SAI KRIPA

RETIREMENT OF A PARTNER
By: - CA RAKESH KALRA

Topics to be covered
 Meaning and term
 Calculated of new profit sharing ratio
 Calculation of gaining ratio
 Treatment of goodwill
 payment to retiring partner
 Preparation of revaluation account , capital account , and balance sheet
 Prepare of loan account
 Treatment of capital adjustment

Topic – 1
MEANING AND TERMS

Retirement of a partner: - A partner can retire from the partnership firm as per partnership deed
and on the date of such retirement all the assets and liabilities is need to be revalued and new profit
sharing ratio has to be calculated. A retiring partner will be entitled to take his share of capital and
goodwill in the partnership firm.

Topic – 2
CALCULATION OF NEW PROFIT SHARING RATIO
A New profit sharing ratio of Partners can be computed with the help of two methods.

New Profit Sharing ratio

Very Simple Method Take over Method

Very Simple Method

Example – 1
A , B and C are partner sharing profit and the loss and 5:3:2 respectively; B decided to retire from the
partnership firm. Calculate New Profit Sharing Ratio of firm after B’s retirement.

Solution

1
Take over Method

Example – 2
A , B and C are partner sharing profit and loss equally, A decided to take retirement and gives his
share of profit to B and C in the ratio 3:2. Calculate New Profit Sharing Ratio of firm after A’s
retirement.

Solution
New profit sharing ratio

2
Gaining Ratio

Topic – 3
CALCULATION OF GAINING RATIO
Gaining ratio is compute for the remaining partners only, this ratio shows the level of gain incurred
by the remaining partners from the retirement of a retiring partner. Amount of share of premium of
retiring partner is given by the remaining partner to the retiring partner in this ratio.

Gaining ratio

New Ratio – Old Ratio

Topic – 4
TREATMENT OF GOODWILL
In the case of retirement retiring partner take his share of goodwill from remaining partners in
gaining ratio and of remaining partner’s Capital decrease and capital account of retiring partner
increases.

JOURNAL ENTEY FOR GOODWILL

Remaining partner capital A/C Dr

To Retiring partner capital A/C
[Being goodwill given by partner in gaining ratio]

Example – 3
A , B and C are partner sharing profit and loss equally; A decided to take retirement and his share of
profit is taken over by B and C in the ratio of 2:1. Goodwill of the firm is valued Rs 120000/-.
Calculated NPSR and Pass journal entry for treatment of goodwill.

3
Solution

Journal Entry
Date Particulars DR CR

New Profit Sharing Ratio

Gaining Ratio

A’s Share of Goodwill

4
Topic – 5
PAYMENT TO RETIRING PARTNER
At the time to retirement all amount due to retiring partner can be settled by 4 ways either by cash
or by taken such amount as loan or partly in cash and partly in loan or transferring such amount to
executor account of retiring partner.

Payment to Retiring Partner

In Cash Through Loan Partly in Cash & Partly In Loan Through executor A/C

Topic – 5
PREPARATION OF REVALUATION ACCOUNT, CAPITAL ACCOUNT, BALANCE SHEET.
Revaluation account is prepared to calculate the profit and loss earned by all partner because of any
appreciation and depreciation in the assets and liabilities of the partnership firm. Such profit or loss
will be distributed among all partners in old ratio.

Format of revaluation Account

REVALUATION ACCOUNT
PARTCULAR AMOUNT PARTICULAR AMOUNT
To decrease in assets XXXX By increase in assets XXXX
To increase in liabilities XXXX By decrease in liabilities XXXX
To unrecorded liabilities XXXX By unrecorded assets XXXX
To provision credit XXXX By provision not required XXXX
To profit transfer: By loss transfer to: XXXX
A XXX A XXX XXXX
B XXX XXXX B XXX XXXX

XXXX XXXX

Example – 4
A , B and c are partner sharing profit and loss in the ratio of 2:2:1. Their balance sheet as on 31st
march 2009. C decided to retire.
Balance sheet
As on 31st march 2009
Liabilities Amount Assets Amount

