RETIREMENT / DEATH OF A PARTNER
Retirement [ Reconstitution ]
A partner may retire from the firm:-
1)
If there is an agreement to that effect.
2)
If all the partners consent to his retirement
3)
If the partner is at will, by giving the notice to all the partners of his
decision to retire.
The retiring partner is entitled to the amount due to him, which includes:-
● Balance in his capital /
current A/C.
● Share of goodwill.
● Share in the gain/loss on
revaluation.
● Share of accumulated profit
(losses) and reserves.
● I.O.C salary etc. from the
date of the last B/sheet to the date of retirement.
Drawing and I.O.D are debited for that period to the
concerned partner
Capital A/C.
● Share in the profit of the
current year.
Liability of a retiring partner
▪️
liability of the firm for the acts before retirement.
▪️
Liability of the firm for the acts after retirement.
(Until a public notice of his retirement is
given)
Adjustment at the time of retirement
1. Change in P.S.R:-
The
retirement partner gains part of the retiring partner’s share of the profit
New share of partner= old share
+ acquired share
Cash
(i) when new P.S.R is not given,
In
that case, retirement partners are preassumed to share profits is an old ratio
→ the new P.S.R of the retirement
partners is calculated by simply striking out the share of the retiring partner
and finding out the new denominator of the remaining ratio.
NOTE→
Before attempting any calculation, ratio, if it appears infraction, should
first be brought to a simple figure by taking L.C.M.
Example:-
A: B:
C
1/2: 2/5:
1/10:
⇒ 5: 4: 1
Calculate new P.S.R
a) 'A'
retires
B.C. 4:1
b). 'B'.
retires
A.C. 5:1
● Under this, the P.S.R b/w the
continuous parents will remain the same.
Case(ii)
when the remaining
partners purchase the share of the
retiring partner in a specified ratio:-
In this case, the acquired share is added to
their existing share.
Example:- A: B:
C
5:
3: 2
B retires
His share is
taken by ⇒ A: C
2: 1
‘B’
A
taken share of 'B' =3/10 (old ) ×
2/3 ⇒ 2/10
A new
share = 5/10 ( old ) + 2/10 (gain) ⇒ 7/10
C taken = 3/10 × 1/3 = 1/10
'C' new = 2/10 + 1/10 = 3/10
New P.S.R
A: C
7: 3 Ans
Gaining ratio:- ( G.R)
The
ratio in which the continuing partners acquire the outgoing partners share
Is
called the gaining ratio.
G.R
New Ratio – Old Ratio
1) When no agreement exists:-
Continuing partner shall continue to share profits in
the old ratio, Thus
In effect, the gain is in old P.S.R.
2) When new P.S.R is given:-
New Ratio – Old Ratio
A: B: C
3: –:
2 ⇒ 5 * 2 new
5:
3: 2 ⇒ 10*1 old
6: –:
4
5: 3:
2
1:
–: 2
A: C
New
P.S.R 1: 2
2. Accounting Treatment Of Goodwill:-
When
a partner retires (or died) he receives some compensation from the remaining
partner in the ratio they take the share of the retiring partner. That
competition is
known as goodwill. ( AS -26 )
Treatment.
STEP1
→ If any
amt. of goodwill already appears all partners cap/current A/C.
Or [In old P.S.R] to goodwill
A/C.
STEP2
→ Share
given to outgoing partner
Continuing part cap/current
A/C Dr (In - G R) to outgoing part cap/current A/C
(share of goodwill).
NOTE
→ if any continuing partner sacrifices due to
Reconstitution.
Continuing part capital A/C -
Dr [who gains]
To retiring partners capital
A/C
To continuing partners capital
A/C [who sacrifices]
3. Revaluation Of Assets And Reassessment Of Liabilities:-
Same as in the previous chapter
4. Reserves And Accumulated Profits/Losses:-
Same as in the previous chapter
5. Computation Of Amount Due To Retiring Partner:-
It
is determined by preparing the capital A/C of the retiring partner.
Dr.
Retiring partner capital / current A/C G
|
|
|
|
|
|
Drawing Int on drawing
Share in accumulated loss Share in loss on revaluation Retiring partner loan
A/C
|
- -
- - - - - - |
Opening Bal. Share of profit on revaluation Share of res/Accumulated
profit Share of goodwill Share of profit till the date
of retirement Sal. I.O.C till the date of retirement
|
- - - - - - - - - -
|
Journal Entry
● Retiring part capital
A/C - Dr.
To
retiring part loan A/C
This A/C is shared on the
liability side of B/sheet.
Payment of amt due to the
retiring partner
1) Payment of Full Amt:-
Payment is made on the date of
retirement.
entry ⇒ Retiring partner capital A/C Dr.
To Cash /
Bank A/C
[Instead On opening loan account payment is
made in cash]
2) Payment by equal installments:-
If
may be agreed upon the partners. That principal amount will be paid in a number
of installments in such a case balance of his capital A/C will be transferred
to his loan A/C and interest is also paid loan.
Exercise:- Partner Loan = Rs 20,000 int - 6% P.A Paid In
2 Equal Installments
⇒ Each Installments Will Be Of Rs 10,000 Plus
Int.
Partner loan A/C
|
Date |
Particular |
Amt. |
Date |
Particular |
Amt. |
|
|
To Bank (10,000+1800)
To balance c/d
To Bank [10,000+600] |
11,200
19,000 31,200 10,600
10,600 |
1jan (1styear)
31,Dec |
By par. Cap A/C
By int A/C[2000 *6/100]
By balance b/d By int A/C [10,000*6/100]
|
20,000
1200 31,200 10,000 600
10,600 |
Entries
1) Amt. transferred to loan A/C
from capital A/C
retiring Part
capital account Dr.
