Retirement of a Partner
- 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.
Gaining ratio isMarks:1
New Ratio - Old Ratio.
The ratio in which the continuing partners acquire the retiring partner's share is called gaining ratio. It is calculated by deducting old ratio from new ratio.
Increase in value of asset is credited toMarks:1
At the time of retirement of a partner, a revaluation account is opened to record revaluation of assets and reassessed value of liabilities on the date of retirement of the partner. Any increase in assets and any decrease in liabilities is credited to the revaluation account.
Decrease in value of asset is debited toMarks:1
At the time of retirement of a partner, a revaluation account is opened to record revaluation of assets and reassessed value of liabilities on the date of retirement of the partner. Any decrease in assets and any increase in liabilities are debited to the revaluation account.
The ratio of A, B and C is 2:2:1. C retires. The new profit sharing ratio between A and B will beMarks:1
1 : 1.
The ratio in which the continuing partners decide to share the future profits and losses, is known as the new profit sharing ratio. New Share = Old Share + Acquired Share. The new profit sharing ratio between A and B will be 1 : 1.
The ratio which is calculated at the time of retirement or death of a partner isMarks:1
Gaining ratio is the ratio in which the remaining partners acquire the outgoing partner's share. It is calculated at the time of retirement or death of a partner and change in the profit sharing ratio.