5
Capital a/c Cash in hand 50000
A 100000 Debtors 75000
B 100000 Plant & machinery 100000
C 50000 250000 Stock 25000
Creditor 30000 Investment 50000
Reserve fund 15000 Patent 25000
Bill payable 55,000 Goodwill 25000

305000 305000

Adjustments

a. Investment is revalued at Rs 75000.

b. A provision of 10% is required to be created on S. debtors.
c. Plant & machinery are depreciated by 10%.
d. Stock is depreciated up to Rs 24000.
e. Patents are found value less.
f. Goodwill of the firm is valued at Rs 50000/- C’s share is adjusted from the capital remaining
partner.
g. Half amount due to C is paid by cash and balance is transferred to a loan account of C.
Prepare revaluation account, partner capital account, balance sheet.

Solution
REVALUATION ACCOUNT
PARTCULAR AMOUNT PARTICULAR AMOUNT

Capital Account
Particulars A B C Particulars A B C

6
 Balance Sheet
Liabilities AMOUNT Assets AMOUNT

Working Note
Note – 1
Calculation of C’s Share of Goodwill

Note – 2
Journal Entries
Journal Entries
Date Particulars DR CR

7
Topic – 6
PREPARATION OF PARTNER LOAN ACCOUNT
Sometimes retiring partner’s amount is transfer to his loan account and his loan amount is paid to
him in the instalments along with the interest on such loan, then in such case we have to prepare
loan account of partner.

Partner loan account

Date Particulars Amount Date Particulars Amount
1. To bank a/c XXX 1. BY C,s capital A/C XXX
[ interest + instalment ] By Interest XXX
To balance c/d XXX

XXXX XXXX
2. To bank account XXX 2. By balance b/d XXX
[interest + instalment ] By interest a/c XXX
To balance c/d XXX

XXXX XXXX

By balance b/d XXXX

Example – 5
A , B and C are partner sharing profit and loss in the ratio of 5:3:2. Their balance sheet as march 31st
2009. C are retire.
Balance sheet
As on 31st march 2009

8
 Liabilities Amount Assets Amount
Capital a/c Cash in hand 45000
A 100000 Debtor 100000
B 100000 Plant & machinery 100000
C 100000 300000 Stock 25000
Creditor 30000 Investment 50000
Reserve fund 15000 Computer 25000

345000 345000

Adjustment
a. Investment is revalued at Rs 45000.
b. A provision of 10% is required to be credited on debtor.
c. Plant & machinery depreciated by 10%.
d. Computer is valued 20000 and C’s take computer.
e. Goodwill of the firm is valued at Rs 50000.
f. Rs 27000/. Is paid cash to C immediately and balance is paid in three equal instalment within
10%P.A.
Prepare revaluation account, partner capital account, C’s loan account and balance sheet.

Solution
REVALUATION ACCOUNT
PARTCULAR AMOUNT PARTICULAR AMOUNT

Capital Account
Particulars A B C Particulars A B C

9
 Balance Sheet
Liabilities AMOUNT Assets AMOUNT

C’s Loan Account

DATE PARTICULARS AMOUNT DATE PARTICULARS AMOUNT

10
Working Note
Note – 1
Journal Entries

Journal Entries
Date Particulars DR CR

Note – 2
Annual instalment of C’s Loan

11
Note – 3
Calculation on Interest on C’s Loan

Topic – 6
CAPITAL ADJUSTMENT
When partner retire from the partnership firm than some time question ask to revalue the capitals
of remaining partners. There are two methods of capital adjustments such as: -

Capital Adjustment

When Firm’s Capital Given When Firm’s Capital not given

Steps of Capital Adjustment

Capital Adjustment – 1
When Firm’s capital is given

Step – i: - Calculate New profit sharing Ratio

Step – ii: - Calculate Partners Capital

Partners’ capital = Firm Capital * New profit sharing ratio

Step – iii: - Calculate balancing figure as Cash/Current balance

Example – 6
A , B and C are partner sharing profit and loss in the ratio 2:2:1. Their balance sheet as on 31st march
2009. B decided to retire to the firm and his share is taken over by A and C in the ratio of 3:2.
Balance sheet
Liabilities Amount Assets Amount
Capital account Cash in hand 15000
A 125000 Land & building 125000
B 75000 Plant & machinery 147000
C 75000 2765000 Stock 25000
Creditor 55000 Investment 18000
Reserve fund 25000 Prepaid salaries 25000

