Reconstitution of a Partnership Firm – Retirement/Death of a Partner
Class 12 Accountancy · Accountancy Part I · Chapter 3
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Summary
The retirement or death of a partner also reconstitutes the firm: the existing partnership deed ends, and the remaining partners continue under new terms. The accounting treatment is broadly the same in both cases and centres on ascertaining the amount due to the retiring partner or to the legal representatives of a deceased partner. This sum includes the credit balance of the partner's capital and current accounts, the share of goodwill, the share of accumulated profits and reserves, the share in the gain on revaluation of assets and liabilities, the share of profit up to the date of retirement or death, and any interest on capital or salary due. From this, deductions such as drawings, interest on drawings, the share of any loss and the share of revaluation loss are made. The remaining partners gain a part of the profit share, so the new profit-sharing ratio and gaining ratio are calculated, and the retiring partner is compensated for goodwill through the gaining partners in their gaining ratio. Assets and liabilities are revalued and accumulated reserves distributed in the old ratio. The amount finally payable to a retiring partner may be paid in cash or transferred to a loan account, while the share due on death is transferred to the executor's account. The chapter ends with the preparation of the balance sheet of the reconstituted firm.
Amount due to retiring or deceased partnerNew ratio and gaining ratioTreatment of goodwill on retirement and deathRevaluation and distribution of reservesLoan account and executor's account
Key terms
Retirement of a Partner
A partner leaving the firm, ending the existing partnership while the remaining partners continue the business.
Gaining Ratio
The ratio in which the continuing partners acquire the share of profit given up by the retiring or deceased partner.
Executor's Account
The account to which the amount due to a deceased partner is transferred for payment to the legal representatives.
Revaluation of Assets and Liabilities
Recording the changes in the values of assets and liabilities so that gains or losses up to the date of retirement or death belong to all old partners.
Retiring Partner's Loan Account
An account opened when the amount due to a retiring partner is not paid immediately but carried as a loan with interest.
Share of Goodwill
The retiring or deceased partner's portion of the firm's goodwill, compensated by the gaining partners in their gaining ratio.
Extra questions & answers
Try one from this chapter
On the retirement of a partner, the gaining ratio is calculated as: