Retirement of Partner
Retirement of Partner Accounts
A Partner may retire from the partnership firm (because of old age, illness, or any other reason) etc.
The Partnership Firm may not come to an end when one of the partners retires, and other partners may continue to run the business of the firm. In such case, readjustment takes place as in case of admission of a partner.
On retirement, Assets and Liabilities are revalued, value of goodwill is raised and surrender value of joint life policy, if any, is taken into account.
Revaluation Profit and Reserves are transferred to Capital Account and Current Accounts of Partners’ Accounts.
Gaining Ratio
Gaining Ratio Computation on Retirement of Partner
On retirement of a partner, the continuing partners will gain in terms of Profit Sharing Ratio.
Gaining Ratio is the difference between New Profit Sharing Ratio and Old Profit Sharing Ratio.
Gaining Ratio = New Profit Sharing Ratio – Old Profit Sharing Ratio
Or New Profit Sharing Ratio = Old Profit Sharing Ratio + Gaining Ratio
Sometimes, the Old Profit Sharing Ratio acts as a Gaining Ratio between the existing partners if nothing is mentioned about New Profit Sharing Ratio.
Ex. : X, Y and Z were sharing Profits and Losses in the Ratio of 5:3:2 and Y retires, the new ratio X:Z is 3:2. Compute Gaining ratio of continuing partners.
Gaining Ratio = (New Ratio – Old Ratio) : X gains (3/5– 5/10) = 1/10, Z gains (2/5– 2/10) = 2/10.
So, the Gaining Ratio X: Z is (1/10) : (2/10), i.e. 1:2.
Ex : P, Q and R are in partnership sharing ratio of 3:2:1. P retires. Q and R want to continue sharing ratio of 2:1. Find the Gaining Ratio.
Gaining Ratio = (New Ratio – Old Ratio) – Q: (2/3– 2/6) = 2/6, R : (1/3 – 1/6) = 1/6. So, Gaining ratio Q: R = 2/6:1/6= 2:1
Accounting of Goodwill
Accounting of Goodwill on Retirement of Partner
Goodwill raised in full value but not shown in the books
| Goodwill raised Goodwill A/c Dr To Partners’ Capital A/c (In the old sharing ratio) | Goodwill written off Partners’ Capital A/c Dr To Goodwill A/c (In the new sharing ratio, to continuing Partners) |
Only retiring partners share is brought or raised
| Goodwill A/c Dr To Retiring Partners’ Capital A/c (Share of goodwill of retiring partner) | Goodwill A/c Dr To Partners’ Capital A/c (Share of goodwill of retiring partner transferred to continuing Partners) in the gaining ratio. |
Ex: R, S and T are partners sharing ratio @ 4:3:2. S retires and goodwill is valued Rs. 27,000. No goodwill is shown in the books of the firm. R and T continue sharing @ 5:3. Show Journal Entries for Goodwill A/c
Old Ratio R: S:T is 4:3:2, New ratio – R :T is 5:3. Gaining Ratio = New Ratio – Old Ratio
Gaining Ratio : R : (5/8 – 4/9) = 13/72, T: (3/8 – 2/9) = 11/72, Gaining ratio of R: T= 13/72:11/72= 13:11
Journal Entries
Case 1 : When goodwill account is raised but written off
Goodwill credited to partners in old ratio : R:S:T 4:3:2. R- (27000×4/9)= 12,000, S – (27000×3/9)= 9,000, T- (27000×2/9)= 6,000
Goodwill transferred to continuing partners in new ratio : R:T -5:3. R- (27000×5/8)= 16,875, T – (27000×3/8)= 10,125
| Goodwill A/c Dr 27000 Dr. 27,000 To R’s Capital A/c 12,000 12,000 To S’s Capital A/c 9,000 9,000 To T’s Capital A/c 6,000 (Goodwill created in old sharing ratio) 6,000 | R’s Capital A/c Dr. 16,875 T’s Capital A/c Dr. 10,125 To Goodwill A/c 27,000 (Goodwill transferred to continuing partner in new ratio) |
Case 2 : When only S’ s goodwill account is raised and written off.
