = Rs. 40,000

Table:

| Step | Amount (Rs.) |
|---|---:|
| Implied total capital | 3,20,000 |
| Actual capital after admission | 2,80,000 |
| **Hidden goodwill** | **40,000** |

**Conclusion:** Hidden goodwill is credited to old partners in **sacrificing ratio** as compensation for sacrifice.

Partnership Accounts: Admission, Retirement, Death of Partner and Goodwill Treatment (Basics)

8 more questions to unlock