355000 355000

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Adjustment
a. Land and building is valued at Rs 189700.
b. Prepaid salaries come to Nil during course of revaluation.
c. Plant and machinery is depreciated at 10%.
d. B share of goodwill comes of Rs 30000.
e. B will be paid Rs 35000 in cash and balance will transfer his loan a/c carrying interest @
10% P.A.
f. Total capital of firm valued at Rs 255000.
Prepare revaluation account, partner capital account, and balance sheet.

Solution

REVALUATION ACCOUNT
PARTCULAR AMOUNT PARTICULAR AMOUNT

Capital Account
Particulars A B C Particulars A B C

Balance Sheet

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 Liabilities AMOUNT Assets AMOUNT

Working Note
Note – 1
Capital Adjustment

14
Note – 2
Cash Account
CASH ACCOUNT
PARTCULAR AMOUNT PARTICULAR AMOUNT

Capital Adjustment – 2
When Firm’s capital is not given.

Step – i: - Prepare Partner’s Capital account and calculate the balance c/d of remaining partners

Step – ii: - Calculate Firm’s Capital

Firm Capital = Balance C/D of remaining partners + Amount bring by remaining for retiring

Step – iii: - Calculate remaining partner’s Capital

Remaining Partner’s Capital = Firm Capital * New profit sharing ratio

Step – iv: - Calculate balancing figure as Cash.

Example – 7
P , Q and R are partner sharing profit and loss in the ratio 5:3:2. Balance sheet as on 31st Dec 2009
are given. R decided to retire.
Balance sheet

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 Liabilities Amount Assets Amount
Capital a/c Bank 58000
P 150000 Land & B 125000
Q 100000 Plant & M 85000
R 100000 350000 Stock 72000
Debtor 100000
Creditor 50000 Deferred revenue expenditure 10000
Reserve fund 30000
Provision on debts 20000

450000 450000

Adjustment
a. Creditor includes old outstanding of Rs 22,000 which is now to be write off from the book of
a/c.
b. Provision on debtor is required 10%.
c. Stock undervalued by 10%.
d. Goodwill of the R is Rs32,000
e. R will paid by the cash brought by P and Q to make their capital proportionate to their profit
sharing ratio. Minimum bank balance will be maintained at Rs 18000.
Prepare revaluation account, capital account, and balance sheet.

Solution
REVALUATION ACCOUNT
PARTCULAR AMOUNT PARTICULAR AMOUNT

Capital Account
Particulars P Q R Particulars P Q R

16
 Balance Sheet
Liabilities AMOUNT Assets AMOUNT

Working Note
Note – 1
Calculation of amount of stock undervalued

17
Note – 2
Capital Adjustment

Note – 3
Cash Account
CASH ACCOUNT
PARTCULAR AMOUNT PARTICULAR AMOUNT

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Example – 8
The following in the balance sheet of A, B and C who was partner as on 31.3.1993:
Liabilities Amount Assets Amount
A,s cap. A/c 33600 Plant & machinery 49000
B’s cap. A/c 25200 Furniture and fitting 4800
C‘s cap. A/c 12000 Stock in trade 22800
Creditor 12000 Debtor 1000
15%mortage loan 16000 Cash at bank 200

