RETIREMENT / DEATH OF A

PARTNER

CLASS 12
ACCOUNTANCY
 NOTES
RETIREMENT / DEATH OF A PARTNER

Retirement [reconstitution ]
A partner may retire from the firm:
i) if their is an agreement to that effect
ii) if all the partners consent to his retirement
iii) 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 amt due to him, which includes:-
•Balance in his capital /current A/C.
• Share of goodwill
• share in the gain/loss on revaluation.
• Share of accumulate profits (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 cap. 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]

CLASS 12 ACCOUNTS
 NOTES
RETIREMENT / DEATH OF A PARTNER
Adjustment at the time of Retirement
1. Change in P.S. R
The remaining partner gains a part of the retiring partner share of profit.
New share of Partner = old share + Acquired Share

case (i) When new P.S.R is not given

in that case remaining partners are pre assumed to share profits in old
ratio.
→The new P.S.R of the remaining partners is calculated by simply striking
out the share of retiring partner and finding out the new denominator of
the remaining ratio.
NOTE before attempting any calculation, ratio, if it appears in fraction,
should first be brought to simple figure by taking L.C.M.
Ex 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 partners will remain same.

CLASS 12 ACCOUNTS
 NOTES
RETIREMENT / DEATH OF A PARTNER

Case (ii) when the remaining partner purchase the share of the
retiring partner in a specified ratio :-
in this case acquired share is added to their existing shares.
Ex A:B:C
5:3:2
B retires
his share is taken by = A : C
2:1
A takes share of 'B' = 3/10 { B old } x 2/3
= 2/10
A new share = 5/10 [old] + 2/10 [gain]
=7/10
C takes = 3/10 x 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
partner's share is called gaining ratio.

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CLASS 12 ACCOUNTS
 NOTES
RETIREMENT / DEATH OF A PARTNER
Gaining Ratio
New Ratio - Old ratio
1. when no agreement exists
Continuing partner shall continue to share profits in the old ratio,
Thus in effect, gain is in old P.S.R.
2 when new P.S.R is given
New ratio - old ratio
ex : A:B:C
new 3 : - : 2 = 5 x 2
old 5 : 3 : 2 = 10 x 1
6:-:4
5:3:2
A:C 1: - : 2
New P.S.R 1 : 2
2. Accounting treatment of goodwill -
when a partner retire [or died] the receives some compensation
from the remaining partner in the ratio they takes the share of the
retiring partners. "That compensation is known as goodwill.[As -26]
Treatment
Step 1 if any amt of goodwill already appears
All partners cap /current A/c ... Dr. [In old P.S.R]
To goodwill A/C

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 NOTES
RETIREMENT / DEATH OF A PARTNER

Step 2 Share given to outgoing partner

Continuing park cap/curr. A/c .......Dr [in G.R]
To outgoing part. cap./curr A/c [Share of goodwill]
NOTE = If any continuing partner Sacrifice due to reconstitution
Continuing part. cap A/c ....... Dr [who gains]
To Retiring par. cap. A/c
To continuing part. cap. A/c [who Sacrifice]

3. Revaluation of assets and reassessment of liabilities

The assets are revalued and liabilities. are reassessed at the time of
reconstitution and the profit or loss arising. from it is credited or
debited to partners cap A/C. in old P.S.R

for this "Revaluation A/C" or "P&L Adj. A/C" is opened.

Revaluation A/c

PARTICULARS AMT PARTICULARS AMT

by asset [increases in
-
To assets dec. in ass. ass.] -
-
To liability [increase in lia. ] by liability [decrease in -
-
To unrecorded liability lia.] -
To par cap A/c's by un recoded assets
-
[-gain on revaluation] by partner cap. A/c's -
[ - loss on revolution]

CLASS 12 ACCOUNTS
 NOTES
RETIREMENT / DEATH OF A PARTNER

only one will appear at a time.

Assets and liability should be individually named.
After preparation of Revaluation A/C.
The balance sheet should contain only revised value of assets & liab.

ii)appear in books at the old values.

[Memorandum revaluation A/c]
Sometimes partner decide not to alter the value of assets and
liabilities at the time of reconstitution of firm at that time
memorandum revaluation A/c is created.
Memo revaluation A/C is divided into 2 parts

Part 1 is similar as revaluation A/c.

The Profit or loss from Part 1 will distributed to old partners. in old P.S.R.

Part 2 all the entry of Part 1 is reversed.

Cr what Dr. and Dr. what cr. in part (1)
The balance will transferred to all part [including new partner] Cap A/c

NOTE: The value of assets & liabilities except cash and to capital A/c
does not change and the old value will continue to appear in B/sheet

CLASS 12 ACCOUNTS
 NOTES
RETIREMENT / DEATH OF A PARTNER

4.Reserves and Accumulated (undistributed) profits/losses

if any reserve or Accumulated profits/losses exist in the books of firm
(at the time then) they are to transferred to partners capital /current
in old P.S.R.". The reason for this is that the partners should not be
placed at an advantage or advantage, at the time of reconstitution.

