On retirement or death of a partner, the remaining partners who have gained due to change in the profit sharing ratio should compensate the:

When a partner retires or dies, the profit-sharing ratio among remaining partners changes. This results in two types of adjustments:

Understanding the Gaining Ratio:

Gaining Ratio = New Share - Old Share

Some remaining partners gain more share than their previous proportion, while others may sacrifice part of their share.

Who needs to be compensated?

The gaining partners receive benefit from two sources:

From the retiring/deceased partner: The retiring partner's share is distributed among remaining partners. Those who gain from this distribution must compensate the outgoing partner for their share of goodwill.

From sacrificing partners (if any): Among the remaining partners themselves, if some have sacrificed their share in favor of others, the gaining partners must compensate these sacrificing partners as well.

Example scenario:

If partners A, B, and C share profits equally (1:1:1), and A retires with the new ratio between B and C being 3:2 (instead of equal 1:1):

• B gains more than C from A's share
• C actually sacrifices in favor of B
• B must compensate both A (retiring partner) and C (sacrificing partner)

The gaining partners therefore compensate both the retiring partner and any remaining partners who have sacrificed, making Option 1 correct.