Introduction

When the retirement or death of a Partner, the existing partnership deed comes to an end and a new partnership deed prepared  for the reconstituted firm.The firm will continue its business with new terms  and conditions.

Retirement of a Partner

A partner’s withdrawal from the business with the consent of other partners or as per the provisions or partnership deed or by giving notice of retirement is called retirement.

Accounting Treatment on Retirement

  1. Change in profit sharing ratio
  2. Calculation of gaining ratio
  3. Adjustment regarding goodwill
  4. Adjustment of reserves and accumulated profit or losses
  5. Revaluation of assets and liabilities
  6. Ascertainment of profit or loss up to the date of retirement
  7. Calculation of total amount due to the retiring partner
  8. Settlement of total amount due to the retiring partner
  9. Adjustment of capitals of continuing partners.

1-Change in Profit Sharing Ratio

The share in the profit of the retiring partner is often acquired by the continuing partners in their profit sharing ratio, unless otherwise agreed.

If the share acquired by old partners in their old PSR , the new ratio among the remaining partners will not change.

Ex: A,B and C are Partners, Their PSR 3:2:1,  if B retires, the New PSR of A and C is 3:1

2-Calculation of Gaining Ratio

The ratio in which the continuing partners decide to share the outgoing partner’s profit share is called gaining ratio.

Gaining Ratio of Contng.Partner’s = New Share – Old Share
Note: if a partner retires and the new profit sharing ratio(PSR)of the continuing partners are not given, Gaining ratio will be same as the Old Ratio.

3-Adjustment regarding Goodwill

A retiring partner is entitled to his share of goodwill.The goodwill earned by the firm with the effort of all partners including retiring partner

He is not going to share future profits.so he has to compensate by the continuing partners in their gaining ratio.
The Good will is adjusted through the capital accounts of partners asper the accounting statndards 10(AS10)

The following journal entry is recorded for this purpose


Continuing Partner’s Capital     A/c   Dr
To Retiring partner’s capital A/c

A-When Good will does not appear in the books- Goodwill raised its full value and written off immediately

Goodwill      A/c    Dr
To all Partners(including retiring) Capital A/c

(Goodwill raised,credited to partners in old ratio)

Written off

Remaining Partners’ Capital  A/c Dr
To Goodwill   A/c

(Goodwill written off remaining partners New ratio)

B-When goodwill already appearing in the books
If GW is already appearing in the books at the time of retirement of a partner, the same should be written off by passing the following entry

All partners capital A/c     Dr
To Goodwill A/c

(Goodwill existing in the books written off by debiting all partners in the old ratio)

Hidden Goodwill
Some times,a firm may agree to settle the retiring partner by making a lump sum payment.The amount paid may be more than what is due to him based on his capital a/c after all adjustment.(share of accumulated profit,revaluation profit etc).Then the excess paid shall be treated as his share of goodwill.

4-Adjustment of reserve and accumulated profit/loss

General reserve and P&L  a/c credit balance and unused reserve like workmen’s compensation reserve

 (appearing on the liability side of B/S) should be transferred to all the partners capital a/c in the old PSR.

Journal entry

General reserve    a/c   Dr
Workmen’s compensation reserve a/c  Dr
Profit   and loss              a/c Dr
To Partners capital A/c     (Individually in Old PSR)

*Similarly accumulated losses should be written off by transferring caital a/c

Partners capital a/c    Dr
To    P&L       a/c

(If reserve or P&L a/c balance transferred to old partners capital a/c, it should not be shown again in the new B/S prepared after the retirement of Partner)

Alternatively ,only retiring partners share in General reserve and P&L may be credited or debited to his capital a/c
In such a case:-

1-For transferring retiring partner’s share of reserve or accumulated profit
Reserve /accumulated profit A/c Dr
To retiring partners capital a/c

2-Transferring loss
Retiring partners capital a/c Dr
To  P&L a/c

Note: The amount of reserve and  P&L a/c balance should be shown in new B/S after deducting retiring partner’s share.

These a/c balance should be transferred to partners capital a/c even if the problem is silent about it.

5-Revaluation of Assets and liabilities

The assets and liabilities should be revalued on the same as in the case of admission

A revaluation a/c is prepared for this purpose.The profit or loiss on revaluation is transferred to all the partner’s capital accounts,including retiring partnerscapital a/cs in their old profit sharing ratio.

