unit II Higher Financial accounting (4).pptx

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1. RETIREMENT OF A PARTNER

2. Topics to be covered in this Module Meaning and Liability of Retirement of Partner Rights of Retiring Partner Adjustments/Accounting treatment required at the time of retirement of a partner Accounting treatment required at the time of retirement of a partner Difference between Gaining Ratio and sacrificing Ratio Calculating Gaining Ratio - Different Cases

3. Meaning of Retirement of a Partner Withdrawal of a partner from the partnership with the consent of other partners or as per the provisions of the partnership deed or by giving notice of retirement is termed as retirement of a partner. A partner who cut his connection with the firm is called a retiring partner or outgoing partner . Retirement of a partner leads to reconstitution of a partnership firm as the original agreement between the partners comes to an end. The business may continue with a new agreement with the remaining partners. When a partner retires, his share in the firm is to be correctly ascertained and settled.

4. Rights of a Retiring Partner A retiring partner is entitled to get his share of capital, interest on capital, revaluation profit, share of profit etc. up to the date of his retirement. Similarly he is liable for his share in all the losses like accumulated loss, revaluation loss, Drawings, interest on drawings, share of current year’s loss up to the date of retirement, drawings, interest on drawings etc. till the date of his retirement. He is not liable for any loss incurred by the firm after his retirement .

5. Adjustments/Accounting treatment required at the time of retirement of a partner Calculation of new profit sharing ratio and gaining ratio Treatment of goodwill Treatment of accumulated profit and losses 4.Revaluation of assets and liabilities Ascertainment of profit and loss upto the date of retirement Calculation of total amount due to the retiring partner Settlement of total amount due to the retiring partner 8.Adjustment of capitals of the continuing partners

6. Accounting treatment required at th e time of retirement of a partner I. Calculation of New profit sharing ratio and gaining ratio At the with the time of retirement of a partner, the business continues remaining partners. New Ratio The ratio, in which the continuing partners decide to share the future profits and losses, is known as new profit sharing ratio. Gaining Ratio The ratio in which the continuing partners acquire the outgoing partner’s share is called gaining ratio.It is called gaining ratio because the continuing partners stand to gain by acquiring the retiring partner’s share in profits. Gaining Ratio = New Share – Old Share

7. Difference between sacrificing and Gaining Ratio Bases of Sacrificing Ratio Gaining Ratio Differenc When to calculate It is calculated at the It is calculated at the time of admission of a time of retirement/death partner and change in of a partner and change profit sharing ratio in profit sharing ratio Purpose It is calculated to know how much each partner needs to sacrifice for the new partner It is calculated to know how much more each partner will gain when a partner retires or die Meaning The ratio in which the old partners sacrifice their share of profit in favour of the new partner The ratio in which the continuing partners acquire the outgoing partner’s share is called gaining ratio.

8. Bases of Sacrificing Ratio Gaining Ratio Difference Objective It is used to share the goodwill brought in cash by new partner between old partners Gaining ratio is used to determine the compensation payable to the retiring by the continuing par tners Calculation Old Share– New Share New Share- Old Share Effect on Capital Old Partners Capital Accounts are credited in the sacrificing ratio Remaining partners capital accounts are debited in gaining ratio Difference between Gaining Ratio and sacrificing Ratio Slide 8

9. Calculating Gaining Ratio - Different Cases Case-1 Relative Ratio between remaining partners unchanged Case-2 When the profit sharing ratio between continuing partners is changed/the new ratio between remaining partners is given Case- 3 When the continuing partners acquire (Purchase) the retiring partner’s share of profit in an agreed ratio. Case- 4 When entire share of the retiring partner is taken by only one continuing partner

10. I. Calculation of New profit Sharing ratio and Gaining ratio: Case 1: When a Partner retires, and nothing is mentioned about the New Ratio of the Remaining Partners : Steps to determine the New Profit-Sharing Ratio:  Step 1 :  Convert the old profit-sharing ratio into the simplest form by taking L.C.M . Step 2 :  Calculate the New Profit-Sharing Ratio of the remaining partners by simply striking off the share of the retiring partner.