S’s Share of Goodwill : 27000 x 3/9 = 9000
Goodwill transferred to continuing partners in gaining ratio: R:T – 13:11- R: 9,000 x (13/24) = 4875, T: 9,000 x (11/24) = 4125
| Goodwill A/c Dr. 9,000 To S’s Capital A/c 9,000 (Goodwill created for retiring partner’s hare) | R’s Capital A/c Dr. 4,875 T’s Capital A/c Dr. 4,125 To Goodwill A/c 9,000 (Share of goodwill for retiring partner transferred to continuing partner in gaining ratio) |
Revaluation on Retirement
Accounting entries on Retirement of Partner
On retirement of a partner, revalued assets and liabilities are to be recorded and resulting Gain / Loss to be distributed among the partners (including the retiring partner) at the old ratio.
| Loss on Revaluation Revaluation A/c Dr To Partners’ Capital A/c Cr | Gain on Revaluation Partners’ Capital A/c Dr To Revaluation A/c |
When revaluation Account does not appear in Balance Sheet
Ex 1. A, B, C share profits and losses equally. A retires. Revaluation profit amounts to Rs.60,000. Show Journal Entries
Amount Due to A, =(60,000/3) = Rs.20,000. This amount is to be borne by B and C equally
B’s Capital A/c Dr 10,000
C’s Capital A/c Dr 10,000
To A’s Capital A/c 20,000
Ex 2. A, B and C are partner’s equally sharing Profit or Loss. A retires, on revaluation, there is an increase in fixed assets of Rs.15,000 and decrease of Rs.3,000 in sundry creditors: Show the journal entries.
Step 1 : Revaluation gain on Old ratio : On revaluation, there is increase in asset – Rs 15000, and decrease in Liabilities – Rs 3000. So, total revaluation gain = 15000+3000 = 18,000, which is to be distributed to all Partners equally( old sharing ratio), i.e 18000/3= 6000 to each partner
Step 2 : Distribution of Revaluation gain on New ratio : the Gain is to be distributed to continuing partners in old ration between them. B: 18000/ 2 =9000, C: 18000/ 2 =9000,
Journal Entries
| Revaluation gain on Old Ratio Fixed Assets A/c Dr 15000 Sundry Creditors Dr 3000 To A’s capital A/c 6,000 To B’s capital A/c 6,000 To C’s capital A/c 6,000 | Revaluation gain on New Ratio B’s capital A/c Dr 9,000 C’s capital A/c Dr 9,000 To Fixed Assets A/c 15000 To Sundry Creditors 3000 |
Reserve Fund
Reserve Fund Accounting entries on Retirement of Partner
On retirement of a partner, undistributed profit or reserve standing at the Balance Sheet is to be credited to the Partners’ Capital Accounts in the old profit sharing ratio.
Alternatively, only the retiring partner’s share may be transferred to his Capital account, if the other partner’s continue at the same profit sharing ratio.
Ex. 1: X, Y and Z were in partnership sharing profits and losses at the ratio 3:2:1. X retired and Y and Z agreed to continue at the ratio 2:1. Reserve balance was Rs.12,000. Show the journal entries
Distribution of Revaluation gain to all partners in old ratio 3:2:1- X: (12000x 3/6)=6000, Y: (12000x 2/6)=4000, Z: (12000x 1/6)=2000,
Journal Entries :
| Reserve A/c Dr 12000 To X’s Capital A/c. 6000 To Y’s Capital A/c. 4000 To Z’s Capital A/c. 2000 | Reserve A/c Dr 6000 To X’s Capital A/c. 6000 |
In this case, Y and Z continued at the same ratio 3:2 as they did before A’s retirement.
Ex 2: X, Y and Z were equal partners. Z decided to retire. X and Y decided to continue at the ratio of 3:2. Reserve standing at the date of retirement of Z was Rs.18,000. Show Journal Entries
Calculation of Gaining Ratio : X : 3/5 – 1/3= 4/15, Y : 2/5 – 1/3= 1/15, Gaining Ratio = X: Y = (4/15) : (1/15) = 4 : 1.
Journal Entry
| Reserve A/c Dr 18,000 To X’s Capital A/c 6000 To Y’s Capital A/c 6000 To Z’s Capital A/c 6000 (Reserve credited to Partner Capital A/c on retirement of Z, in old ratio -1:1:1) | When the continuing partners want to show reserve in Balance Sheet X’s Capital A/c. Dr 4800 Y’s Capital A/c. Dr 1200 To Z’s Capital A/c. Dr 6000 (Z’s share of reserve to continuing partner in gaining ratio 4:1, X:6000´4/5= 4800, Y: 6000´1/5 =1200) |
Final Payment to Retiring Partner
Final Payment Accounting entries on Retirement of Partner
On Retirement of Partner,adjustments entries are made for Transfer of Reserve, Transfer of Goodwill & Transfer of Gain/loss on revaluation. After making the adjustments, the Balance standing to the credit of the Capital A/c of retiring partner should be paid to him.
