Chapter 5 deals with the Retirement of a Partner — the voluntary cessation of partnership by an existing partner. Section 32 of the Indian Partnership Act, 1932 recognises three modes: with the consent of all partners, per an express clause in the partnership deed, or by giving notice in writing in a partnership-at-will. On retirement, the firm is reconstituted: the continuing partners share the retiring partner's slice of future profits among themselves and the retiring partner is settled for his complete claim.
The chapter centres on five core adjustments. First, the new profit-sharing ratio and the Gaining Ratio (= New Ratio − Old Ratio) are computed — the gaining ratio is what the continuing partners pay for. Second, goodwill is adjusted under AS 26 by debiting continuing partners (in gaining ratio) and crediting the retiring partner with his share of goodwill, without raising goodwill in the books. Third, a Revaluation A/c is opened to record changes in asset and liability values, with the resulting profit or loss distributed to ALL partners (including the retiring one) in the OLD ratio. Fourth, accumulated reserves and profits (and any losses) are distributed in the OLD ratio. Finally, the retiring partner's claim is settled — in cash, by transfer to a Loan A/c (interest @ 6% default under Section 13), or by instalments of principal plus interest.
Special-case treatments include Workmen Compensation Reserve (excess over expected claim distributed in OLD ratio; deficiency to Revaluation A/c), Investment Fluctuation Reserve (similar netting against fall in market value), hidden goodwill (when retiring partner is paid more than his adjusted capital), and the capital adjustment of continuing partners to the new profit-sharing ratio. Numerical practice on these scenarios drives a large part of the 6-mark and 8-mark questions on the board paper.