CHAPTER- 4

RETIREMENT AND DEATH OF PARTNER

 Retirement and death of a partner leads to discontinuation of old partnership and a
change in the existing partnership deed.

 The following are the different ways in which a partner can retire from a partnership
firm.

 With the consent of all other partners

 With an express agreement by all the partners
 By giving a written notice

 The following are the various items that need adjustments at the time of retirement
and death of partner.
 New ratio of the remaining partners.
 Gaining ratio of the remaining partners.
 Calculation of goodwill of the new firm and its accounting treatment.
 Revaluation of assets and liabilities of the new firm.
 Distribution of accumulated profits and losses and reserves among all the
partners (including the retiring partner).
 Treatment of Joint Life Policy
 Settlement of the amount due to the retiring partner
 Adjustment of capital accounts of the remaining partners in their new profit
sharing ratio.

 Calculation of New Profit Sharing Ratio

In the case of retirement or death of a partner, generally, there exist the following
two cases for calculation of new profit sharing ratio.

 Case-1: When new profit sharing ratio of the remaining partners is not
mentioned in the question.
Example: If A, B and C are partners sharing profits and losses in the ratio
3:2:1. If B retires, then the new profit sharing ratio between A and C
becomes 3:1.

 Case-2: When the share of the retiring or deceased partner is purchased in a

particular ratio by the remaining partners.
Example: If A, B and C are partners sharing profits and losses in the ratio
3:2:1. B retires and his share is purchased by A and C in the ratio 2:1.
 2 2 4
B's share taken by A =  
6 3 18
3 4 13
New share of A =  
6 18 18
2 1 2
B's share taken by C =  
6 3 18
1 2 5
New share of C =  
6 18 18
Thus, the New Profit Share of A and C is 13:5

 Gaining Ratio

It is the ratio in which the remaining (or continuing) partners acquire the share of
profit of the outgoing partner.

Algebraically,

Gaining Ratio  New Ratio – Old Ratio

 Difference between Sacrificing Ratio and Gaining Ratio

Basis of
Sacrificing Ratio Gaining Ratio
Difference

It is the ratio in which the old partners It is the ratio in which the continuing
Meaning agree to sacrifice their share of profit partners acquire the share of profit
in favour of new partner. from outgoing partner.
Sacrificing Ratio = Old Ratio – New Gaining Ratio = New Ratio – Old
Calculation
Ratio Ratio
It is calculated at the time of It is calculated at the time of
Time
admission of new partner. retirement/death of old partner.
It is calculated to ascertain the share It is calculated to ascertain the share
of profit and loss given up by the of profit and loss acquired by the
Objective
existing partners in favour of new remaining partners from the retiring
partner. or deceased partner.
It reduces the profit share of the It increases the profit share of the
Effect
existing partners. remaining partners.
 Treatment of Goodwill
At the time of retirement or at the event of death of a partner, the goodwill is
adjusted among the remaining partners in the gaining ratio with the share of
goodwill of the retiring or the deceased partner. The following are the two probable
cases on which the treatment of goodwill rests.

 Situation 1: If goodwill already appears in the books of the firm at the

time of retirement/death of partner

Step 1: Write-off the existing goodwill

First of all, we need to write-off the existing goodwill among all the
partners of the firm (including the retiring or the deceased partner) in their
old profit sharing ratio. The following Journal entry is passed to write-off
the existing goodwill.

All Partners’ Capital A/c Dr.

To Goodwill A/c
(Goodwill written of among all the partners in their old ratio)

Step 2: Adjusting goodwill through Partner’s Capital Account

After writing-off the existing goodwill, we need to adjust the goodwill
through the Remaining Partners’ Capital Account with the share of the
Retiring or the Deceased Partner’s goodwill.

Remaining Partners’ Capital A/c Dr.

To Retiring/Deceased Partner’s Capital A/c
(Gaining Partner’s Capital A/c is debited in their gaining share
and retiring/deceased Partner’s Capital Account is credited with
his share of goodwill)

 Situation 2: If no goodwill appears in the books of the firm at the time of

retirement/death of partner.

As no goodwill appears in the books of the firm, so the goodwill is

adjusted through the Remaining Partners’ Capital Account with the share
of the goodwill of the Retiring or the Deceased Partner.
 Remaining Partners’ Capital A/c Dr.
To Retiring/Deceased Partner’s Capital A/c
(Gaining Partner’s Capital A/c is debited in their gaining share
and retiring/deceased Partner’s Capital Account is credited with
his share of goodwill)

Note: In both the above cases, if any of the remaining (or continuing) partner/s is/are
sacrificing instead of gaining, then the Journal entry for adjusting the goodwill
becomes.