To retiring part loan A/C
2) On interest being provided
Int.
On loan A/C Dr.
To
retiring part loan A/C
3) On being installment paid
Retiring
partners loan A/C Dr.
To
Bank A/C
6. Adjustment of capital:- [if agreed]
•
New capital may be in new P.S.R
•
Capital may be adjusted through partners current account
( If
any deficit in b/w new and old capital partners may have brought in further
capital if any excess partners may withdraw some capital)
This
adjustment can be done by 3 ways:-
A) when total cap. of the new firm is
given:-
STEP1→ calculate the present
capital of the remaining partner
[after all adjustment]
STEP2→ calculate proportionate capital on the basis of the
total cap of a new firm
STEP3→
Find out surplus/ deficit from above 2 steps
STEP4→
|
Surplus |
Deficit |
|
Concerned part cap. A/C Dr. To cash Bank/current A/C |
Cash/bank/current account to Concuruned part
capital account |
⇒ Unless otherwise mentioned, any
Surplus/Deficit will
Be adjusted through cash/Bank and not
current A/C.
B) When Total Capital of New Firm is
Not Given:-
STEP1→
calculate
the present capital of remaining part
(After all adjustments)
STEP2→
calculate total capital of new frim
= aggregate of an adjusted cap. [Step
I]
STEP3→
Distribute
the capital (step (ii)) in new P. S. R
STEP4→
any surplus/deficit occur is adjusted by
taking/giving cash or by current A/C
Concerned partners.
C) when the retiring partner is to be
paid through cash brought in by the remaining part in a manner to make their
capital proportionate to their
new P. S. R:-
STEP1→
calculate
the present capital of the remaining part
(After all adjustment)
STEP2→ calculate total capital of the new
firm as follows:- aggregate of present capital
(step i) + shortage of cash brought in by continuing part in order
to make payment to retiring
Shortage of cash = Amt payable to retiring
partner-existing cash balance + minimum
cash balance req.
STEP3→
calculates
the new capital of the partner by distributing the capital ( step ii) in new P. S. R
STEP4→
find out surplus/deficit comparing new cap
with adjusted old capital.
STEP5→
pass
necessary journal entry for adjusting surplus/deficit
Retirement during an accounting year
The
partner is entitled to the share of all profit and loss till the date of
retirement.
⇒ His share is calculated as per
provisions of the partnership deed.
⇒
if the deed is silent the amt of profit should be calculated in the manner
agreed by the partner.
There are 2 ways of calculating
1)
previous Year Basis In this the profit of the previous year is taken as a base.
2) Average profit of past few years:-
STEP
A→ Take
total profit of the given no of years
STEP
B→ Calculate
the average
STEP
C→ Reduce
the profit for the period up to the date of retirement
STEP
D→ Calculate
the share of retiring partner on the basis of old P. S. R
STEP
E→ pass an
entry
P&l suspense
account..... Dr.
To retiring partners cap
account
[With
his share of profit ]
● P&l suspense account is
shown is b/sheet at the time of retirement
● When P&l account is
prepared at the end of accounting year the balance of P&l suspense account
is transferred to P&l app account.
Death of a Partner
When
a partner dies, his h hairs are entitled to the amt due and the rights which a
retiring partner has
His
Heins also become entitled to the share of profit
Heirs
is entitled to /the amount in deceased part capital account
Dr.
Deceased part cap A/c
|
|
₹ |
|
₹ |
|
To share of loss on To revaluation on To Drawing To I.OD up to the date death To acc losses To deceased part executors A/C {B.F}
|
– – – –
– –
– |
By share of goodwill By share of profit of revelation By share in acc profit & res By I.O.C up to the of death By salary up to the date of death
|
– – – – – – –
– |
share of profit up to the date of
death
=
Balance is transferred
Deceased part cap
A/C.....Dr.
To
deceased partner executors, A/C
Payment
Payment To The Executors Is Made In Always:-
1)
Full payment in one installment:-
Deceased partner executors
A/C……Dr.
To Bank A/C
2) when payment is made in more than one
installment:-
⇒ Interest @6% P.A is paid by the firm unless
otherwise agreed
⇒
Executors can opt to take a share of profit instead of int.
Entries.
Entries
a) When int. Is paid
Interest A/C……Dr.
To
Deceaesd part executors A/C
b) When installment is paid
Deceased part executors A/C……Dr
To
Bank A/C
Issues At The Time Of Death:-
1) profit of deceased partner. If the part deed
in between the yr. Profit
is calculated
on the basis of-
2) Time basis –
Under this, it is assumed that profit had orison
uniformly over the yr.
Example:- Profit of
the previous yr. ⇒ 24,000
Part
died after 2 months
Deceased part share = 3/10
Calculate
profit share of deceased part on time basis
Ans profit of 2 months = 24,000*2/12 =
4,000
Deceased part share = 4000 * 3/10 =1200
Entry
P & S suspense A/C…..Dr.
To deceased part. cap A/C
In case of loss revenue entry is passed
2) Turnover or sales basis:-
We should know
a) The sales of the whole yr,
and
b) Sale up to the date of death.
Example:-
Partners
dies ⇒ 1st march 2012, accounts closed 31st Dec. The profit till
The date of death is to be ascertained on the
basis of sales, assuming profits for
2012
is the same as for 2011. The following information is available:-
Sale for 2011
Rs. 1,20,000
Profit for 2011
Rs. 24,000
Sales of jan & feb Rs. 30,000
⇒ Rate of profit to sales = Profit/sales*100
=
24,000/1,20,000*100
= 20%
2) Treatment of goodwill:-
Same as in
retirement