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 Ratio’s.

(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

Not Same • Similar to Admission of Partner

Information given

• 1. Balance Sheet of Old Firm • 2. Adjustments

To Prepare

• 1. Revaluation A/c • 2. Partner’s 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 Partner’s Capital A/c GO (Old)

Goodwill is written off (New Ratio) New Partner’s Capital A/c ….. Dr. To Goodwill A/c NG(New)

Cont….

Goodwill Conti..

Net Effect of the above 2 entries In Gain Ratio

New Partner’s Capital A/c….. Dr. To Retiring Partner’s 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

D 3/6

3/5

R 2/6

2/5

A 1/6

x

OR 3:2:1

NR=3:2

GR=3:2

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

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 Partner’s Capital A/c

Settlement of Retiring Partner’s Capital A/c

Credit Side – Debit Side

Amount is Payable to Retiring Partner

Either Transfer to Cash / Bank A/c or Retiring Partner’s 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 31 st December, 1996 Liabilities Assets

Sundry Creditors

Bills Payable

Reserve Fund

Capital Accounts

Kareena

Karishma

Deepika

38,000

10,000

25,000

80,000

60,000

49,000

Cash at Bank

Debtors 32,000 Less: R.D.D. 2,000

Stock

Motor Van

Plant and Machinery

Factory Building

6,000

30,000

50,000

16,000

70,000

90,000

2,62,000 2,62,000

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 Karishma’s 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 firm’s 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 Amt. Amt.

To Plant A/c

To Motor Van A/c

To Compensation

Payable A/c

To Partners Capital A/c.

Kareena

Karishma

Deepika

4,000

3,000

3,000

7,000

2,000

6,000

10,000

By Stock A/c

By Building A/c

By R.D.D. A/c

5,000

18,000

2,000

25,000 25,000

Solution Conti..

Cont.……

Partners Capital Account

Particulars Kareena Karishma Deepika Particulars Kareena Karishma Deepika

To Karishma’s A/c

To Karishma’s Loan

A/c

To Balance c/d

5,143

88,857

-

79,500

-

3,857

55,643

By Balance b/d

By Reserve Fund

By Revaluation A/c

By Kareena A/c

By Deepika A/c

80,000

10,000

4,000

60,000

7,500

3,000

5,143

3,857

49,000

7,500

3,000

94,000 79,500 59,500 94,000 79,500 59,500

-

-

- -

Solution Conti..

(After Retirement) Balance Sheet

Liabilities Amt. Amt. Assets Amt. Amt.

Partner’s Capital A/c Kareena Deepika Compensation Payable Creditors Bills Payable Karishma’s Loan

88,857 55,643 1,44,500

6,000 38,000 10,000 79,500

Machinery Motor Van Cash Stock Building Debtors

63,000 14,000 6,000

55,000 1,08,000

32,000

2,78,000 2,78,000

MCQ’s

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 firm’s 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 X’s capital A/c Credited with ₹12,000

d) Only X’s 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 X’s 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 firm’s 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 Partner’s Capital A/c

Settlement = Cash or Loan , If Question Silent then Loan

Thank You