Ex. A and B are partners in a business, sharing profit and losses as A : 3/5th and B -:2/5th. Their Balance Sheet as on 1st January, 2010 reveals :
LIABILITIES : Capital – (A:25000, B: 15,000), Reserve – 15,000, Sundry Creditors – 2500 : Total 57500
ASSETS : Plant & machinery – 25000, Stock – 11000, Debtors 14000, Bank – 6000, Cash 1,500 : Total 57500
B retires from the business and A takes it over. The goodwill of the firm is valued at Rs.25,000. Depreciate Plant and Machinery by 10% and Stock by 15%, Make Bad debts provision for Debtors @ 5% and a discount reserve against creditors @ 2%
Show Opening Balance Sheet of A and the Journal Entries of the firm
Accounting Entries
| Goodwill A/c Dr 25000 To A’s Capital A/c 15000 To B’s Capital A/c 10000 (Credited to all partners in old ratio 3:2 A: 25000 x 3/5= 15000, B: 25000 x 2/5= 10000) | Reserve A/c Dr 15000 To A’s Capital A/c 9000 To B’s Capital A/c 6000 (Transfer of reserve to A and B’s Capital Account in the old profit sharing ratio 3 : 2 A: 15000 x 3/5= 9000, B: 15000 x 2/5= 6000) |
| Profit and Loss Adjustment A/c Dr 4850 To Plant and Machinery A/c 2500 To Stock A/c 1650 To Provision for Bad Debts A/c 700 [Reduction in the values of stock (@ 15% on 11000 =1650) & provision for doubtful debts( @ 5% of 14000 =700] | Reserve for Discount on Creditors A/c Dr 50 To Profit and Loss Adjustment A/c 50 (Creation of reserve for discount on creditors @2% of 2,500) |
| A’s Capital A/c Dr 2880 B’s Capital A/c Dr 1920 To Profit and Loss Adjustment A/c 4800 (Transfer of revaluation loss Rs.4,800 (4,850 – 50) to Capital Accounts in old 3 : 2). A : 4800X3/5= 2880, B : 4800X2/5= 1920 | B’s Capital A/c Dr 29,080 To B’s Loan A/c 29,080 (Transfer of B’s Capital Account to his Loan A/c (10,000+6,000+15,000)-1,920] |
Partners’ Capital Account
| Dr. | Cr. | ||||
| Particulars | A | B | Particulars | A | B |
| To P& L Adjustment A/c | 2,880 | 1,920 | By Balance b/d | 25,000 | 15,000 |
| To B’s Loan A/c | – | 29,080 | By Goodwill A/c | 15,000 | 10,000 |
| To A’s Capital A/c | 46,120 | – | By Reserve A/c | 9,000 | 6,000 |
| 49,000 | 31,000 | 49,000 | 31,000 |
Balance Sheet of A as on 1st January, 2009
| Liabilities | Amount | Assets | Amount |
| A’s Capital Accounts [(25.000+9,000+15,000)-2880] | 46,120 | Goodwill | 25,000 |
| B’s Loan Account | 29,080 | Plant and Machinery 25000 – Depn 2500 | 22,500 |
| Sundry Creditors 2500 – Reserve for Discount 50 = 2450 | 2,450 | Stock (Rs.11,000 – 1,650) | 9,350 |
| Debtors 14000 – provision 700 | 13,300 | ||
| Balance at Bank | 6,000 | ||
| Cash in Hand | 1,500 | ||
| 77,650 | 77,650 |
Note: As the Business has been sold to A, the goodwill has been raised and it will appear in the Balance Sheet of A.
Partner’s Loan Repayment
Partners Loan repayment entries on Partners Retirement
Sometimes a partner’s loan carries Interest and the loan is to be paid off in installments, including Interest
Ex: A partner’s loan stands at Rs.60,000 and that it has to be paid in three annual equal installments carrying interest at 6% p. a.
Computation of Instalments payable
First Year : interest 6% on Rs.60,000 = 3600. So, total payment =20,000 (P)+ 3,600 (I) = 23600. Balance Payable 60000-20000=40000 (P).
2nd Year : Interest on 40000@6%=2400. So, total payment =20,000 (P)+ 2400 (I) = 22400. Balance Payable 40000-20000=20000 (P).
3rd Year : Interest on 20000@6%=1200. So, total payment =20,000 (P)+ 1200 (I) = 21200.
