Accountancy Part AReconstitution of Partnership Firm: Retirement and Death

Retiring/Deceased partner is compensated for his share of goodwill by…

Retiring/Deceased partner is compensated for his share of goodwill by the continuing partners in their _______.

Answer & explanation

Correct answer: option 3

The correct answer is Option (3) → Gaining ratio

The goodwill of the firm was earned by all the partners, so the retiring or deceased partner gets his share of it. The partners who take over his share of future profit are the ones who benefit, so they pay him for it in the proportion in which they gain, that is, in their gaining ratio.

Option (1) Sacrificing ratio — Incorrect. On retirement the continuing partners gain; the sacrificing ratio is used on admission of a partner.

Option (2) Old ratio — Incorrect. The old ratio is used for items that belong to all partners, such as reserves and revaluation profit.

Option (3) Gaining ratio — Correct.

Option (4) New ratio — Incorrect. The new ratio decides future profit sharing, not the compensation for what each partner gains.

NCERT (2026-27 edition):
Treatment of Goodwill – “The retiring or deceased partner is entitled to his share of goodwill at the time of retirement/death because the goodwill has been earned by the firm with the efforts of all the existing partners. Hence, at the time of retirement/death of a partner, goodwill is valued as per agreement among the partners the retiring/ deceased partner compensated for his share of goodwill by the continuing partners (who have gained due to acquisition of share of profit from the retiring/ deceased partner) in their gaining ratio.”