Retirement of a Partner -:
According
to Section 32(1) of the Indian Partnership Act, a partner may retire:
(a)
with the consent
of all the partners;
(b)
in accordance
with an express agreement by the partners;
(c)
where the
partnership is at will, by giving notice in writing to all the other partners
of his intention to retire.
A partner may retire from the partnership firm because of
old age, illness, etc. But the partnership firm may not come to an end by one
of the partner’s retire, other partners may continue to run the business of the
firm. Readjustment take place in case of retirement of a partner likewise the
case of admission of a partner.
Gaining Ratio -:
On retirement of a partner, the continuing partners will
gain in terms of profit sharing ratio.Example -: Vivek, Karan and Virat were sharing profit &
lo0sses in the ratio of 5:4:6 and virat retires, than vivek & karan have to
decide at which ratio they will share profit and losses in future at the ratio
of 3:2.
Vivek gains -: 3/5 – 5/15
= 4/15
Karan gains -: 2/5 - 4/15 =
2/15
So
gaining ratio between Vivek & Karan is 4:2.
If vivek & Karan decide to continue at the ratio of 5:4 this
indicates that they are dividing the gained share in the previous profit
sharing ratio.
Revalue Assets & Liabilities on Retirement of a
Partner -:
When a partner retire, it is require to revalue
assets and liabilities as it is at admission of partner. If there is profit
then such profit should be distributed amongst the existing partner including
the retiring partner at the exiting profit sharing ratio. If there is loss then
such loss should be distributed amongst the existing partner including the retiring
partner at the exiting profit sharing ratio.
Profit or loss on revaluation of assets & liabilities, a Revaluation
A/c or Profit and Loss Adjustment A/c is
open and this A/c is closed automatically
by transfer of profit and loss balance
to the partner’s capital a/c.
When
decided that revalued amounts of assets & liabilities will not appear in
the balance sheet of the continuing partners then a journal entry should be
passed with the amount payable or chargeable to the retiring partners which the
continuing partners will share at the ratio of gain.
1.
For Profit on
Revaluation –:
Revaluation a/c Dr
To Partners capital A/c
2. For loss on Revaluation-:
Partner’s Capital
A/c Dr.
To
Revaluation A/c
Reserve -:
1.
On the retirement of a partner, any
undistributed profit or reserve standing at the balance sheet is to be credited
to the partners capital A/c in the
exiting profit sharing ratio.
Reserve a/c Dr
To Partners
capital A/c
2.
Alternatively, only the retiring partner share
may be transferred to his capital a/c if the others continue at the same profit
sharing ratio.
Reserve a/c Dr
To Retiring Partner
capital A/c
3.
Alternative, if the continuing partners want to
show reserve in the balance sheet.
Continue partner’s capital
a/c Dr
To Retiring
Partner capital A/c
Final Payment to a Retiring Partner -:
1. Transfer
of reserve 2. Transfer of goodwill
3. Transfer of profit and loss on revaluation
After adjustment of the above
mentioned item, the capital A/c balance standing to the credit of the retiring
partner represents amount to be paid to him.
- When continuing partners my discharge the whole claim at the time of retirement.
To Bank A/c
- When retiring partner agree to retain some portion of his claim in the partnership as loan
To Retiring Partner Loan A/c
To Bank A/c
Paying
a Partner’s Loan in Installment -:
In this the loan amount should be
divide into equal parts. The interest for the period should be calculated and
the payment should consist of the installment on account of the loan +interest
for the period.
Payment of Retiring Partners Interest
-:
The amount
due to the retiring partner can be paid as per the terms of the partnership
agreement. In case the terms of the agreement are silent, the payment may be
made as mutually agreed. The payment can be made by any of the following
methods:
(i) Lump Sum Payment
Method: If the firm has adequate funds, the amount due to the retired partner may be paid forthwith. His
Capital Account will be debited and Bank will be credited.
(j) Installment
Payment Method: In order to avoid financial difficulties, a part or full payment
due to the retired partner, may be deferred, In this case, the balance of his
Capital Account will be transferred to his Loan Account which will be credited
periodically with interest at the agreed rate on the outstanding balance and
debited with payment on account until the balance is extinguished. The
arrangement of installments may take the following two forms.
a.
Decreasing
Payment Method: In this method,
the total amount due is divided in a number of equal installments and the installment amount plus interest on
the outstanding balance is paid out.
b.
Equal Payment
Method: In this method, the total amount to be
paid is divided in a number of equal
installments in such a way that the amount after including interest on the
outstanding balance is always equal.