Retiring Partner’s Loan A/c
| Date | Particulars | Dr | Date | Particulars | Cr |
| 1 year | To Cash A/c | 23,600 | 1 year | By Capital A/c | 60,000 |
| Rs.(20,000 + 3,600) | By Interest A/c. | 3,600 | |||
| To Balance c/d | 40,000 | Rs.60,000 | |||
| 63,600 | 63,600 | ||||
| 2 year | To Cash A/c. | 22,400 | 2 year | By Balance b/d | 40,000 |
| Rs.(20,000 + 2,400) | By Interest A/c. | 2,400 | |||
| To Balance c/d | 20,000 | Rs.40,000 | |||
| 42,400 | 42,400 | ||||
| 3 year | To Cash A/c | 21,200 | 3 year | By Balance b/d | 20,000 |
| By interest A/c. | 1,200 | ||||
| Rs.20,000 x | |||||
| 21,200 | 21,200 |
Partner’s Loan Repayment – Problems
Partners Loan repayment Accounting entries on Partners Retirement
Ex : X, Y and Z are partners sharing profits and losses in the ratio of 5:3:2. On 1.1. 2009, Z retires. On that date, the Capital Account of the partners showed credit balance of X Rs.15,000, Y Rs.12,000 and Z Rs.10,000. Goodwill of the firm to be calculated at 2 year’s purchase of the average profits of the last 3 years.
Payment of the Capital and share of Goodwill to the retiring partner shall be made by annual installment of Rs.6,000 each, together with interest for the first years and the balance in the last year, Interest @ 6% on the unpaid balances.
The Profit for the years 2006, 2007 and 2008 were Rs.6,000, Rs.4,000 and Rs.2,000 respectively. The first installment was paid on 31st December, 2009. Show Z’s Loan Account.
Computation of Goodwill : Average Profits for past 3 years (6,000 + 4,000 + 2,000) /3 = 4,000, Value of Goodwill @ 2 years purchase of average profit = 4,000 x 2 =8,000, Z’s Share of Goodwill = 8,000 x 2/10 = 1,600.
Z’s Capital Account
| Date | Particulars | Dr | Date | Particulars | Cr |
| 2009 | 2009 | ||||
| Jan, 1 | To Transfer to Z’s Loan A/c. | 11,600 | Jan, 1 | By Balance b/d | 10,000 |
| By Goodwill A/c. | 1,600 | ||||
| 11,600 | 11,600 | ||||
| 2009 | 2009 | ||||
| Dec | To Cash or Bank A/c | 6,000 | Jan, 1 | By Transfer from Z’s Capital A/c | 11,600 |
| To Balance c/d | 6,296 | Dec | By Interest A/c | 696 | |
| Rs.11,600 x (6/100) | |||||
| 12,296 | 12,296 | ||||
| 2010 | 2010 | ||||
| Dec | To Cash or Bank A/c | 6,674 | Jan, 1 | By Balance b/d | 6,296 |
| Dec | By Interest A/c | 378 | |||
| Rs.6,296 x (6/100) | |||||
| 6,674 | 6,674 |
Goodwill – Problems
Goodwill Accounts on Partner’s Retirement
The Balance Sheet of A, B, and C who sharing profit and losses of their capitals i.e. 4:3:2 stood as follows as on 31.12.09.
Liabilities: Sundry Creditors- 13800, Capital (A:-40000, B: 30000, C: 20000), Total 103800
Assets : Land and Building – 50000, Plant & Machinery – 17000, Stock 16000, Debtors (10000- Prov for Bad Dbt 200) -9800, Bank 11000, Total 103800
On 31.12.2009, B retires. Assets and Liabilities are revalued to ascertain the amount payable to B.
1. Stock to be written off by 6%. 2. The provision for bad debts upto 5% on sundry debtors. 3. Land and Building be appreciated by 20%. 4. Provision for legal charges 1,540. 5. Goodwill at Rs.21,600. B’s share of goodwill be adjusted in the accounts of A and C. The future profit sharing ratio A:C is 5:3. 6. The entire capital of the newly constituted firm is fixed as Rs.56,000 between A and C in the proportion of 5:3 after passing entries in the accounts for goodwill.
Show Journal entries and Balance sheet of the newly constituted firm transferring B’s share of capital and goodwill to a separate Loan Account on his name on 1st January.
Gaining ratio between A & C : Share of goodwill of B (the retiring partner) will be adjusted in the account of A & C. So only B’s share in goodwill will be raised and written off in the account of A & C in the gaining ratio.
