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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.
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)
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.
Steps to be followed
1. When old good will appears in the books then first of all this is writer in the old ratio. Remember Old Goodwill old Ratio
All Partner’s capital A/C Dr.
To Good Will A/c
2. After written off of goodwill adjustment of retiring partner’s share goodwill will be made through the following journal entry.
Remaining Partner’s Capital, A/C Dr. (in gaining
To Retiring/Deceased Partner’s Capital A/c
Sometimes goodwill is not given in the question directly, But if a firm agrees to pay a sum which is more than retiring partner’s balance in capital also after making all adjustment with respect to resaves, revaluation of assets and liabilities etc. then cases amount is treated as his share of goodwill (known as hidden goodwill).
Revaluation of Assets and Reassessment of Liabilities
Revaluation A/c is prepared in the same way as in the case of admission of a new partner. Profit and loss on revaluation is transferred among all the partners in old ratio.
4. Adjustment of Reservation and Surplus (Profits)
(Appearing in the Balance Sheet – Liability Side)
(a) General Reserve A/cDr.
Reserve Fund A/cDr.
Profit & Loss A/c (Credit Balance)Dr.
To all partners Capital/Current A/c (in old ratio)
(b) Specific Funds – If the specific funds such as workmen’s compensation funds or investment fluctuation fund are in excess of actual requirement, the excess will be transferred to the Capital A/c in old ratio.
Workmen Compensation Fund A/cDr.
Investment Fluctuation Funds A/cDr.
To All Partner’s Capital A/cs
(c) For distributing accumulated losses
(i.e. P & L A/c debit balance shown on the Asset side of Balance Sheet)
All partner’s Capital/Current A/cDr. (in old ratio)
To P & L A/c