99400 99400

They share of profit and loss in the ratio of 2:2:1 on 1.4.1993, C retire from firm and claimed his
share of secret reserve/profit arising out of the following:
o During the year ended 31.3.93 purchase of machinery at a cost of Rs 10,000 was charge to
purchase account the erection charge of Rs600 being charge to machinery repairs account,
depreciation is to be charge at 10% p.a.
o Rs 600 received from Mr X on 30.3.93 toward rent of the property subject were credited to
his personal account so as to reduce his debit balance from Rs1000 to Rs400 debit on
31.3.93.
o Interest on mortgage loan was paid in advance up to 31.5.93 and the whole amount was
charge to interest account during the year ended 31.3.93 after rectifying the above error it
was mutually decided as under:
 The goodwill of the firm be valued at five time the average profit of the last three
year such profit should be correct profit and not the book profit the book profit of
the last year were: 1990-91 Rs18380 , 1991-92 Rs 32000, 1992-93 Rs 7471.
 Land and machinery to be depreciated by 10%, Provision for bad & doubtful debts to
be made at 5% on debtor.
 The goodwill should not appear in the book.
 There is a liability for Rs 501 for bill discount this has to be account for.
 C should be paid half of his dues in cash which shall be brought in by A and B in their
profit sharing ratio and the other half shall to be left in the business as C’s loan
fetching an interest of 18%p.a.
Prepare Revaluation A/c, capital A/c, and balance sheet

Example – 9

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Avinash, Basuda LTD. and Chinmoy LTD. Were in partnership sharing profit and loss in the ratio of
9:4:2. Basuda Ltd. Retire from the partnership on 31.3.98 when the firm balance sheet was as
under:
Balance Sheet
As on 31st march 1998
Liabilities Amount Assets Amount

Creditor 600 Cash at bank 284

Capital A/c Debtor 400
Avinash: 2700 Stock 800
Basuda Ltd.: 1200 furniture 266
Chinmoy Ltd.: 600 4500 Plant 850
Land and building 2500

5100 5100

Basuda Ltd share in goodwill and capital was acquired by Avinash and Chinmoy Ltd in the ratio of 1:3
respectively, the continuing partner bringing in the necessary finance to pay off Basuda Ltd.
The partnership deed provides that on retirement or admission of a partner the goodwill of the firm
is to be valued at three times the average annual profit of the firm for the four year ended on the
date of retirement or admission the profit of the firm during the four year ended 31.3.98 Profit were
as follows:
1994-95 450
1995-96 250
1996-97 600
1997-98 700
The deed further provided that the goodwill account is not to be appear in the book account at all.
The continuing partner agreed that with effect from 1.4.98,Ghanashyam, son of Avinash is to be
admitted as Partner with 25% share in profit.
Avinash gifts to Ghanashyam, by transfer from his capital account an amount sufficient to cover up
12.5%of capital and goodwill requirement. The balance 12.5% of capital and goodwill requirement
is purchase by Ghanashyam from Avinash and chinmoy Ltd In the ratio of 2:1.
The firm asks to you:
Calculate New Profit Sharing Ratio.
Prepare the balance sheet of the firm after Ghanashyam admission.

Topic – 7
JOINT LIFE POLICY
A partnership firm can take the joint life policy on the life of its all partners, and in such case if any
partner enter into the firm or any partner retire from the firm or in case of dissolution of partnership
firm only “Surrender value of such policy” is received to the firm however in case of Death of any
partner or in case of maturity of the policy “Full amount” is received to the firm.

Joint Life Policy

Admission of Partner Retirement of Partner Death of Partner Dissolution of Firm

Surrender Value Surrender Value Full Value Surrender Value

20
 SAI KRIPA
DEATH OF A PARTNER
By: - RAKESH KALRA
8447200919

Topics to be covered
 Meaning and term
 Calculated of new profit sharing ratio
 Calculation of gaining ratio
 Treatment of goodwill
 Payment to retiring partner
 Preparation of revaluation account , capital account , and balance sheet

Topic – 1
MEANING AND TERMS

Death of a partner: - In case of death of a partner, all the amount due to such deceased partner such
as his share of Capital, his share of goodwill, Interest on capital on such capital, any salary, and his
share of profit up to the date of retirement. In this type of question we have prepare deceased
partner’s Capital account and all the balance sing figure is transfer to his legal representative.

Topic – 2
CALCULATION OF NEW PROFIT SHARING RATIO
A New profit sharing ratio of Partners can be computed with the help of two methods.

New Profit Sharing ratio

Very Simple Method Take over Method

Very Simple Method

Example – 1
A , B and C are partner sharing profit and the loss and 2:3:2 respectively; B decided to retire from the
partnership firm. Calculate New Profit Sharing Ratio of firm after B’s retirement.

