Retirement of a partner
HARIKUMAR.G
Retirement of a partner
Retirement of a partner refers to a partner retiring from the firm and ceasing himself to be a partner of the firm anymore.
A partner may retire :
If there is an agreement prior to the affect.
If all the partners give consent to his retirement.
If it is his will, he may retire by giving a written notice to the remaining partners of his decision to retire.
New Profit Sharing Ratio & Gaining Ratio
As soon as a partner retires, the profit sharing ratio of partners continuing the firm get changed.
The share of the retiring partner is distributed amongst the continuing partners.
In case of the absence of information, the continuing partners take the retiring partner’s share in their profit sharing ratio or in an agreed ratio.
The ratio in which retiring partner’s share is distributed amongst continuing partners is known as gaining ratio. It is :
Gaining Ratio=New Ratio-Old Ratio
Treatment of Goodwill
The retiring partner is entitled to his share of goodwill at the time of retirement because the goodwill is the result of the efforts of all partners including the partner who is retiring, in the past.
That’s why, the retiring partner is compensated for his share of goodwill.
As per Accounting Standard 10 (AS-10), 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 in the books.
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 share of goodwill and remaining partner’s capital account is debited in their gaining ratio.
The journal entry for the same is as follows:
Remaining Partner(s)’s Capital A/c Dr.
To Retiring Partners Capital A/c
/
/
₹
₹
Revaluation of Assets and Liabilities
At the time of retirement of a partner the assets and liabilities of the firm are revalued and 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 profit or loss due to revaluation is divided amongst all the partners including retiring/deceased in their existing profit sharing ratio.
Treatment of accumulated reserves and undistributed profit
All the balances of Accumulated Reserves, funds and undistributed amount of Profit or Loss appearing in the balance sheet of the firm on the date of retirement/death is distributed amongst all partners including retiring/deceased partner in their old profit sharing ratio.
Following journals are made:-
(i) For distribution of undistributed profit and reserve:
Reserves A/c Dr
Profit & Loss A/c (Profit) Dr.
To Partners’ Capital A/c [individually]
(Reserves and Profit & Loss (Profit) transferred to all partners capitals A/c in existing profit sharing ratio)
The amount due to the retiring partner is paid according to the terms of partnership agreement. The retiring partners’ claim consists of:
SETTLEMENT OF PARTNERS CLAIM