11. Case- 1 Q.X,Y and Z are partners sharing profits in the ratio of 1/2,3/10,1/5 or (5/10:3/10:2/10).Calculate the new ratio and sacrificing ratio if X retires. Old ratio of X,Y and Z = 5:3:2 New ratio of Y and Z = 3:2 Gaining Ratio = New share – Old share Y’s Gain = 3/5 – 3/10 or 6/10 – 3/10 =3/10 Z’s Gain = 2/5 – 2/10 or 4/10 – 2/10 = 2/10 Gaining ratio of Y and Z = 3:2 In this type problem (Case-1) Gaining Ratio = New Ratio So in this type problem there is no need to calculate gaining ratio When a Partner retires, and nothing is mentioned about the New Ratio of the Remaining Partners:

12. Q1 . Ram , Mohan, and Shyam were partners, sharing profits and losses in the ratio of  1/2,2/5 and1/10 Calculate the New Profit-Sharing Ratio of the remaining Partners if Ram retires . Ans:4:1 Q2. Riya , Ravi, and Shymali were partners sharing profit and losses in the ratio of5/10,4/10,5/50.   Calculate the New Profit-Sharing Ratio of the remaining Partners if Ravi retires . Ans:5:1

13. Case 2: When the remaining partner acquires a share of the retiring partner in a certain ratio : The Remaining Partners may agree to acquire the share of the Retiring Partner in a certain specific ratio . Steps to determine the New Profit-Sharing Ratio: Step 1 : Calculate the share acquired by the remaining Partners Divide the share of the retiring partner in the ratio of acquisition agreed upon by the remaining partners. Step 2 : Calculation of New Profit-Sharing Ratio To find the New Share, add the share acquired by the remaining partners to their old shares. New Share = Old Share + Share Acquired

14. Question 1  (When a share is acquired by all the remaining partners):  P, Q, and R are partners sharing profits in the ratio of   5/20,2/5,7/20.  If P retires and his share is taken up by Q and R in the ratio of 1:2. Calculate the New Ratio . Ans :New Ratio of Q: R =  29: 31 Question 2  (When a share is acquired by one of the remaining partners) : X, Y, and Z were partners sharing profits in the ratio of 4: 4: 2. Y retires, and his share is taken by Z only. Calculate the New Profit Sharing ratio. (When a share is acquired by one of the remaining partners) Ans : New Ratio of X: Z = 4: 6 i.e.,  2: 3 .

15. Question for Practice 1. From the following particulars, calculate the new profit- sharing ratio of the partners: Shiv, Mohan and Hari were partners in a firm sharing profits in the ratio of 5: 5: 4. Mohan retired and his share was divided equally between Shiv and Hari. P, Q and R were partners sharing profits in the ratio of 5: 4: 1. P retires from the firm.

16. 1 . a)Shiv and Hari new profit ratio = 15 : 13 b)New Profit Ratio Q: R = 4:1

17. II. 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. Therefore, in case of retirement of a partner, the goodwill is adjusted through partner’s capital accounts. The retiring partner’s capital account is credited with. his/her share of goodwill and remaining partner’s capital account is debited in their gaining ratio.

18. The accounting treatment for goodwill in such a situation depends upon whether or, not goodwill already appears in the books of the firm. Retiring Partner Share of Goodwill = Value of Goodwill on the date of retirement x Retiring partner’s share in the firm

19. Goodwill is adjusted by taking the following steps: Step 1:  Calculate the gaining ratio of the remaining partners. Gaining Ratio = New Ratio – Old Ratio Step 2:  Calculate the goodwill of the firm or what is stated in the question. Step 3:  Calculate the share of goodwill of the retiring partner.

20. Case 1: When Goodwill Account appears in the books: When goodwill already appears in the books (i.e., it appears in the asset side of the Balance Sheet) at the time of retirement of the partner, it is written off among all the partners in the old profit-sharing ratio. The following journal entry is passed:

21. Case 2: When goodwill does not appear in the books: The value of the firm’s goodwill is calculated, and then the share of the retiring partner in the goodwill is determined. The remaining partner’s capital account is debited in the gaining ratio, and the retiring partner’s capital a/c is credited with the share of goodwill. The following journal entry is passed:

22. Case 3: CONTINUING PARTNER MAKING SACRIFICE If any of the continuing partners has also agreed to sacrifice a part of his share in the profits of the firm on retirement. Continuing partners capital a/c Dr xxx To Retiring partner’s Capital a/c xxx To continuing partner’s( sacrificing) capital a/c xxx

23. llustration 2:   G, H, and K are partners sharing profit and loss of the firm in the ratio of 5:4:3.H retires from the firm on 31st March, 2022. On the date of retirement of H, the firm’s goodwill is valued ₹3,72,000. G and K decided their future profit-sharing ratio to be 7:5. Pass the necessary journal entry . Solution :  Retiring Partner Share of Goodwill = Value of Goodwill on the date of retirement x Retiring partner’s share in the firm H’s Share of Goodwill =   3,72,000*4/12 = ₹1,24,000