Solution

Take over Method

21
Example – 2
A , B and C are partner sharing profit and loss equally, A decided to take retirement and gives his
share of profit to B and C in the ratio 2:1. Calculate New Profit Sharing Ratio of firm after A’s
retirement.

Solution
New profit sharing ratio

22
Gaining Ratio

Topic – 3
CALCULATION OF GAINING RATIO
Gaining ratio is compute for the remaining partners only, this ratio shows the level of gain incurred
by the remaining partners from the death of a deceased partner. Amount of share of premium of
deceased partner is given by the remaining partner to the deceased partner in this ratio.

Gaining ratio

New Ratio – Old Ratio

Topic – 4
TREATMENT OF GOODWILL
In the case of Death, deceased partner take his share of goodwill from remaining partners in gaining
ratio and of remaining partner’s capital decrease and capital account of deceased partner increases.

JOURNAL ENTEY FOR GOODWILL

Remaining partner capital A/C Dr

To Retiring partner capital A/C
[Being goodwill given by partner in gaining ratio]

Example – 3
P , Q and R are partner sharing profit and loss in the ratio 2:2:1. Q died in car accident and his share
of profit is taken by P and R in their old ratio. Goodwill of the firm is valued Rs 150,000. Calculate
NPSR and pass journal entry for treatment of goodwill.

Solution

23
 Journal Entry
Date Particulars DR CR

New Profit Sharing Ratio

Gaining Ratio

A’s Share of Goodwill

24
Topic – 5
PAYMENT TO DECEASED PARTNER
At the time to death, all amount due to deceased partner can be settled by 4 ways either by cash or
by taken such amount as loan or partly in cash and partly in loan or transferring such amount to
executor account of retiring partner.

Payment to Deceased Partner

In Cash Through Loan Partly in Cash & Partly In Loan Through executor A/C

Topic – 6
PREPARATION OF REVALUATION ACCOUNT, CAPITAL ACCOUNT, BALANCE SHEET.
Revaluation account is prepared to calculate the profit and loss earned by all partner because of any
appreciation and depreciation in the assets and liabilities of the partnership firm. Such profit or loss
will be distributed among all partners in old ratio.

Format of revaluation Account

REVALUATION ACCOUNT
PARTCULAR AMOUNT PARTICULAR AMOUNT
To decrease in assets XXXX By increase in assets XXXX
To increase in liabilities XXXX By decrease in liabilities XXXX
To unrecorded liabilities XXXX By unrecorded assets XXXX
To provision credit XXXX By provision not required XXXX
To profit transfer: By loss transfer to: XXXX
A XXX A XXX XXXX
B XXX XXXX B XXX XXXX

XXXX XXXX

Topic – 7
TIME DUARATION OF AMOUNT GIVEN TO DECEASED PARTNER
On death of a partner some item are given only for the time span for which he was available in the
business and some items are given full in totally without time basis some examples are given.

Amount Given to Deceased Partner Time Period

25
 a. Capital amount a. full value
b. Goodwill amount b. full value
c. Profit up to date death c. time value
d. Interest on capital d. time basis
e. Salaries / commission e. time basis
f. Interest on drawing f. time basis
g. Drawing g. time basis
h. Reserve fund / P&L balance h. full basis
i. Joint life policy i. Full basis
j. Revaluation account j. Full basis
k. Goodwill write off k. Full basis

Example – 4
P , Q AND R are partner sharing profit and loss in the ratio of 2:2:1. Balance sheet as on 31.3.2009 R
died 1.10.2009 his share is taken over by P and Q in the ratio of 3:2.
Balance sheet
liabilities Amount Assets Amount
Capital account Cash 5000
P 200000 Land & B 250000
Q 200000 Plant & M 145000
R 100000 300000 Debtor 10000
Investment 60000
Creditor 55000 P & L A/C 20000
Reserve fund 25000

580000 580000

Adjustment
a. Land and building is valued at Rs 215000
b. Investment is overvalued by Rs 5000
c. Plant & machinery is undervalued by 15000
d. R share of goodwill comes of 30000
e. R is entitled to an annual salary of Rs 24,000 and interest on capital 12%pa
f. Total amount due to R will be transfer to his executer a/c.