Remaining Partner’s Capital A/c Dr. (Gaining Partner)

To Retiring/Deceased Partner’s Capital A/c (Retiring or Deceased Partner)
To Remaining Partner’s Capital A/c (Sacrificing Partner)

 Treatment of JLP (in case of Retirement)

The treatment of JLP depends on the following two situations.

 Situation 1: If no JLP appears in the Old Balance Sheet, but the

continuing partners decided to show JLP in the New Balance Sheet
In this case, the surrender value of JLP will be distributed among all the
partners (including the retiring partner) in their old profit sharing ratio.
Also, JLP will be shown at its surrender value on the Assets side of the
Balance Sheet of the new firm.

JLP A/c Dr. (With the surrender value in the Old Ratio)
To All Partner’s Capital A/c

 Situation 2: If no JLP appears in the Old Balance Sheet, but the

continuing partners decided not to show JLP in the New Balance Sheet.
In this case, JLP will be written-off with the share of the surrender value of
JLP of the retiring partner in the gaining ratio among the remaining partners
in the gaining ratio. In this case, no JLP will be shown on the Assets side of
the new Balance Sheet.

Remaining Partner’s Capital A/c Dr. With the share of surrender value of JLP of
the retiring partner (in gaining ratio)
To Retiring Partner’s Capital A/c
  Situation 3: If JLP already appears in the Old Balance Sheet
In this case, JLP is treated as an asset and any increase or decrease in its
surrender value is credited (or debited) to the Revaluation Account. Also,
JLP will be shown on the Assets side of the New Balance Sheet at its final
surrender value (i.e. net of increase or decrease).

 Treatment of JLP (in case of Death)

The treatment of JLP in case of death of a partner depends on the following two
situations.

 Situation 1: If the surrender value of JLP is not appearing in the Old

Balance Sheet.
In this case, Insurance Company pays amount against the claim for the death
of a partner.

Insurance Company A/c Dr. With the full value of the policy
To Life Policy A/c

Life Policy A/c Dr. With the full value of the policy
To All Partner’s Capital Account (In Old Ratio)
(Insurance claim credited to all partners)

Remaining Partners’ Capital A/c Dr. (In Gaining Ratio)

To Deceased Partner’s Capital A/c With the share of the deceased partner in
the surrender value of the policy

 Situation 2: If the surrender value of JLP is already appearing in the

Old Balance Sheet.
In this case, the amount received from the Insurance Company will be
credited to the all partners’ Capital Accounts net of the surrender value.

Insurance Company A/c Dr. With the full value of the policy
To Life Policy A/c

Life Policy A/c Dr. (Full value – Surrender Value of the

policy)
To All Partner’s Capital Account (In Old Ratio)
(Insurance claim credited to all partners)
 No entry is to be passed for recording the surrender value of the
continuing partners, as their surrender value is already appearing on
the Assets side of the Old Balance Sheet.

 Revaluation of Assets and Liabilities

Revaluation A/c
Dr. Cr.
Amount Amount
Particulars Particulars
Rs Rs
Decrease in Value of Assets Increase in Value of Assets

Increase in Value of Liabilities Decrease in Value of

Liabilities
Unrecorded Liabilities
Unrecorded Assets
Outstanding Expenses (e.g.
Salaries) Prepaid Expenses

Income Received in Advance Income Earned but not yet

received
Revaluation Profit*
A Revaluation Loss 
B A
(Transferred to the Credit side B
of All Partners’ Capital A/c in (Transferred to the Debit side
Old Ratio) of All Partners’ Capital A/c
in Old Ratio)

* If Credit side > Debit Side

 If Credit side < Debit Side
  Partners’ Capital Account- Continuing and Retiring (or Deceased) Partner’s
Capital Account
Partners’ Capital A/c
Dr. Cr.
Particulars A B C Particulars A B C
Profit and Loss (Debit Balance) –– –– –– Balance b/d –– –– ––

Deferred Revenue Expenditure

–– –– –– General Reserve –– –– ––
(Advertisement Expenditure)

Revaluation Loss –– –– –– Profit and Loss (Credit Balance) –– –– ––

Assets (Taken over by Partners’) –– –– –– Revaluation Profit –– –– ––

Cash/Bank/Partner’s Loan –– Workmen’s Compensation Fund* –– –– ––

Goodwill A/c Investment Fluctuation Fund*

–– –– –– –– ––
Profit and Loss Suspense Account
(up to date loss of retired/deceased –– Contingency Reserve* –– –– ––
partner)