Journal entry
1) for transfer of Reserve & Accumulated profits
Reserve/P&L A/C ...... Dr
Workmen comp. Res. A/C ......Dr [excess of res. over liability]
Investment fluctuation Res. A/C ...... Dr.[excess of reserve over
the diff. b/w book value market value]
To par. cap/current A/c [ in old ratio]
i2) for transfer of Accumulated losses
All partners cap/current A/c ...... Dr [ in old ratio]
To P&L A/c
To deferred revenue expenditure A/C[like advertisement cap.]
Sometimes partner decide to continue their P&L A/C and reserve A/c
balance ie. they want that the A/c will continue to appear in B/sheet.
At that time the net effect is determined [gain X sacrifice of partners]
and an adjustment entry is passed .

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CLASS 12 ACCOUNTS
 NOTES
RETIREMENT / DEATH OF A PARTNER

5. computation of amt due to retiring partner

It is determined by preparing capital A/c of retiring partner :

Dr Retiring partner loan A/c Cr

Drawing - opening bal

-
Int. on drawing Share of profit on Revaluation
- -
share in Accumulated losses Share of res/ Accumulated
- -
share in loss on revaluation profit
- -
Retiring partner loan A/c Share of goodwill
- -
Share of profit till the date of
retirement. -
Sal, I.o.c till the date of
retirement.

Journal entry
Retiring Part cap A/c........Dr
To Retiring Part. loan A/c
This A/c is shown on liability side of B sheet.

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 NOTES
RETIREMENT / DEATH OF A PARTNER

Payment of Amt due to the retiring partner.

i) Payment of full amt :-
Payment is made on the date of retirement.
entry = Retiring partner cap. A/c....Dr
To cash /Bank A/c
[instead on opening loan A/c payment is made in cash ]

ii) Payment by equal installments:-

It may be agreed upon the partners to pay the principal amt will be
paid in number of installments. In such a case balance of his capital
A/C will be transfer to his too loan A/c and it interest is also paid upon.
Example :- Partner loan = ₹20,000 int. 6% p.a
paid in 2 equal installments.
= each installment will be of ₹10,000 plus int:

Partner loan A/c

DAT
E PARTICULAR Amt DATE PARTICULAR Amt

To bank [ 10,000 + 1200] 11,200 By par, cap. A/c 20,000

To Bal c/d 10,000 By int. A/c [20,000x6/100 1,200
21,200 21,200
To Bank 10,600 By bal b/d 10,000
[ 10,000 + 600] 10,600 By int. A/C 600
[10,000X6/100] 10,600

CLASS 12 ACCOUNTS
 NOTES
RETIREMENT / DEATH OF A PARTNER

Entries
(i) Amt. transfer to loan A/c from capital A/c
Retiring part. cap. A/c ..... Dr
To Retiring part. loan A/c
(ii) on int. being prepaid
Int. on loan A/c ...... Dr
to retirement Part. loan A/c
(iii) on being installment paid
Retiring part. cap A/c ...... Dr
To Bank A/c

6. Adjustment of capitals :- [if agreed]

• New capital may be in new P.S.R.
• Capital may be adjusted through partners Current A/c.
[If any deficit in b/w new and old capital partner may have..
brought in further capital, if any excess occur partners may withdrawn
some capital]

CLASS 12 ACCOUNTS
 NOTES
RETIREMENT / DEATH OF A PARTNER

This adjustment can be done by 3 ways:-

A) when total cap. of new firm is given.
Steps
i) Calculate the present capital of remaining partner. [after all
adjustments]
ii) calculate proportionate capital on the basis of total cap. of new firm.
iii) Find out Surplus/Deficit from above 2 steps [i-ii]
iv) Surplus Deficit
Concerned part. cap A/c...... Dr Cash/Bank/current A/C
To cash [Bank/ Current A/c To concerned part cap A/c

→ unless other wise mentioned, any surplus/ Deficit will be adjust

through cash / Bank A/c.

B) when total capital of new firm is not given:

steps
(i)calculate the present capital of remaining part. [after all adjustments]
(ii) Calculate total capital of new firm
= Aggregate of adjusted cap [step 1)]
(iii) Distribute the capital [Step (i)] in new P.S. R
iv) Any surplus / Deficit occur is adjusted by taking / giving cash or by
current A/c of concerned partners.