Prepare Revaluation A/C, capital A/C.

Solution
REVALUATION ACCOUNT
PARTCULAR AMOUNT PARTICULAR AMOUNT

26
 R’s Capital Account
Particulars Amount Particulars Amount

Working Note
Note – 1
New Profit Sharing ratio

Note – 2
Treatment of Goodwill

27
Note – 3
Calculation of Interest on Capital

Note – 4
R’s Salary

Topic – 8
CALCUATION OF PROFIT IN THE YEAR IN WHICH PARTNER DIED
On death of a partner his legal executor is entitled to a profit of the year in which partner is died
profit of every is calculated at the end of every year, however on the date of retirement we have to
take approximate profit for giving the share to deceased partner this approximation can be taken by
3 method:
 Average profit basis
 On the basis of last year profit
 Sales/ Turnover Basis

Average profit basis

Died partner share = average profit * His share * Time

Average profit = Total profit

No. of year

On the basis of last year

Died partner share = last year profit * His share * Time

Last year profit = profit immediately prior to death of a partner

Sale / turnover basis

Died partner share = sale during died partner period *rate of profit* His share
100

Sales during died partner period = sales during the period when died partner existed in the firm

Rate of profit = net profit % of firm.

Example – 5

28
A , B and C are partner sharing profit and loss in the ratio of 3:2:3. Firm sale of year 2008 is 2400,000
B died on 30.6.2009 on that date sales ledger show a credit balance of RS 800,000 firm closed his
account 31.12.2009.
Calculate
 Average profit
 Profit of last year
 Sale duration basis

Additional information
Profits of last 4 years are as follow:

31.12.2008 240,000
31.12.2007 100,000
31.12.2006 180,000
31.12.2005 120,000

SOLUTION

BY AVERAGE PROFIT BASIS

BY LAST YEAR PROFIT BASIS

29
 BY SALE/TURNOVER METHOD

Example – 6
A , B and C are partner sharing profit and loss in the ratio of 2:2:1. Balance sheet as on 31.3.2005 and
his share is taken over by A and C in the ratio 3:2

30
 Balance sheet
Liabilities Amount Assets Amount
Capital a/c Cash 55000
A 150000 Land & building 150000
B 100000 Plant & machinery 177000
C 100000 350000 Debtor 100000
Investment 28000
Creditor 55000 P&L a/c 25000
Reserve fund 25000
B’s loan a/c 100000
Provision for debtor 5000

535000 535000

Adjustment
a. L&B is valued at Rs 185,700
b. Investment is valued at Rs 35,000 and B take over the investment
c. Plant & machinery is depreciated by 10%
d. B share of goodwill comes of RS 30000
e. B loan will continue to be held under liabilities of new firm & B’s has carried interest @ 12%.
f. B’s share of profit up to the date of retirement will be calculated on last year profit. Profit of
the year ended 31.3.2004 was Rs 150000.
g. Total amount due to B will be transfer to his executer a/c.
Prepare revaluation account, capital accounts and Balance sheet after B death.

Solution
REVALUATION ACCOUNT
PARTCULAR AMOUNT PARTICULAR AMOUNT

Capital Account
Particulars A B C Particulars A B C

31
 BALANCESHEET
LIABILITIES AMOUNT ASSETS AMOUNT

Working Note
Note – 1
New Profit Sharing ratio &Gaining ratio

32
Note – 2
Calculation of Interest on B’s Loan

Note – 3
B’s Share of Profit

Note – 4
Journal Entries
S.No Particular Dr Cr

33
Topic – 9
JOINT LIFE POLICY
A partnership firm can take the joint life policy on the life of its all partners, and in such case if any
partner enter into the firm or any partner retire from the firm or in case of dissolution of partnership
firm only “Surrender value of such policy” is received to the firm however in case of Death of any
partner or in case of maturity of the policy “Full amount” is received to the firm.

Joint Life Policy

Admission of Partner Retirement of Partner Death of Partner Dissolution of Firm

Surrender Value Surrender Value Full Value Surrender Value

34