Old Ratio A: B:C is 4:3:2, New ratio A: C is 5:3, Gaining ratio (New ratio – Old ratio) : A: (5/8 – 4/9) = 13/72, C:(3/8 – 2/9) =11/72
Gaining ratio of A : C is (13/72) : (11/72) = 13:11
Calculation of Adjusted capital of A & C : After retirement of B, Capital of the firm is fixed at 56,000, which will be shared between A & C in the new ratio, i.e, A: (56,000 x 5/8) = 35,000, C: (56,000 x 3/8) = 21,000, after passing entries in goodwill.
Partners’ Capital A/cs will be adjusted against their new capital balances after passing the entries for goodwill. Excess capital, if any, will be withdrawn, while deficiency, if any, will be brought by partners in cash, as the case may be.
Journal Entries
| Land and Building A/c Dr 10000 To Profit & Loss Adjustment A/c 10000 (Appreciation of land and building by 20% of 50000) | Profit & Loss Adjustment A/c Dr 2800 Dr. To Stock A/c 960 To Provision for bad debts A/c 300 To Provision for legal charges A/c 1540 (Adjustment of decrease in value of stock (6% on 16000=960), increase in provision on debtors and legal charges (5% on 10000- 200)= 300, | ||
| Profit & Loss Adjustment A/c Dr 7200 To A’s Capital A/c 3200 To B’s Capital A/c 2400 To C’s Capital A/c 1600 (Profit on revaluation (10000- 2800=7200) transferred on old ratio 4:3:2. A: 7,200 x 4/9=3200, B: 7,200 x 3/9=2400, C: 7,200 x 2/9=1600 ) | Goodwill A/c Dr 7200 To B’s Capital A/c 7200 B’s share of goodwill raised (21,600 x 3/9) = 7200 A’s Capital A/c Dr 3900 C’s Capital A/c Dr 3300 To Goodwill A/c 7200 (B’s share of goodwill transferred to remaining partners in gaining ratio 13:11, A: 7200 x 13/24=3900, C: 7200 x 11/24=3300) | ||
| B’s Capital A/c Dr 39600 To B’s Loan A/c 39600 (Balance of B’s Capital 30000+2400+7200=39600 transferred to B’s Loan Account.) | Bank A/c 2700 To C’s Capital A/c 2700 (Deficit brought by C (20000+1600)- (3300+21000)=2700, to make 3/8share) | ||
| A’s Capital A/c Dr 4300 To Bank A/c 4300 (Surplus withdrawn by A (40000+3200) – (3900+35000)= 4300, to make his Capital balance to 5/8share) | |||
Partners’ Capital Account
| Particulars | A (Dr) | B (Dr) | C (Dr) | Particulars | A (Cr) | B (Cr) | C (Cr) |
| To Goodwill A/c | 3,900 | – | 3,300 | By Balance b/d | 40,000 | 30,000 | 20,000 |
| To Bank A/c | 4,300 | – | – | By P& L Adjustment A/c | 3,200 | 2,400 | 1,600 |
| To Balance c/d | 35,000 | – | 21,000 | By Goodwill A/c | – | 7,200 | – |
| To B’s Loan A/c | – | 39,600 | – | By Bank A/c | 2,700 | ||
| 43,200 | 39,600 | 24,300 | 43,200 | 39,600 | 24,300 |
Cash at Bank= 11000 (Opening) + C’s capital (2700) – A’s capital (4300) = 9400
Balance Sheet As on 1st January, 2010
| Liabilities | Assets | ||
| Capital A/c A – 35,000, C: 21,000 | 56,000 | Land and Building 50000+Appreciation @ 20% 10000 | 60,000 |
| 56,000 | Plant & Machinery | 17,000 | |
| Sundry Creditors | 13,800 | Stock 16000 – written off @6%= 960 | 15,040 |
| Provision for legal charges | 1,540 | Sundry Debtors 10000- (Prov for Bad Debts 200+300=500) =9500 | 9,500 |
| B’s Loan Account | 39,600 | Cash at Bank | 9,400 |
| Total | 1,10,940 | 1,10,940 |
Joint Life Policy
Partners Joint Life Policy Accounts
A partnership firm may decide to take a Joint Insurance policy on the lives of all partners. The firm pays the premium and the amount of policy is payable to the firm on the death of any partner or on the maturity of policy, whichever is earlier.
If premium is treated as expense, Premium paid is debited to profit and loss account each year. Amount received from Insurance Company will be treated as firm’s profit and will be credited to capital accounts of all partners.
