• When a partner leaves a partnership firm, it is known as retirement of a partner. Firm continues its business operations with continuing partners.
  • Adjustments required at the time of retirement are calculation of new and gaining ratios, accounting treatment of goodwill, revaluation of assets & liabilities, adjustment of reserves and accumulated profits/losses, share of profits from the date of last Balance Sheet to date of retirement, payment to the retiring partner and adjustment of capital.
  • In case of treatment of goodwill, continuing partners who gain by acquiring an additional right to share future profits must compensate the outgoing partner who sacrifices his foregoing right to share future profits.
  • Revaluation of assets and liabilities is required to divide profit or loss on revaluation among all partners in old profit sharing ratio. For this revaluation account is prepared.
  • The balance of general reserve/ accumulated profit at the time of retirement of a partner belongs to all the partners. Hence, it is required to be distributed among all the partners in their profit sharing ratio.
  • Accounting treatment of Reserves and Accumulated Profits/Losses when partners do not want to distribute them.
  • The amount due to the retiring partner can be settled by paying the full amount, by treating full amount as loan or by partly paying in cash and remaining amount treated as a loan. Payment can be made to retiring partner by calculating the amount with the help of annuity tables.
  • Adjustment of capitals can be done when the total capital of the new firm is given, when the total capital of the new firm is not given or when the outgoing partner is to be paid through cash brought in by continuing partners in such a way so as to make their capitals proportionate to their profit sharing ratio.

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