Meaning: Partner leaves voluntarily with consent or as per deed. Firm continues with remaining partners. Retiring partner entitled to share of capital, reserves, goodwill, revaluation profit, profit up to retirement date.
9 Adjustments required: Change in PSR, Gaining ratio, Goodwill adjustment, Reserves & accumulated P&L, Revaluation A/c, Profit up to retirement date, Total amount due, Settlement of amount, Adjustment of continuing partners' capitals.
NEW PROFIT SHARING RATIO & GAINING RATIO
New Share = Old Share + Acquired Share.
Gaining Ratio = New Ratio – Old Ratio. Ratio in which continuing partners acquire retiring partner's share.
4 Cases:
- Case 1: Relative ratio between continuing partners unchanged → new ratio = old ratio among them; gaining ratio = old ratio. (Madhu, Neha, Tina 5:3:2 – Madhu retires → Neha:Tina 3:2).
- Case 2: New ratio given directly → compute gaining ratio by subtracting old from new.
- Case 3: Retiring partner's share acquired in specified ratio → compute new shares accordingly.
- Case 4: Entire share taken by one continuing partner → that partner gains fully.
TREATMENT OF GOODWILL ON RETIREMENT/DEATH
A. When Goodwill does NOT appear in books (4 methods):
- Method 1: Goodwill raised at full value & retained: Goodwill A/c Dr. (full value) → To All Partners' Capitals (old ratio). Then gaining partners' Capitals Dr. (gaining ratio) → To Retiring Partner's Capital.
- Method 2: Raised & written off: Goodwill A/c Dr. (full) → To All Partners (old). Gaining Partners Dr. → To Retiring Partner. All Partners Dr. (new ratio) → To Goodwill A/c.
- Method 3: Raised only to extent of retiring partner's share: Goodwill A/c Dr. (retiring share) → To Retiring Partner. Gaining Partners Dr. (gaining ratio) → To Goodwill A/c.
- Method 4 (direct adjustment – most common): Gaining Partners' Capitals Dr. (gaining ratio) → To Retiring Partner's Capital.
C. Hidden Goodwill: If lump sum paid to retiring partner exceeds his capital after all adjustments, excess = his goodwill share. Entry: Gaining Partners' Capitals Dr. → To Retiring Partner's Capital.
REVALUATION OF ASSETS & LIABILITIES
Revaluation A/c prepared to reflect current values. Profit/loss transferred to all partners (including retiring) in old ratio. Journal entries same as admission.
ACCUMULATED PROFITS & LOSSES
Reserves & accumulated profits transferred to all partners' capitals in old ratio. Accumulated losses written off by debiting all partners in old ratio.
PROFIT/LOSS UP TO DATE OF RETIREMENT
Retiring partner's share of profit from last balance sheet date to retirement date calculated (usually based on last year's profit or average). Entry: P&L Suspense A/c Dr. → To Retiring Partner's Capital. If loss, reverse.
SETTLEMENT OF AMOUNT DUE TO RETIRING PARTNER
Paid as lump sum cash, transferred to loan account, or part cash part loan. If instalments, interest @6% p.a. (or agreed rate) on outstanding. Loan account shown in balance sheet until fully paid.
ADJUSTMENT OF CAPITALS OF CONTINUING PARTNERS (3 CASES)
Case 1: Total capital of new firm given → adjust capitals to that total in new ratio; excess withdrawn/deficit brought in.
Case 2: Total capital not specified → take sum of existing capitals as total; adjust to new ratio.
Case 3: Retiring partner's amount brought in by continuing partners to adjust capitals.
DEATH OF A PARTNER
Similar to retirement – amount due transferred to Deceased Partner's Executor's Loan A/c. All adjustments (goodwill, revaluation, reserves, profit up to death, interest on capital) same as retirement. Death date may be any day, so profit up to death calculated proportionately.
JOINT LIFE POLICY
Policy taken on lives of all partners. On death, amount received credited to all partners' capitals in old ratio, or used to pay deceased partner's share. If premium treated as expense, surrender value method used.
IMPORTANT EXAM QUESTIONS
1. Muneer, Madhav, Mathew (5:3:2). Muneer retires; Madhav & Mathew decide future ratio 4:3. Calculate gaining ratio (2 marks – 2019 Say).
2. Anil, Sunil, Manoj (3:2:1). Sunil retires; goodwill ₹60,000. Gaining ratio = 3:1. Pass journal entry (2 marks – 2023 Mar).
3. A, B, C – A retires, due ₹60,000. Paid in 3 equal annual instalments with interest @10%. Prepare A's Loan Account (4 marks – 2024 Mar).
4. Meera, Radha, Rajani (4:3:2). Radha died 30 Sept 2017. Profits last 3 years: 1,20,000; 80,000; 70,000. Calculate Radha's share of profit till death and pass entry (3 marks – 2019 Say).
5. Distinguish between Sacrificing Ratio and Gaining Ratio.
6. Explain the four methods of goodwill adjustment on retirement.