Retirement or Death of a partner Test - 55

The main effect of retirement of a partner is that the combined share of remaining partners increases due to the reason that the remaining partner gets the share given by the retiring partner.

In the absence of partnership deed profit sharing ratio will be equal. In this case, M is right; profit should be shared equally among the partners i.e. 4,000 equally among all the partners.

Deceased partner’s share will be calculated on the basis of:

•Time

•Turnover

Note : Read the question carefully while calculating the share of profit of deceased partner.

Any asset taken by the partner will be shown in the debit side of his capital account. It means his capital account will be reduced by the same.

Journal Entry:

Partners Capital A/c. Dr.(Debit the Receiver)
To Assets A/c (Credit what goes out)

Outgoing partner cannot take complete goodwill of the firm. Outgoing partner is entitled for the followings:

(i) His capital account balance

(ii) His share of profit reserves & gains etc.

(iii) Revaluation profit or loss

(iv) His share of goodwill

Note: outgoing partner is entitled for his share of goodwill only and not the complete goodwill of the firm.

Goodwill given in outside the balance sheet (in adjustment) is used to calculate the share of outgoing partner only. This goodwill is self generated and should not be distributed or not to be shown in the books of accounts.

Unrecorded legal charges are the liability of the firm, so it should be recorded in the debit side of revaluation account and same should be shown in the liabilities side of the balance sheet.

If the retiring partner not be paid fully immediately on retirement, in such a case his remaining amount will be shown in the balance sheet liabilities side by his loan account.

Retirement or death of a partner will create a situation for the continuing partners, which is known as Reconstitution.

New Ratio of A and C will be 5:2

Old Ratio = 1/2, 3/10 and 1/5 i.e. 5:3:2

Share of B = 3/10

Remaining = 5:2

Gaining Ratio of B and C will be 3:2.

Proof : Gain Ratio = New Share – old share

B’s gain = 3/5 – 3/10 = 3/10

C’s gain = 2/5 -2/10 = 2/10

Gaining ratio is calculated by deducting the old ratio from the new ratio. The following formula is used to calculate the gain ratio.

Gaining ratio = New ratio – old ratio

A partner can get retirement in the following ways:

Section 32

RETIREMENT OF A PARTNER.

(1) A partner may retire -

(a) with the consent of all the otter partners,

(b) in accordance with an express agreement by the partners, or

(c) where the partnership is at will, by giving notice in writing to all the other

partners of his intention to retire.

(2) A retiring partner may be discharged from any liability to any third party for acts

of the firm done before his retirement by an agreement made by him with such third

party and the partners of the reconstituted firm, and such agreement may be implied

by a course of dealing between such third party and the reconstituted firm after he

had knowledge of the retirement.

(3) Notwithstanding the retirement of a partner from a firm, he and the partners

continue to be liable as partners to third parties for any act done by any of them

which would have been an act of the firm if done before the retirement, until public  

notice is given of the retirement

Provided that a retired partner is not liable to any third party who deals with the firm

without knowing that he was a party.

(4) Notices under sub-section (3) may be given by the retired partner or by any

partner of the reconstituted firm.

At the time of death of a partner, a temporary account is opened, which is known as Profit and loss suspense account. The main purpose of this account is to calculate and transfer the share of deceased partner to his account (up to the date of his death). and at the year end it is closed by transfering the balance to profit and loss account.

The amount payable to deceased partner’s executor as profit (up to the date of death) will be transferred to the credit side of deceased partner’s capital account and same will be shown in the assets side of the balance sheet. as P/L Suspense A/c.