Steps involved in accounting treatment at the time of death/retirement of a partner -

(A) Adjustment of capital, if required

(B) Preparation of revaluation account, if required

(C) Ascertainment of new profit sharing ratio and gaining ratio

(D) Settlement of the amounts due to retired / deceased partner

Choose the correct answer from the options given below:

When a partner retires or dies, the accounting treatment follows a specific logical sequence:

Step 1: Ascertainment of new profit sharing ratio and gaining ratio (C)

The new profit sharing ratio among continuing partners must be determined first as it forms the basis for all subsequent adjustments. The gaining ratio (the ratio in which continuing partners acquire the outgoing partner's share) is calculated as:

Gaining Ratio = New Ratio - Old Ratio

This step is crucial because gaining partners will compensate the retiring/deceased partner for goodwill and bear adjustments in their gaining ratio.

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Step 2: Preparation of revaluation account (B)

Assets and liabilities are revalued to reflect their current values. The profit or loss from revaluation is shared among all partners (including the retiring/deceased partner) in their old profit sharing ratio. This ensures the outgoing partner gets their share of any increase or decrease in the firm's net worth.

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Step 3: Adjustment of capital (A)

After revaluation, capitals may need adjustment for:

• Distribution of accumulated reserves and profits in old ratio
• Goodwill adjustment
• Transfer of retiring partner's loan (if capital is insufficient)

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Step 4: Settlement of amounts due (D)

Finally, the total amount due to the retiring/deceased partner is determined by totaling their capital account balance. This is then paid off either immediately or transferred to their loan account for gradual payment.

Correct sequence: (C), (B), (A), (D)