Retirement of a partner

1. RETIREMENT OF A PARTNER
MEANING:
When one or more partners leaves the firm and
the remaining partners continue to do the
business of the firm, it is known as retirement of a
partner.
Due to some reasons like old age, poor
health, strained relations etc., an existing partner
may decide to retire from the partnership.

2. RETIREMENT OF A PARTNER
A partner retires either :
(i) with the consent of all partners, or
(ii) as per terms of the agreement; or
(iii) at his or her own will.

3. RETIREMENT OF A PARTNER
Due to retirement, the existing
partnership comes to an end and the
remaining partners form a new
agreement and the partnership firm is
reconstituted with new terms and
conditions. At the time of retirement the
retiring partner’s claim is settled.

4. RETIREMENT OF A PARTNER
The terms and conditions of
retirement of a partner are normally
provided in the partnership deed. If
not, they are agreed upon by the
partners at the time of retirement.

5. Adjustments to be made
(a) New profit sharing ratio and gaining ratio.
(b) Goodwill
(c) Revaluation of Assets and liabilities
(d) Transfer of accumulated reserve
(e) Transfer of undistributed profit or loss
(f) Settlement of retiring partners dues
(g) New capital of the continuing partners.

6. New profit sharing ratio and gaining ratio
As soon as a partner retires the profit
sharing ratio of the continuing partners get
changed. The share of the retiring partner is
distributed amongst the continuing
partners. In the absence of information, the
continuing partners take the retiring
partner’s share in their profit sharing ratio
or in an agreed ratio.
Gaining Ratio = New Ratio – Existing Ratio

7. Gaining
Ratio
The ratio in which retiring partner’s
share is distributed amongst continuing
partners is known as gaining ratio.
Gaining Ratio = New Ratio – Existing Ratio

8. Distinguish between Sacrificing Ratio
and Gaining Ratio.
Basis Sacrificing Ratio Gaining Ratio
(i) Meaning Proportion in which old
partners sacrifice their
share in favour of new
partner.
Proportion in which
continuing partner gain
the share of outgoing
partner on his retirement.
(ii) Occasion Sacrificing ratio is
calculated at the time of
admission of new partner.
Gaining ratio is
calculated at the time of
retirement or death of a
partner.
(iii) Formula Old ratio – New ratio New ratio – Old ratio

9. (i) Retiring partner’s share
distributed in Existing Ratio :
In this case, retiring partner’s
share is distributed in existing
ratio amongst the remaining
partners. The remaining partners
continue to share profits and
losses in the existing ratio.

10. Example
A, B and C are partners
sharing profits and losses
in the ratio of 4 : 3 : 2.
A Retired. Calculate the
new ratio of B and C.

11. Answer
Existing Ratio between B and C = 3/9 and 2/9
A’s Ratio (retiring partner) = 4/9
A’s share taken by the B and C in the ratio of 3 : 2
B’s gets = 4/9 × 3/5 = 12/45
B’s New Share = 3/9 + 12/45 = 27/45
C’s gets = 4/9 × 2/5 = 8/45
C’s New Share = 2/9 + 8/45 = 18/45
New ratio between B and C is 27/45 : 18/45 = 3 : 2.
Gaining Ratio = New Ratio – Existing Ratio
B Gain = 27/45 – 3/9 = 12/45
C Gain = 18/45 – 2/9 = 8/45
= 3 : 2

12. (ii) Retiring partner’s share
distributed in Specified proportions:
Sometimes the remaining
partners purchase the share of
the retiring partner in specified
ratio. The share purchased by
them is added to their old share
and the new ratio is arrived.

13. Example
P, Q and R are partners in the firm
sharing profits in the ratio of 3 : 2 : 1.
Q retired and his share was divided
equally between P and R. Calculate
the new profit sharing ratio of P & R.

14. Answer
Q’s Share = 2/6
Q’s share is divided between P & R in the ratio of 1 : 1.
P gets 1/2 of 2/6 = 1/6
P’s New Share = 3/6 + 1/6 = 4/6
R’s gets 1/2 of 2/6 = 1/6
R’s New share = 1/6+1/6 = 2/6
Gaining Ratio
Gaining Ratio = New Ratio – Existing, Ratio
Gain of P = 4/6 – 3/6 = 1/6
Gain of R = 2/6 – 1/6 = 1/6
1 : 1 i.e, equal.