Balance c/d (If Cr. Side > Dr. side) Liabilities (If taken over by
–– –– –– –– ––
Partners’)

Profit and Loss Suspense Account

(up to date profit of ––
retired/deceased partner)

Balance c/d
–– –– ––
(If Dr. side > Cr. Side)
`

* Workmen’s Compensation Fund, Investment Fluctuation Fund and Contingency Reserve

are transferred to All Partners’ Capital A/c (Credit side) only with the excess amount. For
example, if WCF appears on the Liabilities side of the Old Balance Sheet at Rs 6,000 and if
in the adjustment, an amount of Rs 4,000 for Workmen’s Compensation Claim is given,
then the excess amount of Rs 2,000 (i.e. Rs 6,000 – Rs 4,000) will be transferred to the
credit side of All Partners’ Capital Account in their old ratio. The amount of claim i.e. Rs
4,000 will be shown on the Liabilities side of the New Balance Sheet.
 This represents the amount of existing goodwill that is already appearing on the Assets
side of the Old Balance sheet. It has to be written-off by debiting All Partners’ Capital A/c
in their old profit sharing ratio.

Note:
1) If in the question, there are no adjustments related to WCF, IFF, Contingency Reserve,
then these are transferred to the Partners’ Capital Account (with full value given in the
question) among all the partners (including the retiring/deceased partner) in their profit
sharing ratio.

2) Reserves such as, Employees’ Provident Fund, Provision for Tax, Taxation Reserve, JLP
Reserve and Depreciation Reserve are not transferred to the Partners’ Capital Account and
are shown on the Liabilities side of the New Balance Sheet.

 Modes of Payment to the Retiring and Deceased Partner

The retired/deceased partner may either be paid in cash or through loan (in
instalments) or partly in cash and partly through loan.

Modes of Payment to Retiring or Deceased

Journal Entries
Partner

If the retired/deceased partner is paid in Cash Retiring/Deceased Partner’s Capital A/c Dr.
To Cash/Bank A/c

If the retired/deceased partner is paid through

Retiring/Deceased Partner’s Capital A/c Dr.
Loan (in instalments)
To Retiring/Deceased Partner's Loan A/c

If the retired/deceased partner is paid partly in

Retiring/Deceased Partner’s Capital A/c Dr.
Cash and partly through Loan
To Cash/Bank A/c
To Retiring/Deceased Partner’s Loan A/c

Note: If nothing is mentioned in the question regarding the mode of the payment to
the retiring or the deceased partner, then it is assumed to be paid through loan. The
capital account of the retiring or the deceased partner is closed by transferring the
balancing figure to the credit side of the Retiring/Deceased Partner’s Loan A/c. The
Retiring/Deceased Partner’s Loan A/c will be shown on the Liabilities side of the
New Balance Sheet

 Loan Account- Retiring and Deceased Partner

The question may ask to prepare Retiring Partner’s Loan Account or Deceased
Partner’s Executors’ Loan Account for one year or for more than one year.
For one year
Retiring Partner’s Loan Account
or
Deceased Partner’s Executors’ Loan Account
Dr. Cr.
Amount Amount
Date Particulars Date Particulars
Rs Rs
Date of Retiring/Deceased
Death/ Partner’s
Retirement Capital/Executor’s A/c –
End of For the
Cash/Bank A/c – Interest A/c
Year Year

For more than one year

Retiring Partner’s Loan Account
or
Deceased Partner’s Executors’ Loan Account
Dr. Cr.
Amount Amount
Date Particulars Date Particulars
Rs Rs
1st Cash A/c (Interest + first – Date of Retiring/Deceased –
Year year instalment) Death/ Partner’s
Retirement Capital/Executors’ A/c
Balance c/d Interest A/c –

2nd Cash A/c (Interest + – 2nd Year Balance b/d –

Year second year instalment)
Balance c/d – Interest A/c –

Last Cash A/c (Interest + last – Last Year Balance b/d –

Year year instalment)
Interest A/c –
 Adjustment of Capital Balances of the Remaining Partners

 Total Capital of New Firm is Mentioned in the Question

If in the question, the total capital of the new firm after the retirement or
death of a partner is mentioned, then following are the steps involved in the
adjustment of capital.

Step1: Calculate Cr. – Dr. Balances (Old capital) of the remaining partners,
after all adjustments.
Step 2: Calculate the individual new capital of the remaining partners by the
following formula.