Journal entries

1-For increase in the value of assets

Assets   A/c Dr
To Revaluation A/c

2-For decrease in the value of assets

Reavaluation a/c Dr
 To Asset a/c

3-For Increase in the value of liability

Revaluation a/c Dr
To liability a/c

4-For decrease in the value of liability

Liability a/c Dr
To revaluation a/c

5-For transferring revaluation profit to partners capital a/c( balancing figure)

Revaluation a/c Dr
To Partners capital a/c (
individually including retiring partner)

6-if loss,

Partners capital a/c
To revaluation a/c
   

6-Ascertainment of Profit/loss up to the date of retirement

If a partner retires on any day other than closing day of the accounting year ,his sare of profit should be ascertained for the period from the date of last balance sheet to the date of retirement

Retiring partner’s share of profit will be calculated the following way

  1. Calculate the average profit of required years from the given details
  2. Reduce average annual profit for the period up to the date of retirement of partner.
  3. Find out the share of the retiring partner.

Note :some times ,profit up to the date of retirement may be based on previous year’s profit alone.

Journal entries

In case of Profit:-

Profit & loss suspense     A/c     Dr
To Retiring partner’s Capital A/c.

In case of loss:-

Retiring partner’s capital A/c Dr
To P&L suspense A/c

7-Calculation of Total Amount Due to retiring partner

The total amount due to retiring partner is determined by preparing his capital account on the date of retirement.Retiring partners capital a/c shall have the following items

Note :If it shows a debit balance it means the amount payable by retiring partner to the firm.

When capital accounts are maintained according to fixed capital method all items are posted in current account of the retiring partner .The final balance in the current a/c is then transferred to his capital A/c.

7-Settlement of total Amount due to the Retiring Partner

The amount due to the retiring partner is settled as per the provisions  of partnership deed.

It may be paid in full at the time of retirement  or due amount transferred to retiring partner’s loan account.

Journal entries

  1. When retiring partner is paid i cash in full

Retiring partner’s capital A/c    Dr
To Cash/ Bank A/c

 2-When retiring partner is partly paid in cash and the remaining amount treated as loan

Retiring partners capital A/c   Dr
To cash/Bank      A/c
To Retiring partners Loan A/c

3-When retiring partner’s whole amount is transferred to his loan account

 Retiring Partner’s capital A/c   Dr
 To Retiring partners Loan A/c

4-When loan A/c is settled by paying in instalment include Principal and interest

a-When interest due
Interest on loan    A/c   Dr
To  Retiring partners Loan A/c

b-Payment of Instalments
Retiring partners Loan A/c
To Cash/Bank A/c

(entries ‘a’ and ‘b’ continue in next years till the loan amount paid full)

8-Adjustment of capitals of continuing Partners

Sometimes ,after the retirement of a partner ,the remaining partners decide to adjust their capitals.Such adjustments can be done in the following ways:-

  1. Fix a total capital for the firm and divide it among the continuing partners in their new profit sharing ratio.  

Ex: A and B are partners whose Profit Sharing Ratio  is 2:3, they fixed Total capital as 50000

A should bring Rs 5000 as additional capital, B can withdraw Rs 3000

Journal entries :
Cash/bank    A/c Dr  5000
A’s capital A/c   Dr     3000

 B’s Capital A/c  5000              
To Cash/ Bank A/c     3000

  1. When the total capital of new firm is not specified – here total is capital is calculated by adding continuing partners capital balances .Here total capital is not blindly fixed.

With the above example ,Total capital of A & B is , = 15000+33000 = 48000,instead of Rs 50000 specified in question.

  1. When the amount payable to retiring partner will be contributed by continuing partners in such a way that their capitals are adjusted – here the total capital is calculated by adding all partners capital balances including retiring partner.

Total capital = Continuing partners capital + retiring partners capital

A,B and C, are partners, their  PSR is 2:3 If  C retires ,his capital balance is Rs40000

Total capital is : 15000+33,000+40,000=88,000, this capital should divide among the continuing partners and  bring the shortage .

DEATH OF A PARTNER

A partnership comes to an end on the death of any one of the partners , although the firm may continue with the remaining partners .The accounting treatment for various adjustments in case of death of a partner is similar to that of retiring partner.

Difference between Death and Retirement of a Partner

  1. Retirement is a planned one.death may take place at any time
  2. Relation of a partner with the firm voluntarily broken in case of retirement .It is automatic in case of death
  3. Amount payable to a retiring partner is transferred to his loan account, on death the amount due to deceased is transferred to executors account

Journal Entries

1-Amount due to deceased partner

Deceased partner’s capital A/c    Dr
To Executors     A/c

2- When loan A/c is settled by paying in instalment include Principal and interest

a-When interest due

Interest on loan    A/c   Dr
To  Executors Loan A/c

b-Payment of Instalments

 Executors Loan A/c
To Cash/Bank A/c(entries ‘a’ and ‘b’ continue in next years till the loan amount paid full)