Retirement Of A Partner
The Necessary Adjustments

A partner or partners may retire from the firm due to the various reasons but the retirement of can take place in any of the following grounds:

  1. With the constant or consensus among all the members.
  2. According to with the partnership agreement which has already been signed.
  3. According to the written notice, if the partnership is at will.

On retirement of a partner, it becomes necessary to make necessary adjustments for accounting purpose.The required adjustments are as follows:

  1. Calculation of New Profit Sharing Ratio
  2. Revaluation of Assets and Liabilities
  3. Treatment of Accumulated Profits and Losses
  4. Treatment of Goodwill
  5. Adjustment of Capital
  6. Ascertainment of Amount Due To The Retiring Partner
  7. Mode Of Payment To The Outgoing Partners.
1. Calculation Of New Profit Sharing Ratio:

Retirement or death reduces the number of partners and eventually increases the profit or loss ratio for the continuing partners.

Calculation of new profit sharing ration is the first step for accounting procedures. The ratio may be recalculated in any of the following ways:

A. When old ratio is given and nothing is mentioned about the new arrangement after retirement:

This is practically the easiest way of presenting new profit sharing arrangement. Under this method, the new ratio under this method is found out simply by canceling the retiring partner's share of profit assuming that the ratio between the continuing partners does not change. When this method is followed the outgoing partner's share merges into the continuing partners share in their profit sharing ratio.

Example: A, B and C have been sharing profits and losses in the ratio 3:2:1. C has retired from the business. Find out new ratio between A & B.

Here C is retired and nothing is mentioned about the arrangement between A & C. The new ratio is found out by simply canceling the C's share of profit.

New ratio = 3:2

Here C's share of profit is merged in the shares of A and B in the ratio 3:2.

B. The outgoing partner's share is taken over by the continuing partners in a certain ratio:

Suppose X, Y, and Z share profits and losses in the ratio 3:2:1. Y retired from the firm and his share of profit is divided equally between the continuing partners.

Therefore the new profit sharing ratio will be:

X's share= 3/6+1/6 from Y

=>4/6 and

Z's share= 1/6+1/6 from Y

=>2/6

Therefore, the new profit sharing ratio

=>4/6+2/6

=>4:2

=>2:1

c. When The New Profit Sharing Ratio Is Given::

When the new ratio is given between the continuing partners, the ratio calculation of gaining ration will be the same.

Gaining ratio however should not be confused with the sacrificing ratio calculated in case of change in profit sharing ratio.

Sacrificing ratio is computed by deducting new ratio from the old ratio. On the contrary, gaining ratio is calculated by subtracting old ratio from the new ratio.

Treatment of Goodwill On Retirement Of A Partner:

1. Raising Of Goodwill:

Goodwill A/c -------------------------------Dr.

 To Partners' Capital A/c

(Being the value of goodwill raised on retirement of a partner and credited to partners' capital account in the old profit sharing ratio)

2. Raising and Writing Off:

a. Goodwill A/c -------------------------------Dr.

 To Partners' Capital A/c

(Being the value of goodwill raised on retirement of a partner and written back to partners' capital account in the old profit sharing ratio)

b. Continuing Partners' Capital A/c -----------------------Dr.

 Goodwill A/c

(Being the value of goodwill raised and debited to continuing partners' capital account in the new profit sharing ratio.)

3. If Adjustment Is Made By Capital Transfer:

Continuing Partners' Capital A/c -----------------------Dr.

 Retiring Partner's A/c

(Being the retiring partner's share of goodwill debited to continuing partners' capital account in the gaining ratio)

Settlement Of Amount Due To Retiring Partner:

 The amount due to the retiring partner may be treated in any of the following ways:

1. The amount due to the retiring partner may be paid off immediately:

Retiring Partner's Capital A/c -----------------------Dr.

 To Cash/Bank A/c

(Being the amount due to the retiring partner paid off)

2. The continuing partners may purchase the share of the retiring partner in some agreed ratio:

a. If payment is made privately:

Retiring Partner's Capital A/c --------------------------Dr.

 To Continuing Partners' Capital A/c

b. If Payment is made through the Firm:

a. Cash A/c -----------------------Dr.

 To Continuing Partners' Capital A/c

(Being cash brought in by continuing partners to pay off the amount due to the retiring partner)

b. Retiring Partner's Capital A/c -----------------------Dr.

 To Cash/Bank A/c

(Being the amount due to the retiring partner paid off)

3. The amount due to the retiring partner may be transferred to his loan account to be paid off with interest gradually:

a. For Transfer To Loan A/c:

Retiring Partner's Capital A/c -----------------------Dr.

 To Retiring Partner's Loan A/c

(Being the amount due to the retiring partner transferred to his loan account)

b. For Interest Due:

Interest A/c --------------------------------Dr.

 To Retiring Partner's Loan A/c

(Being the amount of interest due transferred to his loan account)

c. For Payment Of Installment:

Retiring Partner's Loan A/c---------------------------Dr.

 To Cash/Bank A/c

(Being amount of installment paid)

Note: the last two entries will be repeated till the loan is fully paid off.