New Capital of one of the Remaining Partners = Total Capital of the Firm After Retirement / Death
× New Profit Share of Remaining Partner

Step 3: If the amount calculated in the Step 1 (old capital after all
adjustments) exceeds the amount calculated in the Step 2 (new capital), then
the difference amount (surplus) is paid to the partner in cash or through
bank, i.e. debited to the Partners’ Capital Account. On the other hand, if the
amount calculated in the Step 2 exceeds the amount calculated in the Step 1,
then the difference amount (shortage) is to be brought in by the partner, i.e.
credited to the Partners’ Capital Account.
Step 4: The retiring (or deceased) partner’s balance (i.e. Cr. – Dr.) is
transferred to his Loan Account or paid in cash (or transferred to the
Executors’ Account in case of death of a partner).

 Total Capital of New Firm is not Mentioned in the Question

If in the question, the total capital of the new firm after the retirement or
death of a partner is not mentioned, then following are the steps involved in
the adjustment of capital.

Step1: Calculate Cr. – Dr. Balances (Old capital) of the remaining partners,
after all adjustments.

Step 2: Calculate the total capital of the new firm using the following
formula.
Total Capital of the New Firm  Add Cr.  Dr. balances of remaining partners
 Step 3: Calculate the new capital for each of the continuing partners by the
following formula.

New Capital of one of the Remaining Partners = Total Capital of the Firm After Retirement / Death
× New Profit Share of Remaining Partner

Step 4: If the amount calculated in the Step 1 (old capital after all
adjustments) exceeds the amount calculated in the Step 3 (new capital), then
the difference amount (i.e. surplus) is paid to the partner in cash or through
bank, i.e. debited to the Partners’ Capital Account. On the other hand, if the
amount calculated in the Step 3 exceeds the amount calculated in the Step 1,
then the difference amount (shortage) is to be brought in by the partner, i.e.
credited to the Partners’ Capital Account.

Step 5: The retiring (or the deceased) partner’s balance (i.e. Cr. – Dr.) is
transferred to his Loan Account or paid in cash (or Executors’ Account in
case of death of a partner).

 Amount Payable to Retiring Partner is Contributed by Remaining Partners

If the question specifies that the amount payable to the retiring partner is to
be contributed by the remaining partners such that their capitals become
proportionate in their new profit sharing ratio, then following are the steps
involved in the adjustment of capital.

Step 1: Calculate Cr. – Dr. Balances (Old capital) of the remaining partners,
after all adjustments

Step 2: Calculate the total capital of the new firm using the following
formula.

Total Capital of the New Firm  Add Cr.  Dr. balances of Remaining Partners
+ Amount Payable to Retiring Partner

Step 3: Calculate the new capital for each of the continuing partners by the
following formula.

New Capital of one of the Remaining Partners = Total Capital of the Firm After Retirement / Death
× New Profit Share of Remaining Partner
 Step 4: If the amount calculated in the Step 1 (old capital after all
adjustments) exceeds the amount calculated in the Step 3 (new capital), then
the difference amount (i.e. surplus) is paid to the partner in cash or through
bank, i.e. debited to the Partners’ Capital Account. On the other hand, if the
amount calculated in the Step 3 exceeds the amount calculated in the Step 1,
then the difference amount (shortage) is to be brought in by the partner, i.e.
credited to the Partners’ Capital Account.

Step 5: The retiring (or the deceased) partner’s balance (i.e. Cr. – Dr.) is
transferred to his Loan Account or paid in cash (or Executors’ Account in
case of death of a partner).

 Adjustment of Capital by Maintaining a Minimum Cash/Bank Balance

If the question specifies that the capital of the remaining partners has to be
adjusted in their new profit ratio in such a manner that after the payment to
the retiring or the deceased partner, a minimum cash balance of Rs ______
is maintained. The following are the various steps involved in the
calculation of the new capitals of the remaining partners.

Step 1: Calculate Cr. – Dr. Balances (Old capital) of all the partners, after all
adjustments (including the retiring or the deceased partner).

Step 2: Calculate the total capital of the new firm using the following
formula.

Total Capital of the New Firm  Add Cr.  Dr. balances of all partners
+ Required (New) Cash Balance
 Old Cash Balance (given in the Balance Sheet)

Step 3: Calculate the new capital for each of the continuing partners by the
following formula.

