Retirement of a Partner in Partnership firm

2. The following adjustments are made at the time of
retirement of a partner:
• Calculation of new and gaining ratio.
• Treatment of goodwill.
• Revaluation of assets and liabilities.
• Treatment of accumulated profit.
• Methods of payment to retiring partners.
• Adjustment of capital account.

3.  New Profit Sharing Ratio
Ratio of remaining partner is known as New
profit sharing ratio, in which they share the future
profits.
New Share = Old Share + Acquired Share
 Gaining Ratio
The ratio in which the continuing partners have
acquired the share from the retiring partner is called
the gaining ratio.
Gaining Ratio = New Share –Old Share

4. K ,M and S are three partners sharing profit
and losses in the ratio of 4:3:2 .K retires .M
and S will share future profits and losses in
the ratio of 5:3 .Determine the gaining ratio.

5. The retiring or deceased partner is entitled to his
share of goodwill at the time of retirement because
the goodwill has been earned by the firm with the
efforts of all the existing partners.
There are four steps in treatment of goodwill :
 Step-1: Calculation of goodwill of the entire firm as per
partners agreement including retiring partner.
 Step-2: Ascertainment of retiring partner’s share of
goodwill.
 Step-3: Calculation of gaining ratio.
 Step-4: Accounting treatment

6. The term revaluation simply means “to determine
the value of assets and liabilities again”.
In the preparation of revaluation account there are
only two possibilities. It will be either profit or loss:
 Profit indicates excess of credit side over the debit
side. {DEBIT SIDE}
 Loss indicates excess of debit side over the credit
side. {CREDIT SIDE}

7.  Accounts representing undivided profits should be
transferred to all partner’s capital account
including the retiring partner in the old profit
sharing ratio.
 Accumulated/Undivided profits (also known as
retained earning) consist of Profit & Loss account
balance, General Reserve, Contingency Reserve
etc. They are shown at the liabilities side of the
Balance Sheet.

8.  The procedure of determining the amount payable
to retiring partner is to prepare his capital account
on the date of retirement.
The retiring partner is entitled to get his share out of the following items:
 Share of Goodwill.
 Share of Accumulated Profit.
 Share of Profit on Revaluation.
 Interest on Capital.
 Share of Profit from the Closing of the Last Final
Account to the Date of Retirement.

9.  At the time of retirement of a partner, continuing
partners may agree to fix their capital at a certain
amount to make it in their profit sharing ratio.
If such an agreement takes place then there will be an accounting impact which is
as follows:
I. The specified capital amount is distributed among
continuing partners in their new profit sharing ratio.
II. The closing balance of the capital should be restricted to
the amount determined in step I.
III. Any surplus over the adjusted capital is either returned
to the partner in case or transferred to his/her current
account.

10. The following problems arises at the time of retirement:
 To revalue the assets & liabilities of the firm.
 To fix-up the value of goodwill of the firm.
 To make payment of the dues of retiring partner.
 To determine the new profit sharing ratio.
 To determine the new capital of the firm.
 To distribute general reserve or profit and loss
balance among all partners.
 To ascertain the profit or loss up to the date of
retirement.

12. K ,M and S are three partners sharing profit
and losses in the ratio of 4:3:1 .K retires .M
and S will share future profits and losses in
the ratio of 5:3.Firm’s goodwill valued at Rs
80,000 .You are required to make adjusting
entries for goodwill without opening goodwill
account .

13. X, Y and Z are partners in a firm sharing profits and
losses in the ratio of 3:2:1. Z retires from the firm on
1st April, 2014. On the date of Z’s retirement,
following balances appeared in the books of the
firm:
General Reserves Rs 90,000; Profit and Loss Account
(Dr.) Rs 15,000. Workmen Compensation Reserves
Rs 12,000 which was no more required.
Pass Journal Entries for the adjustment of these items
on Z’s retirements.

15. PARTICULARS AMOUNT
[Dr.]
PARTICULARS AMOUNT
[Cr.]
To Assets (Decrease) By Assets (Increase)
To Liabilities
(Increase)
By Liabilities
(Decrease)
To Unrecorded
Liabilities
By Unrecorded
Assets
To Old Partners
Capital A/c’s (Profit)
To Old Partners
Capital A/c’s (Loss)

16. Balance Sheet of A,B and C sharing profits and losses in the
ratio 5:3:2 as on 31st March,2016 was:
B retires from the firm on 1st April,2016. A and C decided to
share future profits and losses in the ratio of 3:1 respectively.
Following adjustments are agreed:
Liabilities Amount Assets Amount
Sundry Creditors 15,000 Cash at Bank 27,000
Capital A/c’s 1,05,000 Sundry Debtors 16000 15,200
A 46,000 (-) Provision (800)
B 34,000 Stock 12,800
C 25,000 Plant and Machinery 35,000
Land and Building 30,000
1,20,000 1,20,000

17. 1) That an amount of Rs 1,100 included in debtors be written off
as it is no longer receivable.
2) That a Provision for Doubtful Debts be maintained at the
existing rate.
3) That stock be written down by Rs 1,055.
4) That Land and Building be written up by Rs11, 000.
5) That Plant and Machinery be reduced to Rs 34,000.
6) That an amount of Rs 700 included in Sundry Creditors be
written back as no longer payable.
7) That a Provision of Rs 600 be made for an Outstanding
Repair Bill.
8) An old computer previously written of was sold for RS 2000 as
scrap.
9) Firm had to pay Rs 5,000 to an employee injured in an
accident.
Prepare Revaluation Account.

18. Particulars A B C Particulars A B C
To Bal b/d By Bal b/d
To Revaluation By Revaluation
To Drawings By Salary
To Int. on
Drawings
By Int. on Capital
To Retiring
Partner’s Loan
A/c
By Undistributed
Reserves
To Bal c/d By Bal c/d
Total Total

19. Liabilities Amount Assets Amount
Sundry Creditors Cash at Bank
Capital A/c’s Sundry Debtors
Reserves Goodwill
Loan Stock
Bills Payable Plant and Machinery
Land and Building
Patents
Total Total

20. Manoj, Naveen and Deepak were partners sharing profits in
the ratio of 3:2:1. On 1st April, 2016 Naveen retired. On that
date Balance Sheet was:
Liabilities Amount Assets Amount
Sundry Creditors 10,000 Cash 500
Capital A/c’s 31,000 Sundry Debtors 9,500
Manoj 12,000 Patents 3,000
Naveen 10,000 Stock 11,000
Deepak 9,000 Plant 30,000
General Reserve 6,000
Expenses Outstanding 2,000
Bills Payable 5,000
Total 54,000 Total 54,000

21. The terms were:
a) Goodwill of the firm be valued at Rs 12,000 and
Naveen’s share of goodwill be adjusted in the accounts
of Manoj and Deepak who share the profits and losses in
the ratio of 3:2.
b) Expenses Outstanding are to be brought down to Rs
1,500; Plant is to be valued at 10% less and Patents at
Rs 4,000.
c) Total Capital of the new firm will be fixed at Rs 25,000 to
be contributed by partners in profit sharing ratio.
Prepare ledger accounts to record the above transactions and
the balance sheet after Naveen’s retirement.