Table of Contents

Retirement of a partner

Retirement of a partner?

The retirement of a Partner means leaving the firm by a partner.
Or
Retirement of a partner means ceasing to be a partner of the firm.
Or
When one or more partners leave the firm and the remaining partners continue to do the business of the firm, it is known as the retirement of a partner.
According to section 32(1) of the Indian Partnership Act, 1932: A partner may retire in any of the following ways:
1. With the consent of all the partners.
2. If there is an agreement among the partners about retirement.
3. Where the partnership is at will, by giving notice in writing to all the other partners of his intention to retire.

Due to retirement, the existing partnership comes to an end and the remaining partners form a new agreement and the partnership firm is reconstituted with new terms and conditions.

Reasons for the retirement of a partner:

1. Strained relations among the partners.
2. Due to the old age of the partner.
3. Due to ill health of the partner.
4. Due to the permanent residence of a partnership in a city other than one.
5. For any other reason.

The amount due to the retiring partner:

The amount due to the retiring partner is paid according to the terms of partnership agreement. The retiring partners’ claim consists of:

1. Credit Balance of his capital account.
2. Credit Balance of his current account (if any).
3. Share of Goodwill. (To be given by gaining partners)
4. Share of Reserves or Undistributed Profits.
5. His share in the profit on revaluation of assets and reassessment of liabilities.
6. If retirement is during the year, the retiring partner will be given. Share in profits up to the date of retirement.
7. Interest on capital if involved.
8. Salary and other remuneration if any up to the date of Retirement.
Deductions from the above Sum (To be Debited to the Capital Account)
1. Debit balance of his current account (if any)
2. Share of existing Goodwill to be written off.
3. Share of Accumulated loss.
4. Drawings and interest on drawings (if any).
5. Share of loss on revaluation of assets and reassessment of liabilities.
6. His share of business loss up to the date of Retirement/Death (To P & L suspense A/c)

The adjustments are required to be made on the retirement of a partner:

The following adjustments are required to be made on the retirement of a partner

(a) Calculation of New profit sharing ratio and gaining ratio.
(b) Accounting Treatment of Goodwill.
(c) Revaluation of assets and reassessment of liabilities(preparation of Revaluation account)
(d) Accounting Treatment of reserve and accumulated profits.
(e)Accounting Treatment of Loss and Advertisement suspense.
(f) Ascertainment of share of profit/loss till the date of retirement.
(g) Adjustment of capital if required.
(h) Settlement of retiring partners dues.

Settlement of retiring partners dues:

(i) If the amount is paid in cash or cheque immediately:

Retiring Partner’s Capital A/c ….Dr.
To Cash/BankA/c
(Amount paid in cash)
(ii) If the amount is not paid in cash, the due amount is transferred to the retiring partner’s loan Account:
Retiring Partner’s Capital A/c ….Dr.
To Retiring Partner’s Loan A/c
(Due amount transferred to the retiring partner’s loan Account)

If the Retiring Partner is not paid fully at the time of Retirement:
In the absence of any agreement, Section 37 of the Indian Partnership Act, 1932 is applicable, which states that the outgoing partner has an option to receive
1. Either Interest @ 6% till the date of payment
2. Such share of Profits which has been earned with his/her money.

Points to remember –
1. When the question is silent about the amount payable to the retiring partner, then the whole amount payable is transferred to his/her loan account.
2. Goodwill already appeared in the books must be written off in old Profit Sharing Ratio.
5. All accumulated profits and reserves and all accumulated losses are to be distributed among old partners in their old Profit Sharing Ratio.
6. In the case of specific fund, like investment fluctuation fund, market value of the investment must be considered.
For workmen’s compensation fund, actual liabilities must be considered (to be deducted from fund).
7. Revaluation profit/loss is to be distributed in old Profit Sharing Ratio.