Accountancy Part AReconstitution of Partnership Firm: Retirement and Death

A, B and C are partners in a firm. If B is being retired from the fir…

A, B and C are partners in a firm. If B is being retired from the firm, what would be its effect?

Answer & explanation

Correct answer: option 4

The correct answer is Option (4) → Old partnership would be reconstituted

A partnership is the agreement among the partners; the firm is the business they run together. When B retires, the agreement among A, B and C comes to an end and a new agreement between A and C takes its place. That is a reconstitution of the partnership, while the firm continues its business as before.

Option (1) Nothing is affected — Incorrect. The old agreement ends on retirement, so the relationship among the partners does change.

Option (2) Old firm and old partnership would be dissolved — Incorrect. Dissolution of the firm means the business is closed and its assets realised; on retirement the business goes on with the remaining partners.

Option (3) Old firm would be dissolved — Incorrect. The firm is not wound up; only the agreement among its partners changes.

NCERT (2026-27 edition):
Reconstitution of a Partnership Firm – “… Any change in the existing agreement amounts to reconstitution of the partnership firm. This results in an end of the existing agreement and a new agreement comes into being with a changed relationship among the members of the partnership firm and/or their composition. However, the firm continues. The partners often resort to reconstitution of the firm in various ways such as admission of a new partner, change in profit sharing ratio, retirement of a partner, death or insolvence of a partner.”