Accountancy Part AReconstitution of Partnership Firm: Retirement and Death

At the time of retirement of partner, If General Reserve appears in t…

At the time of retirement of partner, If General Reserve appears in the Balance Sheet of the firm, it will be distributed among the partners in:

Answer & explanation

Correct answer: option 3

The correct answer is Option (3) → Old Profit Sharing Ratio

A general reserve is profit earned and kept aside while all the partners, including the retiring one, were sharing in the old ratio. It therefore belongs to all of them and is transferred to all the partners’ capital accounts in their old profit sharing ratio.

Option (1) Gaining Ratio — Incorrect. The gaining ratio is used to compensate the retiring partner for goodwill.

Option (2) Sacrificing Ratio — Incorrect. On retirement the remaining partners gain; they do not sacrifice.

Option (3) Old Profit Sharing Ratio — Correct.

Option (4) New Profit Sharing Ratio — Incorrect. The reserve was earned before the change, so the new ratio does not apply.

NCERT (2026-27 edition):
Adjustment of Accumulated Profits and Losses – “Sometimes, the Balance Sheet of a firm may show accumulated profits in the form of general reserve and/on accumulated losses in the form of profit and loss account debit balance. The retiring/deceased partner is entitled to his/her share in the accumulated profits and is also liable to share the accumulated losses, if any. These accumulated profits or losses belong to all the partners and should be transferred to the capital accounts of all partners in their old profit sharing ratio.”