Retirement of a partner means ceasing to be partner of the firm. A partner may retire (i) of there is agreement of this effect (ii) all partners give consent (iii) At will by giving written notice.
Introduction
Like admission and changes in profit sharing ratio in case of retirement or death also the existing partnership deep comes to end and the new once comes into exist- tense among the remaining partner. There is not much difference in the accounting treatment at the time of retirement or in the event of death.
Amount due to Retiring/Deceased Partner (To be credited to his capital account)
1. Credit Blanca of his capital.
2. Credit Balance of his current account (if any).
3. Share of Goodwill. (By gaining partners)
4. Share of Reserves of Undistributed profits.
5. His share in the profit on revaluation of assets and liabilities.
6. Share in profits up to the date of Retirement/Death. (By p & L suspense A/c)
7. Interest on capital if involved.
8. Salary if any
Deduction from the above sum (to be debited to capital account)
1. Debit balance of his current account (if any)
2. Share of existing Goodwill to be written off.
3. share of accumulated loss.
4. Drawing and interest on drawings (if any)
5. Share of loss on account of Revaluation of assets and liabilities.
6. His share of business loss up to the date of Retirement/Death (To p & L) suspense A/C)
Accounting Treatment
1. Calculation of new profit sharing ratio and gaining ratio
2. Treatment of goodwill.
3. Evaluation a/c preparation with the adjustment in the respect of unrecorded assets /liabilities.
4. Distribution of reserves and accumulated profits/loss.
5. Ascertainment of share of profit/loss till the date of retirement. death.
6. Adjustment of capital if required.
7. Settlement of the Accounts due to Retired/Deceased partner.
Gaining ratio: it is the ratio in which the continuing partners have acquired the share from the outgoing partner. Gaining Ratio = New Ratio -Old Ratio.
Calculation of the two ratios.
Following situations may arise
1. When no information about new ratio or gaining ratio is given in question
In this case it considered that the share of the retraining partner is acquired the remaining partners in the old ratio. Then no need to calculate the new paining ratio as it will be the same as before.