Partnership Accounts

(Retirement of a Partner)
CPT Section A Fundamentals of Accountancy Chapter 8 Unit 4

Prof. Deepak Jaggi

Learning Objectives
(1) Understand the role of retiring partner in
the obligations of the firm.
(2) Logic of treatment of Reserves and Debit
Balances in case of retirement of partner.
(3) Techniques of arriving at the various
Ratios.
(4) Understand the Goodwill adjustment.
(5) To Lay a solid foundation of accounting
treatment in case of retirement of partner.

PARTNERSHIP ACCOUNTS
(Retirement of a Partner)

A partner who retires from the existing partnership

firm is known as a retiring partner

A partner who retires will be called as outgoing

partner

Conti..
(Retirement of a Partner)
A partner may retire from the business due to one or more of the following
reasons:

Old age or Health problems of the partner

Better Opportunity
Difference of opinion among partners

Accounting Treatment
Similar to Admission of Partner
Not Same

Information
given

To Prepare

1. Balance Sheet of Old Firm

2. Adjustments

1. Revaluation A/c
2. Partners Capital A/c
3. Cash /Bank A/c
4. Balance Sheet of a new Firm

Difference between Admission

and Retirement of a Partner

Admission

Retirement

1) 2 Old Partners & 3 New

Partners

1) 3 Old Partners & 2 New

Partners

2) Old Ratio, New Ratio, Sacrifice

Ratio

2) Old Ratio, New Ratio, Gain

Ratio (Benefit Ratio)

3) C = Incoming Partner

3) C = Outgoing Partner

4) 2 Cases of Goodwill

4) 1 Case of Goodwill

5) Incoming Partner brings money

5) Outgoing Partner takes money

Goodwill Adjustment
Goodwill is raised (Old Ratio)
Goodwill A/c .. Dr.
To Old Partners Capital A/c
GO (Old)

Goodwill is written off (New Ratio)

New Partners Capital A/c .. Dr.
To Goodwill A/c
NG(New)
Cont.

Goodwill Conti..

Net Effect of the above 2 entries

In Gain Ratio
New Partners Capital A/c.. Dr.
To Retiring Partners Capital A/c
NR (Gain)

Ratios

Old Ratio = Old Partners

New Ratio = New Partners
Gain / Benefit Ratio = New Partners

Old Ratio

Given
Otherwise
Equal among Old Partners

New Ratio

Given
Otherwise
Just Remove the share of Outgoing Partner

Gain Ratio
Same as Old Ratio if Old Ratio and New
Ratio of New Partners is same
Otherwise Formulae

Gain Received = New Ratio Old Ratio

Example of Ratios - Question

Deepika , Ranbir , Aditya are Old Partners - Ratio
3:2:1. Aditya retires

3/6

2/6

1/6

OR
3:2:1

3/5

2/5

NR=3:2
GR=3:2

Time Gap
Partner retires in between the year

Gap between last Balance Sheet and

Date of Retirement.

Retiring Partner is entitled for share in profits

for this Time Gap
Entry P&L Suspense A/c. Dr.
To Retiring Partners Capital A/c

Settlement of Retiring Partners Capital A/c

Credit Side Debit Side

Amount is Payable to Retiring Partner
Either Transfer to Cash / Bank A/c or Retiring
Partners Loan A/c
Question is Silent - Transfer it to his Loan A/c

Practical Problem
Kareena Kapoor, Karishma Kapoor and Deepika were
partners sharing profits in the ratio of 4:3:3:Balance Sheet as on 31st December, 1996
Liabilities

Assets

Sundry Creditors

38,000 Cash at Bank

Bills Payable

10,000 Debtors

Reserve Fund

25,000 Less: R.D.D.

Capital Accounts

6,000
32,000
2,000

Stock

50,000

Motor Van

16,000

Karishma

80,000 Plant and Machinery

Factory Building
60,000

Deepika

49,000

Kareena

2,62,000

30,000

70,000
90,000

Problem no.1 Conti..

Karishma retired on that date on the following terms:1. The Goodwill of the firm to be valued at 30,000 and Karishmas share in it
should be raised.
2. Plant to be depreciated by 10% and Motor van y 12.5%. Stock to be
appreciated by 10% and Building by 20%.
3. One workman Shahrukh was injured and compensation of 6,000 payable
to him is to be recorded in the firms book.
4. Provision for doubtful debts is no longer necessary.
5. Both the partners decided that Goodwill should not appear in the books of
accounts of the firm. The amount payable to Karishma shall be kept as Loan.
Prepare: Capital Accounts of the Partners. Profit and Loss Adjustment
Account, Balance Sheet of Kareena and Deepika.

Solution
Revaluation Account
Particulars

Amt.

Amt. Particulars

To Plant A/c

7,000 By Stock A/c

To Motor Van A/c

2,000 By Building A/c

By R.D.D. A/c

To Compensation

Amt.

Amt.
5,000
18,000
2,000

6,000

Payable A/c
To Partners Capital A/c.
Kareena

4,000

Karishma

3,000

Deepika

3,000

10,000
25,000

25,000

Solution Conti..
Partners Capital Account
Particulars

To Karishmas A/c

Kareena

5,143

To Karishmas Loan

Karishma Deepika Particulars

3,857

79,500

To Balance c/d

55,643

88,857
94,000

79,500

59,500

Karishma Deepika

By Balance b/d

80,000

60,000

49,000

By Reserve Fund

10,000

7,500

7,500

4,000

3,000

3,000

By Revaluation A/c

A/c

Kareena

By Kareena A/c

5,143

By Deepika A/c

3,857

94,000

79,500

Cont.

