Chapter:4

What are Retirement and Death of a Partner?

Retirement Of A Partner

Retirement of a partner means retiring from the firm, i.e., ceasing to be a partner of the firm. On the retirement of a partner old partnership comes to an end and a new one between the continuing partners comes into existence, however, the firm continues its business.

Adjustments Required At The Time Of Retirement Of A Partner

  • Adjustment in profit sharing ratio.
  • Adjustment for goodwill.
  • Adjustment of profit/Loss arising on the revaluation of assets and reassessment of liabilities.
  • Adjustment of accumulated profits, reserves and losses.
  • Computation of amount due to retiring partner and payment to retiring partner.
  • Adjustment of capitals (if agreed).

New Profit Sharing Ratio

After retirement of a partner, the new ratio in which the continuing partners (i.e. partners other than the outgoing partner) decides to share the future profits and losses, is known as new profit sharing ratio.

New Ratio = Old Share + Acquired Gaining Share

Gaining Ratio

The ratio in which the continuing partners acquire the outgoing (retired or deceased) partners’ share.

Gaining Ratio = New Share – Old Share

Calculation Of New Profit Sharing Ratio And Gaining Ratio

  • Case 1. When one partner retires and the new profit sharing ratio among the remaining partners is not given, the it will be assumed that the remaining partners continue to share profits and losses in the remaining ratio.
  • Case 2. When gains of continuing partners are separately given, then new share of the continuing partners may be calculated by adding their gain to their old share.
  • Case 3. When the remaining partners acquire share of the retiring partner in specified ratio, then share taken by each partner is computed separately and then added to their old share.
  • Case 4. When old ratio and new ratio are given, gaining ratio is computed by taking out the difference between old share and new share.
  • Case 5. When entire share of retiring partner is taken by only one partner, then the acquired share will be added to that particular partner’s share.

Treatment Of Goodwill

At the time of retirement or death of a partner, the gaining partners compensate the retiring or decease partner in the form of goodwill contributed (for the share of profits taken by them) in their gaining ratio.

Gaining Partners’ Capital/Current A/c    Dr.

To Retiring Partners’ Capital/Current A/c

Goodwill Already Appearing in Books

Any goodwill already appearing in the books (balance sheet) will be immediately written off (debited) to old partners’ capital accounts (including retiring partner) in old profit sharing ratio.

All Partners’ Capital/Current A/c

To Goodwill A/c

Dr.

(In old ratio)

(With existing book value of goodwill)

Hidden Goodwill

Sometimes the firm agrees to settle the retiring or deceased partners’ account by payment of a lumpsum amount. If such amount is in excess of his capital and share in reserves/revaluation of assets and reassessment of liabilities, etc, the excess will be treated as his share of goodwill.

Revaluation Of Assets And Reassessment Of Liabilities

At the time retirement of a partner, the assets and liabilities are revalued so that the due share of an outgoing partner in the profit/loss arising from such revaluation may be ascertained and adjusted in capital account. For this purpose, revaluation account is prepared.

Dr.

Revaluation Account

Cr.

Particulars Amount (`) Particulars Amount (`)
To Decrease in Value of Assets (Loss) ... By Increase in Value of Assets (Profit) ...
To Increase in Value of Liabilities (Loss) ... By Decrease in Value of Liabilities (Profit) ...
To Unrecorded Liabilities (At an agreed value) ... By Unrecorded Assets (At an agreed value) ...
* To Profit Transferred to Old Partners’ ... *By Loss Transferred to Old Partners’ ...
Capital/Current A/c (In old ratio) Capital/Current A/c (In old ratio) ...

Adjustment For Accumulated Profits/losses And Reserves

At the time of retirement, net balance (after setting off liability, if any) of specific reserves (e.g. workmen compensation reserve, investment fluctuation reserve, general reserve and accumulated profit or loss, etc) appearing in the balance sheet is distributed among all the partners in their profit sharing ratio.

Computation Of Amount Due To Retiring Partner

The amount due to a retiring partner is ascertained by preparing retiring partners’ capital account, after taking into account the following:

Items to be Credited

  • His share in the profit of revaluation account.
  • His share of reserves and accumulated profits.
  • His share of goodwill of the firm.
  • His share of profit till the date of his retirement.
  • Opening credit balance of capital and current account of retiring partner.
  • His salary and/or interest on capital due to the him till the date of his retirement.

Items to be debited

  • Opening debit balance of capital and account of retiring partner.
  • Advance or loan taken by him from the firm if any.
  • Drawing and interest thereon of the retiring partner.
  • Share in the accumulated losses of past year/years.
  • Share in the loss of revaluation account.

Settlement Of The Amount Due To The Retiring Partner

The amount due to the retiring partner is either paid off immediately or is transferred to his loan account. The retiring partner loan account will appear in the books of the new firm as a liability until it is paid off finally. The following journal entries are passed in this regard.