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CLASS 12 ACCOUNTS
 NOTES
RETIREMENT / DEATH OF A PARTNER

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
Steps
(i) calculate the present cap remaining part. [after all adjustments]
ii) calculate the total capital of the new firm as follows :-
Aggregate of present cap. [step(i)] + Shortage of cash brough in by
continuing part. in order to make payment to retiring partner.
Shortage of cash = Amt. payable to retiring partner - existing cash bal.
+ minimum cash balance required.
(iii) Calculate the new capital of partner by distributing the cap
[step(ii)] in new P.S.R.
(iv) Find out surplus/deficit comparing new cap. with adjusted old
capital.
(v)Pass necessary Journal entry for adjusting surplus/deficit.
Retirement during an Accounting year.
The partner is entities to the share of all profits and loss till the date
of retirement.
→His share is calculated as per provisions of partnership deed.
→If deed is silent, the amt of profit should be calculated in the
manner agreed by the partners

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 NOTES
RETIREMENT / DEATH OF A PARTNER

There are 2 ways for calculating

(i) Previous year & basis:
In this the profit of the previous year is taken as base

(ii) Average profit of past few years :-

steps
a)Take total profit of the given no. of yrs.
b) Calculate the average.
C) Reduce the profit for the period up to the date of retirement.
d) Calculate the share of retiring partner on the basis of old. P.S.R
e) Pass an entry.
P&L Suspense A/c ......... Dr
To Retiring partners cap A/c [ with his share of profit ]

*P&L suspense a/c is shown in B/sheet at the time of retirement

*when P&L A/c is prepared at the end of accounting yr. the bal. of
P&L suspence A/c is transferred to A/c App. A/c

CLASS 12 ACCOUNTS
 NOTES
RETIREMENT / DEATH OF A PARTNER

Death of a partner
when a partner dies, his heirs are entitled to the amt due and the
rights which a retiring partner has his share also become entitled to
the share of profit.
Theirs is entitled to / The amt. in decreased part cap A/c

Dr Deceased part cap A/c Cr

₹ ₹

by Share of goodwill -
To Share of loss on -
by Share of profit -
To revaluation -
by Share of profit of Revaluation
To Drawing -
- By share in Acc. profit & res.
To I.O.D up to the date of -
- by share of I.0.C. upto the date of
death
death.
To Acc. losses
by Salary up to the date of -
To Deceased part cap -
deaths
executors A/c

*Share of profit up to the date of death.

→ Balance is transferred
Deceased part cap A/c .......... Dr.
To Deceased partner executors A/c

CLASS 12 ACCOUNTS
 NOTES
RETIREMENT / DEATH OF A PARTNER

Payment
Payment to the executors is made in 2 ways; -

i) full payment is one installment ;-

Deceased partner executors A/c ... Dr
To Bank A/c
ii) when payment is made in more than one installment:.
→ interest @ 6%. p.a is paid by the firm unless otherwise agreed.
→executors can to take share of profit instead of int .

Entries
a) when int. is paid
Interest A/c ........ Dr.
To Deceased part. executors A/c
b) when installment is paid.
To Deceased part. executors A/c ...... Dr
To Bank A/c

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CLASS 12 ACCOUNTS
 NOTES
RETIREMENT / DEATH OF A PARTNER

Issues at the time of deaths

1. Profit of deceased partner.
If the part. deed in between the yr. profit is calculate on the basis of
(i) Time basis -
under this it is assumed that profit had arisen uniformly over the yr.

Example :- Profit of previous yr = 24,000

Part died after 2 months.
Deceased part. share = 3/10
Calculate profit share of deceased part. on this basis
Ans Profit of 2 months = 24,000 x 2/10 = 4,000
Deceased part. share = 4,000 x 3 /10 = 1200 Ans

Entry
P X L Suspense A/c ......Dr
to Deceased part. cap A/c
increase of loss reverse entry is passed

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 NOTES
RETIREMENT / DEATH OF A PARTNER

2) turnover or sales basis :

we should know
a) the sales of the whole yr, and
b) Sales upto the date of death.
Ex Partner dies ( share 1/3) = 1st March 2012, accounts closed 31st
Dec
The profit till the date of death are to be ascertained on
the basis of sales, assuming profits for 2012 is same as for 2011 The
following information available:-
Sales for 2011 ₹ 1,20,000
Profit for 2011 ₹ 24,000
Sales of Jan x Feb ₹ 30,000

= Rate of profit to sales = Profit /salesx100

= 24,000 /1,20,000x 100
=20%
Profit on the basis of sales for Jan. and Feb, 2012
=30,000x 20/100
profit = 6,000 Ans

Share of Profit of Partner - 6000 x 1/3 = 2,000

 NOTES
RETIREMENT / DEATH OF A PARTNER

2. treatment of goodwill
Accounting treatment of goodwill -
when a partner retire [or died] the receives some compensation
from the remaining partner in the ratio they takes the share of the
retiring partners. "That compensation is known as goodwill.[As -26]
Treatment
Step 1 if any amt of goodwill already appears
All partners cap /current A/c ...Dr. [In old P.S.R]
To goodwill A/C

Step 2 Share given to outgoing partner

Continuing park cap/curr. A/c.......Dr [in G.R]
To outgoing part. cap./curr A/c [Share of goodwill]
NOTE If any continuing partner Sacrifice due to reconstitution
Continuing part. cap A/c....... Dr [who gains]
To Retiring par. cap. A/c
To continuing part. cap. A/c [who Sacrifice]
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