Retirement or Death of a Partner Test - 6

Gaining ratio is that ratio in which continuing partners acquire the share of outgoing partner. It is calculated at the time of retirement or death of a partner.

When new profit sharing ratio of the continuing partners differ from their old ratio, in such a case outgoing partner’s share of profits will be adjusted through capital account of gaining partner.The Entry will be as follows:-

Capital Account of gaining Partner A/c Dr.
To Capital Account of Retiring Partne A/c

(This entry will be in the gaining Ratio)

Following adjustments are done at the time of retirement of a partner:

•New profit sharing ratio of continuing partners

•Accounting treatment of goodwill

•Adjustment of Reserves and Profits

Note : Executor’s Account is prepared at the time of death of a partner.

The following journal entry is to be recorded at the time of retirement of Q:

P’s Capital A/c   Dr. 4000
R’s Capital A/c    Dr. 2000
    To Q’s Capital A/c  6000

Q’s share of goodwill = 18,000 x 3/9 = Rs. 6,000
It is to be passed in gaining ratio which is to be 4:2 in P and R.

Loan of the retiring partner is disposed off according to the pre decided terms and conditions among the partners. In such cases interest is credited to the Loan A/c on the basis of the amount outstanding at the beginning of each year and the amount paid is debited to loan A/c.

Journal Entry 

For Interest:
Interest A/c Dr.
       To Partner's Loan A/c.

For Payment:
Partner's Loan A/c. Dr.
          To Cash/Bank A/c.

Reconstitution of partnership takes place at the time of retirement of death of a partner. A firm may continue its business after the death of a partner, with the consent of continuing partners. In such a case, share of deceased partner will be purchased or acquired by the remaining partners.

Once a partner retires form a partnership firm, he will not be liable for any debt of the firm or any liability due which firm is not able to meet on time as he is no longer a partner now in the firm. He is responsible for the debts and other liabilities up to the date of his retirement only.

At the time of retirement, share of goodwill is calculated for the retired partner as follows: Value of firm’s goodwill x His Share of profit

Total Capital = 23,000 + 30,000 + 17,000 = Rs.70,000

New Capital of R and S will be 70,000/2 = 35,000 each after the retirement of Y

Old capital of S = Rs.17,000

New Capital of S = Rs. 35,000

S will bring = 35,000 – 17,000 = Rs.18,000

The above entry mentioned in the question, will be made when existing book value of Goodwill is written off by all the old partners in their old profit sharing ratio.This Goodwill can be taken from the books/Balance sheet.

A partner can get retirement in the following ways:

(1) With the consent of all the partners

(2) Due to ill health

(3) Agreement/contract is over

(4) By giving notice

In case of death of a partner, amount due to him will be paid to his legal heirs or his executors. Excutors are the leagl heirs or the family/relatives.

A retiring partner has right for the following:

(i) His share of capital

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

(iii) Revaluation profit (if any)

(iv) Goodwill to be taken by 

When a partner retires from the firm, new share for the remaining partners will be calculated as follows: New share = Old share + acquired gaining share

Deceased partner’s share of profit will be provided through profit and loss suspense account. This account is temporary account which is prepared to adjust the profit of deceased partner (up to the date of his death).

R will bring Rs.12,000 i.e.

Amount payable to Y = Rs. 30,000

Total Capital of new firm = 23,000 + 30,000 + 17,000 = Rs. 70,000
As they are distributing capital equal so,

New capital of R and S will be = Rs.35,000 each

R will bring = 35,000 – 23,000 = Rs.12,000

Share of profit of T will be calculated as follows:

Profit for the previous year = Rs.24,000

Profit for 3 months (from the last balance sheet to the date of his death) = 24,000 × 3/12 = Rs.6,000

T’s share of profit for 3 months = 6,000 × 4/16 = Rs. 1,500

When amount due to the retirement is paid in instalments instead of paying it in lump sum and rate of interest on partner’s loan is not given in the question, in such a case interest will be paid at the rate of 6% p.a.

Rs.10,000 will be shown in the account of B:

Old Ratio = 3:2:1 (Capital Ratio)

New Ratio of A and B after the retirement of C = 1:2

B is the only gainer i.e. New ratio - old Ratio = 2/3- 2/6 =2/6

B will be debited with 30,000 × 2/6 = 10,000

There are two ways through which profit of a deceased partner can be calculated which are Sale Basis or Time Basis. Profit and Loss Suspense Account is temporary account which is to be shown on the credit side of capital account of deceased partner.