1. Gaining Ratio at Retirement
Gaining Ratio = New Ratio − Old Ratio (for continuing partners only)
The gaining ratio tells us how much of the retiree's share each remaining partner is absorbing — and therefore who pays how much of the retiring partner's goodwill.
Example: A:B:C = 5:3:2. B retires. A and C continue in ratio 3:2.
| Partner | Old Ratio | New Ratio | New − Old | Result |
|---|---|---|---|---|
| A | 5/10 | 3/5 = 6/10 | 1/10 | Gains 1/10 |
| C | 2/10 | 2/5 = 4/10 | 2/10 | Gains 2/10 |
Gaining Ratio A:C = 1:2
2. Goodwill Treatment at Retirement
The retiring partner is entitled to their share of the firm's goodwill — because they contributed to building it. The continuing partners (who gain the retiree's share) must compensate them.
Method A — Retiring Partner's Share of Goodwill Credited to Their Capital
Dr Continuing Partners' Capital/Current A/cs (in Gaining Ratio)
Cr Retiring Partner's Capital/Current A/c
Amount = Goodwill × Retiring Partner's Old Share. This amount is borne by A and C in their gaining ratio.
Method B — Raise Firm's Goodwill and Then Write Off
Step 1: Dr Goodwill A/c | Cr All Partners' Capital A/cs (in OLD ratio)
Step 2: Dr Continuing Partners' Capital A/cs (in NEW ratio) | Cr Goodwill A/c
Worked Example — Method A
A:B:C = 5:3:2. B retires. Firm's goodwill = ₹60,000. GR = A:C = 1:2.
B's goodwill share = 60,000 × 3/10 = ₹18,000
A pays (GR 1/3 of 18,000) = ₹6,000
C pays (GR 2/3 of 18,000) = ₹12,000
Journal: Dr A's Capital A/c 6,000; C's Capital A/c 12,000 | Cr B's Capital A/c 18,000
3. Revaluation and Reserves at Retirement
Same as at admission — revaluation profit/loss and existing reserves are distributed in the old ratio (all three partners including the retiring one), before the retirement takes effect.
The retiring partner gets their full share of any revaluation profit and accumulated reserves — this is part of their final settlement.
4. Worked Example — Retirement (Revaluation + Goodwill)
A, B, C share profits 3:2:1. B retires. A:C continue in ratio 2:1. Firm's goodwill = ₹60,000. Revaluation: Plant up ₹12,000, Stock down ₹3,000. General Reserve = ₹18,000.
GR: A: 2/3 − 3/6 = 4/6 − 3/6 = 1/6; C: 1/3 − 1/6 = 2/6 − 1/6 = 1/6 → GR = A:C = 1:1
Goodwill: B's share = 60,000 × 2/6 = ₹20,000. A pays 10,000; C pays 10,000.
Dr A's Capital A/c 10,000; C's Capital A/c 10,000 | Cr B's Capital A/c 20,000
Revaluation profit = 12,000 − 3,000 = ₹9,000 distributed 3:2:1 (old ratio):
A = 4,500; B = 3,000; C = 1,500
General Reserve distributed 3:2:1: A = 9,000; B = 6,000; C = 3,000
