Retirement of a partner

1. RETIREMENT
OF A
PARTNER

2.  Partnership as we know is mutual agreement
among partners to carry on legal business. It can
be formed at any time, when two or more person
desire.
 In other words, partnership is always at will of
partner. It is just possible that one of partners may
express his inability to continue in the partnership
and request other partner to allow him to retire
from the firm.

3.  Credit balance of his capital account.
 Credit balance of his current account(if any).
 His share of goodwill.
 His share of accumulated profits (reserves).
 His share in the gain of revaluation of assets & liabilities.
 His share of profits up to the date of retirement.
 Interest on his capital, if involved, up to the date of
retirement.
 Salary & commission, if any, due to him up to the date of
retirement.

4.  Debit balance of his current account(if any).
 His share of goodwill to be written off; if necessary.
 His share of accumulated losses.
 His share of loss on revaluation of assets and liabilities.
 His share of loss up to the date of retirement.
 His drawings up to the date of retirement.
 Interest on drawings, if involved, up to the date of
retirement.

5.  Calculation of New and Gaining Ratio.
 Treatment of Goodwill.
 Revaluation of Assets and Liabilities.
 Treatment of Accumulated/Undivided Profit.
 Methods of Payment to Retiring Partners.
 Adjustment of Capital Account.

6.  New Profit Sharing Ratio
Ratio of remaining partner is known as New profit
sharing ratio, in which they share the future profits.
New Share of Partner = Old Share + Acquired Share
 Gaining Ratio
The ratio in which the continuing partners have acquired
the share from the retiring partner is called the gaining
ratio.
Gaining Ratio = New Share – Old Share

7.  The retiring or deceased partner is entitled to his
share of goodwill at the time of retirement because the
goodwill has been earned by the firm with the efforts
of all the existing partners.
There are four steps in treatment of goodwill :
 Step-1: Calculation of goodwill of the entire firm as per
partners agreement including retiring partner.
 Step-2: Ascertainment of retiring partner’s share of
goodwill.
 Step-3: Calculation of gaining ratio.
 Step-4: Accounting treatment.

8.  The term revaluation simply means “to determine the
value of assets and liabilities again”.
In the preparation of revaluation account there are
only two possibilities. It will be either profit or loss.
 Profit indicates excess of credit side over the debit side.
It will be shown at debit side of revaluation account.
 Loss indicates excess of debit side over the credit side. It
will be shown at credit side of revaluation account.

9.  Accounts representing accumulate/undivided profits
should be transferred to all partner’s capital account
including the retiring partner in the old profit
sharing ratio.
 Accumulated/Undivided profits (also known as
retained earning) consist of Profit & Loss account
balance, General Reserve, Contingency Reserve etc.
They are shown at the liabilities side of the Balance
Sheet.

10.  The procedure of determining the amount payable to
retiring partner is to prepare his capital account on the
date of retirement.
The retiring partner is entitled to get his share out of
the following items.
 Share of Goodwill.
 Share of Accumulated Profit.
 Share of Profit on Revaluation.
 Interest on Capital
 Share of Profit from the Closing of the Last Final Account to
the Date of Retirement.

11.  At the time of retirement of a partner, continuing partners
may agree to fix their capital at a certain amount to make
it in their profit sharing ratio.
If such an agreement takes place then there will be an
accounting impact which is as follows:
Step-1: The specified capital amount is distributed among
continuing partners in their new profit sharing ratio.
Step-2: The closing balance of the capital should be restricted
to the amount determined in step 1.
Step-3: Any surplus over the adjusted capital is either
returned to the partner in case or transferred to his/her
current account.

12.  To revalue the assets & liabilities of the firm.
 To fix-up the value of goodwill of the firm.
 To make payment of the dues of retiring partner.
 To determine the new profit sharing ratio.
 To determine the new capital of the firm.
 To distribute general reserve or profit and loss
balance among all partners.
 To ascertain the profit or loss up to the date of
retirement.