Journal Entries at the Time of Retirement

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MODULE - 4
Partnership Accounts

Notes

20
RETIREMENT AND DEATH OF A PARTNER
If you look around, you must have noticed people in your relation and in your neighbourhood running business in partnership. You must have seen people quitting partnership firm or a person dies while in partnership. These are the events that take place during the lifetime of a partnership firm. Some issues arise on the happening of these events involving finance. Some assets and liabilities may need revaluation, goodwill is to be treated and amount of joint life policy is distributed and soon accounting adjustment are required to be made. Whenever such events take place, the firm has to calculate the dues of a partner leaving the firm or that of the deceased. In this lesson you will learn the accounting treatment in the books of the firm in these two cases i.e. retirement of a partner and death of a partner.

OBJECTIVES After studying this lesson, you will be able to: state the meaning of retirement/death of a partner; calculate new profit sharing ratio and gaining ratio; make adjustments relating to goodwill, accumulated reserves and undistributed profits at the time of retirement/death of a partner; explain the need for revaluation of assets and reassessment of liabilities at the time of retirement/death; prepare the revaluation account relating to retirement/death of a partner; illustrate the various methods of settling the claim of retiring partner and the related accounting treatment; illustrate the accounting treatment of partners capital and its adjustment; ascertain profit up to the date of death of a partner; prepare the account of the deceased partner’s executor.

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ACCOUNTANCY

Retirement and Death of a Partner 20.1 RETIREMENT – MEANING, CALCULATION OF NEW PROFIT SHARING RATIO AND GAINING RATIO When one or more partners leaves the firm and the remaining partners continue to do the business of the firm, it is known as retirement of a partner. Amit, Sunil and Ashu are partners in a firm. Due to some family problems, Ashu wants to leave the firm. The other partners decide to allow him to withdraw from the partnership. Thus, due to some reasons like old age, poor health, strained relations etc., an existing partner may decide to retire from the partnership. Due to retirement, the existing partnership comes to an end and the remaining partners form a new agreement and the partnership firm is reconstituted with new terms and conditions. At the time of retirement the retiring partner’s claim is settled. A partner retires either : (i) with the consent of all partners, or (ii) as per terms of the agreement; or (iii) at his or her own will. The terms and conditions of retirement of a partner are normally provided in the partnership deed. If not, they are agreed upon by the partners at the time of retirement. At the time of retirement the following accounting issues are dealt : (a) New profit sharing ratio and gaining ratio. (b) Goodwill (c) Adjustment of changes in the value of Assets and liabilities (d) Treatment of reserve and accumulated profits. (e) Settlement of retiring partners dues, (f) New capital of the continuing partners. New profit sharing ratio and gaining ratio As soon as a partner retires the profit sharing ratio of the continuing partners get changed. The share of the retiring partner is distributed amongst the continuing partners. In the absence of information, the continuing partners take the retiring partner’s share in their profit sharing ratio or in an agreed ratio. The ratio in which retiring partner’s share is distributed amongst continuing partners is known as gaining ratio. It is Gaining Ratio = New Ratio – Existing Ratio

MODULE - 4
Partnership Accounts

Notes

ACCOUNTANCY

181

MODULE - 4
Partnership Accounts

Retirement and Death of a Partner Various cases of new ratio and gaining ratio are illustrated as follows: (i) Retiring partner’s share distributed in Existing Ratio : In this...
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