24. llustration 3:   Meena , Reena , Seema and Leena are partners sharing profit and loss in the ratio of 4:3:2:1. Leena retires from the firm. The goodwill of the firm is valued at ₹40,500 at the time of retirement of Leena . Meena , Reena , and Seema decided their future profit-sharing ratio to be 3:2:1. Pass the necessary journal entry. Working Notes: 1.  Calculation of Gaining Ratio :   2 . Calculation of Seema’s sacrifice on Leena’s Retirement: Remaining partner’s sacrifice on Retirement of a partner = Value of Goodwill x Sacrificing share. Seema’s sacrifice on Leena’s retirement =  40500*2/60 = ₹1,350  

25. Solution:    Retiring Partner Share of Goodwill = Value of Goodwill on the date of retirement x Retiring partner’s share in the firm Leena’s Share of Goodwill =   40500*1/10                             = ₹4,050

26. Revaluation of assets and of liabilities

27. Revaluation of assets and of liabilities At the time of retirement of a partner the assets of the firm are revalued and liabilities are reassessed. Revaluation Account is prepared in the same way as in case of admission of a partner. This is done to adjust the changes in value of assets and liabilities at the time of retirement/death of a partner. Any gain or loss due to revaluation is divided amongst all the partners including retiring/deceased in their existing profit sharing ratio.

28. 1. A, B and C are three partners sharing profits in the ratio of 5 : 4 : 3 respectively. C retires and the goodwill of the firm is valued at Rs 60,000. Assuming that A and B agree to share future profits in the ratio of 7 : 5 respectively, pass an adjustment entry to credit retiring partner with his share of goodwill. Show calculations clearly.

29. 2.Ashish, Barmon , and Chander are partners sharing profits and losses in the ratio of 2 : 1 : 2 respectively. Chander retires and Ashish and Barman decide to share the profits and losses equally in future. Calculate the gaining ratio. 3.Mitu, Udit and Sunny are partners sharing profit equally. Sunny retires and the goodwill of the firm is valued at ` 54,000. No goodwill account appears in the books of the firm. Mitu and Udit share future profit in the ratio of 3 : 2. Make necessary journal entry for goodwill.

30. 4 . Mudit , Mohit and Sonu are partners sharing profit in the ratio 3 : 2 : 1. Mudit retires from the partnership. In order to settle his claim, the following revaluation of assets and liabilities was agreed upon: The value of Machinery is increased by 25,000. The value of Investment is increased by 2,000. A provision for outstanding bill standing in the books at ` 1,000 is now not required. The value of Land and Building is decreased by ` 12,000. Give journal entries and prepare Revaluation account.

31. 2 . L, M and N were partners sharing profits and losses in the ratio of 2 : 2 : 1 respectively. On 1st April, 2012 L retired when his capital account showed a credit balance of Rs 8,00,000. In the ledger, goodwill account appeared at Rs 1,00,000 but the partners agreed that the fair value of firm’s goodwill on the above mentioned date was Rs 4,75,000. Apart from capital of Rs 8,00,000, the retiring partner’s share of goodwill was also to be paid. Assuming that M and N continue to share profits in ratio of 2 : 1 respectively and L’s capital account is immediately settled in cash, pass journal entries for all the transactions relating to partner’s retirement.

32. llustration : Akanksha , Anamika , and Priyanshi are partners in a firm sharing their profits and losses in the ratio 3:2:5. Their Balance Sheet as at 31 st  March 2021 was:

33. On the same date, Priyanshi retired from the company, and Akanksha and Anamika decided to share their future profits and losses in the ratio of 3:2, respectively. The following adjustments were agreed upon by the partners: An amount of ₹2,200 included in Sundry Debtors be written off as no longer receivables. A Provision for Doubtful Debts to be maintained at an existing rate. Stock be written down by ₹2,110. Land & Building be written up by ₹23,000. Plant & Machinery be reduced to ₹68,000. An amount of ₹1,400 included in Sundry Creditors be written back as no longer payable. A Provision of ₹1,200 be made for an outstanding repair bill. Priyanshi’s Capital is to be transferred to her Loan Account. Pass the necessary journal entries and prepare Revaluation A/c and Revised Balance Sheet.