New Capital of one of the Remaining Partners = Total Capital of the Firm After Retirement / Death
× New Profit Share of Remaining Partner

Step 4: If the amount calculated in the Step 1 (old capital after all
adjustments) exceeds the amount calculated in the Step 3 (new capital), then
the difference amount (i.e. surplus) is paid to the partner in cash or through
bank, i.e. debited to the Partners’ Capital Account. On the other hand, if the
amount calculated in the Step 3 exceeds the amount calculated in the Step 1,
then the difference amount (shortage) is to be brought in by the partner, i.e.
credited to the Partners’ Capital Account.
 Step 5: The retiring (or the deceased) partner’s balance (i.e. Cr. – Dr.) is
transferred to his Loan Account or paid in cash (or Executors’ Account in
case of death of a partner).

Step 6: The closing balance of the Cash/Bank Account (i.e. Balance c/d) will
reveal the same amount as required to be the minimum amount of Cash (as
stated in the question).

 Retirement or Death during an Accounting Period (other than Jan. 01, Dec. 31,
March 31 and April 01)
In case a partner is seeking retirement or death of a partner occurs during an
accounting year, then the treatment of all the above items (such as, accumulated
reserves and losses, Profit and Loss A/c, treatment of goodwill, JLP, etc.) remain the
same. In addition to this, we need to calculate the profit/loss for the period for which
the partner remained in the business during the retiring (current) year. For example,
if B died on Oct. 01, then we need to calculate the profit or loss for the period April
to September, if the accounting period is April to March. It is calculated on the
following two bases.

 Time Basis
According to this approach, the up-to-date profit of the retiring (or
deceased) partner is calculated as:
Up to Date Profit of Retiring (Deceased) Partner = Average Profits
Number of Months Partner Remained
×
12
× Share of the Retiring (Deceased) Partner
where,
Sum of Profits of Last Years  Loss (if any)
Average Profits 
Total Number of Years

 Sales or Turnover Basis

According to this approach, the up-to-date profit of the retiring (or
deceased) partner is calculated as:

Previous Year's Profit

Up to Date Profit of Retiring (Deceased) Partner =
Previous Year's Sales
× Sales till the Date of Retirement or Death of Partner
× Share of the Retiring (Deceased) Partner
 The profit (or loss) whether calculated by Time Basis or Sales Basis is
transferred to the credit (or debit) side of the retiring or deceased Partner’s
Capital Account as ‘Profit and Loss Suspense Account’.

 Executors’ Account
In case of death of a partner, the Deceased Partner’s Capital Account is closed by
transferring its balance after all adjustments (i.e. Cr. – Dr.) to the Executors’
Account. The Executors’ Account is closed by either paying him/her cash or in
instalments or partly in cash and partly through loan.

(a) When payment is made in Cash

Deceased Partner’s Executors’ Account

Dr. Cr.
Amount Amount
Date Particulars J.F. Date Particulars J.F.
Rs Rs
Year Year
Date of Bank – Date of Deceased Partner’s –
Payment Death Capital A/c

– –

(b) When amount due is transferred to Executors’ Loan A/c

Deceased Partner’s Executors’ Account

Dr. Cr.
Amount Amount
Date Particulars J.F. Rs Date Particulars J.F. Rs
Year Year
Date of Deceased – Date of Deceased Partner’s –
Death Partner’s Death Capital A/c
Executors’ Loan
A/c

– –

Note: The preparation of Deceased Partner’s Executors’ Loan A/c has been covered
above (under the topic ‘Loan Account- Retiring and Deceased Partner’).
 Cash Account

Cash Account
Dr. Cr.
Amount Amount
Date Particulars J.F. Date Particulars J.F.
Rs Rs
Balance b/d – Deceased Partner’s –
Executors’ Account
(payment to retiring
/deceased partner)
Partners’ Capital – Partners’ Capital
Account (if Account (if surplus
deficiency any any paid to partner)
brought in by
partner)
Balance c/d –
(to be shown on the
Assets side of
Balance Sheet)

– –

 Balance Sheet

Format of Balance Sheet

Dr. Cr.
Amount Amount
Liabilities Assets
Rs Rs
Bank Overdraft Cash in Hand
Creditors Cash at Bank
General Reserve Debtors
Contingency Reserve Less: Provision
Depreciation Reserve Bills Receivable
Workmen’s Compensation Fund Stock
Investment Fluctuation Fund Land and Building
Machinery Replacement Reserve Plant and Machinery
Employees’ Provident Fund JLP
Provision for Tax Profit and Loss Suspense
 JLP Reserve Account (up to date profit of
Bills Payable retired/deceased partner)
Executors’ Loan Account (or Capitals:
Retiring Partner’s Loan Account) A:
Capitals: B:
A:
B:
** ○○

Note: The equality of ** and ○○ ensures the arithmetical accuracy of the

solution.