Accounting Treatment

1. It the amount is paid in lumpsum Retiring Partners’ Capital A/c To Cash/Bank A/c Dr.
2. In case the amount is paid in instalments (i) For amount due transferred to retiring partners’ loan account Retiring Partners’ Capital A/c
To Retiring Partners Loan A/c
Dr.
(ii) On interest being provided Interest on Loan A/c
To Retiring Partners’ Loan A/c
Dr.
(iii) On payment of instalment with interest Retiring Partners’ Loan A/c
To Cash/Bank A/c
Dr.
3. If payment is partly paid in cash and the remaining amount is to be treated as loan Retiring Partners’ Capital A/c
To Cash/Bank A/c
To Retiring Partners’ Loan A/c
Dr.

Note :

  • If the question is silent on payment to Retiring partner, the amount due to him is transferred to his `loan account’.
  • Unless agreed otherwise, the retiring partner is entitled to interest @6% p.a. till the amount due to him is not paid.

Computation Of Amount Due To Retiring Partner

The amount due to a retiring partner is ascertained by preparing retiring partners’ capital account, after taking into account the following:

Items to be Credited

  • His share in the profit of revaluation account.
  • His share of reserves and accumulated profits.
  • His share of goodwill of the firm.
  • His share of profit till the date of his retirement.
  • Opening credit balance of capital and current account of retiring partner.
  • His salary and/or interest on capital due to the him till the date of his retirement.

Items to be debited

  • Opening debit balance of capital and account of retiring partner.
  • Advance or loan taken by him from the firm if any.
  • Drawing and interest thereon of the retiring partner.
  • Share in the accumulated losses of past year/years.
  • Share in the loss of revaluation account.

Death Of A Partner

The partnership comes to an end immediately, whenever a partner dies although the firm may continue with the remaining partners. The deceased partner is entitled to get his share in the firm as per the provision of a partnership agreement. His share in the firm is calculated in the same manner as in the case of a retiring partner.

Computation Of Amount Due To Retiring Partner

If a partner dies on any date after the date of the balance sheet, then his share of profits is calculated from the beginning of the year to the date of death on the basis of time of sales.

• On the basis of time :

Deceased Partners’ share of profit till date of death = (Number of Days or Months from the Date of last balance Sheet to the Date of Death/365 Days or 12 Months)

× Previous Year’s Profits or Average Profits of a given Number of Past Years × Profit Share

• On the Basis of Turnover Sales :

Deceased Partner’s share of profit till date of death = (Sales from the Date of the Last Balance Sheet to the Date of Death/Previous Year’s Sales or Average Sales of a Given Number of Past Years)

× Previous Year’s Profits of Average Profits of a Given Number of Past Years × Profit Share

Accounting Treatment

  • When new profit sharing ratio of continuing partners does not differ from their old profit sharing ratio.
(i) In case of profit Profit and Loss Suspense A/c
To Deceased Partner’s Capital A/c
Dr.
(ii) In case of loss Deceased Partner’s Capital A/c
To Profit and loss Suspense A/c
Dr.
  • When new profit sharing ratio of continuing partners differs from their old profit sharing ratio.
(i) In case of profit Gaining Partners’ Capital A/c
To Deceased Partner’s Capital A/c
Dr. (Gaining ratio)
(Share of profit)
(ii) In case of loss Deceased Partner’s Capital A/c
To Gaining Partners’ Capital A/c
Dr. (Share of loss) (Gaining ratio)

Dr.

Deceased Partner’s Capital Account

Cr.

Particulars Amount (₹) Particulars Amount (₹)
To Current A/c (Debit Balance) ... By Balance b/d ...
To Loan to Partner A/c ... By Current A/c (Credit Balance)) ...
To Revaluation A/c (Share in loss) ... By Partner’s Loan A/c ...
To Share in Accumulated Losses ... By Profit and Loss Suspense A/c ...
To Drawings A/c ... (Share in Profit for Current year till death)
To Interest on Drawings A/c ... By Revaluation A/c (Share in Gain Profit) ...
To Profit and Loss Suspense A/c
(Share of Loss for current year till death)
... By Share in Accumulated Profit:
- General Reserve A/c
- Profit and Loss A/c
...
To Goodwill A/c (Share in existing goodwill written off) ... By Interest on Capital A/c ...
To Deceased Partner’s Executors’ A/c
(Transfer) (Balancing Figure)
... By Salary or Commission A/c ...
... ...

Settlement Of Deceased Partner’s Execut Or’s Account

The payment to the executors of the deceased partner is made as is stated in the partnership deed or as agreed to by the remaining partners and the executors. The payment is made either in full in one instalment or more than one instalment.

Accounting Treatment

1. When payment is made in full in one instalment Deceased Partner’s Executor’s A/c
To Bank A/c
Dr.
2. When payment is made in more than one instalment (i) When interest is due Interest A/c
To Deceased Partner’s Executor’s A/c
Dr.
(ii) When instalment is paid
Deceased Partner’s Executor A/c To Bank A/c
Dr.