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Dear Teachers,

These slides have been prepared based on the NCERT syllabus to support you in teaching Plus One and Plus Two Accountancy and Computerised Accounting.

Please review and verify the content before using it in your classrooms. If you find any errors or have feedback, please let me know.

Mujeeb Rahiman C

HSST Commerce

GHSS Pattikkad

Malappuram Dt.

✉️ mujeebchemmala@gmail.com

9995983075 �

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Chapter - 3

Reconstitution of a Partnership Firm

Retirement / Death of a Partner

When Partner Retires in the Middle of the Year

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Normally retirement of a partner takes place at the end of accounting period. But there can be a case where a partner decides to retire in the middle of the year.

In such a case the claim shall include share of profit or loss, interest on capital, interest on drawings if any, from the date of last balance sheet to the date of retirement.

Here, the main problem relates to the calculation of profit for the intervening period, i.e., the period from the date of last balance sheet and the date of retirement.

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Example :-

Maira, Shabnam and Vipul were partners in a firm sharing profits in the ratio of 5:4:1. Profits for the year ending on March 31, 2019 was Rs. 1,00,000. Vipul decides to retire on June 30, 2019. The new profit sharing ratio of the firms is 1:1.

Vipul's share of profit for the period of from April 1 to June 30 shall be calculated as:

Total profit for the year ending 31/03/2019 = Rs. 1,00,000

Vipul's share of profit =

Last Year’s Profit x Period x Share of Deceased Partner

= Rs. 1,00,000 x 3/12 x 1/10 = 2500

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The journal entry will be recorded as follows:

Profit & Loss Suspense A/c Dr. 2500

To Vipul's Capital A/c 2500

(Vipul's share of profit transferred to his capital account)

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Alternatively,

If Vipul's share of profit was to be calculated on the basis of average profits of the last three years, to which were Rs. 1,36,000 for 2016-17, Rs. 1,54,000 for 2017-18 and Rs. 1,00,000 for 2018-19, Vipul's share of profit for the period from April 1, 2019 to June 30, 2019 shall be calculated on the basis of average profit based on profits for the last year calculated as follows:

Average Profit = (1,36,000+1,54,000+1,00,000)/3 = 3,90,000/3 = 1,30,000

Vipul’s share of Profit = 1,30,000 x 3/12 x 1/10 = 3250

The Journal entry will be:

Profit and Loss Suspense A/c Dr. 3250

To Vipul's Capital A/c 3250

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In case, the agreement provides, that share of profit of the retiring partner will be worked out on the basis of sales, and it is specified that the sales during the pear 2018-19 were Rs. 8,00,000 and the sales from April 1, 2017 to June 30, 2019 were Rs. 1,50,000.

Vipul's share of profits shall be calculated as follows:

Profit % = (1,00,000/8,00,000) x 100 = 12.5%

Vipul's share of profit = 1,50, 000 x 12.5% x 1/10

= 1875

The Journal entry will be:

Profit and Loss Suspense A/c Dr. 1875

To Vipul's Capital A/c 1875

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Transfer of Profit to Deceased Partner’s Capital Account

(i) Profit & Loss Suspense A/c

To Retiring Partners Capital A/c

(Share of profit for intervening/period)

Later, Profit and Loss suspense account is closed by transferring the amount to the gaining partners capital account in their gaining ratio.

The journal entry is:

(ii) Gaining Partners Capital A/c Dr. (in gaining ratio)

To Profit & Loss Suspense A/c

The following journal entry can also be passed in place of (i) or (ii)

Gaining Partners Capital A/c Dr.

To Retiring partners Capital A/c

(Share of profit of retiring partner credited)