15. (iii) Retiring Partner’s
share is taken by one of
the partners
The retiring partner’s share is taken up by
one of the remaining partners. In this case,
the retiring partner’s share is added to that
of partner’s existing share. Only his/her
share changes. The other partners continue
to share profit in the existing ratio.

16. Example
A, B and C share profit
in the ratio of 5 : 4 : 2.
B retires and his share
is taken by C.

17. Answer
C’s share is 2/11 + 4/11 =
6/11, A share will remain
unchanged i.e, 5/11. Thus,
the new profit sharing
ratio of A and C is 5 : 6.

18. TREATMENT OF GOODWILL
The retiring partner is entitled to his/her share of
goodwill at the time of retirement because the
goodwill is the result of the efforts of all partners
including the retiring one in the past. The retiring
partner is compensated for his/her share of
goodwill. As per Accounting Standard 26 (AS-26),
goodwill is recorded in the books only when some
consideration in money is paid for it. Therefore,
goodwill is recorded in the books only when it is
purchased and the goodwill account cannot be
raised on its own.

19. TREATMENT OF GOODWILL
The retiring partner is entitled to
his/her share of goodwill at the time
of retirement because the goodwill
is the result of the efforts of all
partners including the retiring one
in the past. The retiring partner is
compensated for his/her share of
goodwill.

20. Accounting treatment of Goodwill:
Methods
1. When Goodwill a/c is to be raised/valued at its
full value & then written off.
2. When only retiring partner’s share of Goodwill
is to be raised/valued & then written off.
3. When no Goodwill a/c is to be opened or
when retiring partner’s share of goodwill is to be
adjusted in remaining partner’s capital a/cs.

21. Lets take an example to understand the
treatment of goodwill in retirement of a
partner.
A, B & C are partners sharing profits
& losses in 3:2:1 ratio. B retires from
the firm & his share were taken over
by A & C in 2:1 ratio. Total goodwill
of the firm is valued at 18,000. Pass
journal entries for treatment of
goodwill in all cases.

22. Case 1 :
Goodwill A/c Dr. 18,000
To A’s capital A/c 9,000
To B’s capital A/c 6,000
To C’s capital a/c 3,000
(Being amount of Goodwill raised at its full
value by old partners in old ratio.)
A’s Capital A/c Dr. 13,000
C’s capital A/c Dr. 5,000
To Goodwill A/c 18,000
(Being amount of Goodwill written off by A
& C in new ratio i.e 13 : 5.)

23. Case 2 :
Goodwill A/c Dr. 6,000
To B’s capital A/c 6,000
(Being only B’s share of goodwill is
raised)
A’s Capital A/c Dr. 4,000
C’s capital A/c Dr. 2,000
To Goodwill A/c 6,000
(Being amount of Goodwill written off
by A & C in gaining ratio i.e 2 : 1.)

24. Case 3:
A’s Capital A/c Dr. 4,000
C’s capital A/c Dr. 2,000
To B’s capital A/c 6,000
(Being B’s share of Goodwill adjusted in A
& C capital a/c in gaining ratio i.e 2 : 1.)

25. Loan a/c is to be prepared to show amount
paid to retiring partner.
Continued from the previous example A’s
loan a/c had a balance of 11,400. If B &
C decided to pay A in three annual
installments together with interest @ 5%
p.a. Then prepare A’s loan a/c till his
final payment.

26. A’s Loan a/c
Particulars ParticularsAmount Amount
By A’s capital a/c
By Interest on loan (5%
on 11,400)
11,400
570
Date Date
Beg 1
End
End To bank (3,800+570) 4,370
11,97011,970
To bala c/d 7,600
By bala b/d
By Interest on loan (5%
on 7,600)
7,600
380
Beg 2
End
End To bank (3,800+380) 4,180
7,9807,980
To bala c/d 3,800
By Bala b/d
By Interest on loan (5%
on 3,800)
3,800
190
Beg 3
End
End To bank (3,800+190) 3,990
3,9903,990

27. Death of a Partner:
In case of death of a partner the following things should be
calculated to know the amount due deceased partner’s
executor
1. Amount of credit balance of deceased partner.
2. Amount of drawings
3. Interest on Capital
4. Interest on Drawings
5. Share of Profit
6. Share of general reserve
7. Share of Profit /Loss of Revaluation a/c
8. Share of Goodwill &J.L.P.
Calculated till
partner’s date of
death.

28. N. Bala Murali Krishna