At the time of a partner’s retirement from the partnership firm, who should be compensated by the remaining partners?

Both options 1 & 3

The correct answer is option 4- Both options 1 & 3.

When a partner retires, the fundamental principle of partnership accounting is to ensure that those who are "losing" their share of future profits are compensated by those who are "gaining" that share.

Why both must be compensated:

1. Retiring Partner: By leaving the firm, the retiring partner is sacrificing their entire future share of profits. Therefore, they must be compensated with their share of the firm's Goodwill.

2. Remaining partners who have sacrificed: Sometimes, the profit-sharing ratio of the continuing partners is restructured in such a way that a remaining partner actually loses a portion of their previous share. In this rare but possible scenario, that partner is also a "sacrificing partner" and deserves compensation.

NCERT" It may happen that as a result of decision on the new profit sharing ratio among the remaining partners, a continuing partner may also sacrifice a part of his share in future profits. In such a situation his capital account will also be credited along with the retiring/deceased partner’s capital account in proportion to his sacrifice and the other continuing partners’ capital accounts will be debited based on their gain in the future profit ratio."