59,500

Solution Conti..
(After Retirement) Balance Sheet
Liabilities
Partners Capital A/c
Kareena
Deepika
Compensation Payable
Creditors
Bills Payable
Karishmas Loan

Amt.

88,857
55,643

Amt. Assets

1,44,500
6,000
38,000
10,000
79,500
2,78,000

Machinery
Motor Van
Cash
Stock
Building
Debtors

Amt.

Amt.
63,000
14,000
6,000
55,000
1,08,000
32,000

2,78,000

MCQs

MCQ.1
Q.1. X, Y and Z are partners with profits sharing ratio 4:3:2. Y retires and
Goodwill 10,800 shown in books of account. If X and Z shares profits
new ratio in 5:3, then find the gain profit sharing ratio.

a) 13:11
b) 17 : 11
c) 31 : 11
d) 14 : 21

Ans. a)
13:11

MCQ.2
Q.2. The Capitals of X, Y and Z are 1,00,000, 75,000 and 50,000 ,
profits are shared in the ratio of 3:2:1. Y retires on the basis of firm
purchased by other partners in the new ratio between X and Z is 3:1.
Find the capital of X and Z.

a) 1,50,000
and 1,00,000
b) 1,46,250
and 42,000
c) 1,56,250
and 68,750
d) 86,250 and
46,250
Ans. c) 1,56,250 and
68,750

MCQ.3
Q.3. Outgoing partner is compensated for parting with firms future profits
in favour of remaining partners. In what ratio do the remaining partners
contribute to such compensation amount

a) Gaining Ratio
b) Capital Ratio
c) Sacrificing Ratio
d) Profit Sharing Ratio
Ans. a) Gaining Ratio

MCQ.4
Q.4. Claim of the retiring partner is payable in the following
form

a) Fully in cash
b) Fully transferred to loan account to be paid later
with some interest on it
c) Partly in cash and partly as loan repayable later
with agreed interest
d) Any of the above method
Ans. d) Any of the above method

MCQ.5
Q.5. X, Y and Z were partners in a firm sharing profits and losses in the
ratio of 2:2:1 respectively with the capital balance of 50,000 for X and Y,
for Z 25,000. Y declared to retire from the firm and balance in reserve on
the date was 15,000. If goodwill of the firm was valued as 30,000
and profit on revaluation was 7,050, then what amount will be transferred
to the loan account of Y.

a) 70,820
b) 50,820
c) 25,820
d) 60,000
Ans. a) 70,820

MCQ.6
Q.6. Aman , Raman and Sunit are partners sharing profits
and losses in the ratio of 5:4:3. Sunit retires and if Aman
and Raman shares profits of Sunit in 4:3, then new profit
sharing ratio will be :

a) 4 : 3
b) 47 : 37
c) 5 : 4
d) 5 : 3
Ans. b) 47 : 37

MCQ.7
Q.7. X, Y and Z were partners sharing profits and losses in
the ratio of 3:2:1 . X retired Goodwill of the firm is to be
valued at 24,000 & Goodwill Account is to be raised
which is not appearing in the balance sheet. What will be
the treatment for goodwill ?

a) Credited to Revaluation Account at 24,000

b) Credited to partners capital account 24,000
in profit sharing ratio
c) Only Xs capital A/c Credited with 12,000
d) Only Xs capital A/c credited with 24,000.
Ans. b) Credited to partners capital account 24,000 in profit
sharing ratio

MCQ.8
Q.8. X, Y and Z are partners sharing profits in the ratio
2:2:1. On retirement of Y, goodwill was valued as 30,000.
Find the contribution of X and Z to compensate Y.

a) 20,000 and 10,000

b) 8,000 and 4,000
c) They will not contribute anything.
d) Only Xs capital A/c credited with 24,000.
Ans. b) 8,000 and 4,000

MCQ.9
Q.9. A, B and C are partners sharing profits and losses in
he proportion of 1/2, 1/3 and 1/6. B retired and the new
profit sharing ratio between A and C is 3 : 2 and the
Reserve of 12,000 is divided amount the partners in the
ratio:

a) 2,000 : 4,000 : 6,000

b) 5,000 : 5,000 : 2,000
c) 4,000 : 6,000 : 2,000
d) 6,000 : 4,000 : 2,000
Ans. d) 6,000 : 4,000 : 2,000

MCQ.10
Q.10. Retiring or outgoing partner :

a) To be liable for firms liabilities.

b) Not liable for any liabilities of the firm.
c) Is liable for obligation incurred before his
retirement.
d) Is liable for obligations incurred with his
consent only.
Ans. c) Is liable for obligation incurred before his retirement

Lesson Summary
Partner goes out

Accounting Treatment similar to Admission but not same

Gain Ratio / Benefit Ratio = New Ratio of New Partners, Otherwise Gain
Received = New Ratio-Old Ratio

Also Gain Received + Old Ratio = New Ratio

For New Ratio, Just Remove, the share of Outgoing Partner

Time Gap between Balance Sheet date and Date of Retirement - P & L Suspense A/c
Dr.
To Retiring Partners Capital A/c

Settlement = Cash or Loan , If Question Silent then Loan

Thank You