Retirement of a partner

Retirement of a partner

1. RETIREMENT OF A PARTNER

2. INTRODUCTION 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. Amount Payable to Retiring Partner ( To be Credited to his Capital Account) 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. Deduction from the above Sum (To be Debited to his Capital Account) 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. ADUSTMENTS The following adjustments are made at the time of retirement of a partner 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. Calculation of New & Gaining Ratio 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. Treatment of Goodwill 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. Revaluation of Assets & Liabilities 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. Treatment of Accumulated Profit 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. Amount Payable to Retiring Partners 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. Adjustment of Capital Accounts 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. PROBLEMS The following problems arising at the time of retirement : 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.

13. THANK YOU