This GSEB Class 12 Commerce Accounts Notes Part 1 Chapter 6 Retirement / Death of a Partner covers all the important topics and concepts as mentioned in the chapter.
Retirement / Death of a Partner Class 12 GSEB Notes
In the continuing business/firm, due to any reason, like physical or mental illness, dispute with other partners of firm or if partner wants to retire or partner dies, then as per Indian Partnership Act 1932, the partnership ends but the firm is not dissolved. For the reconstitution of partnership necessary accounting treatment of retirement are required to be given in the books of the firm which we will study in this chapter.
1. Circumstances of Retirement of a Partner:
The circumstances of retirement of a partner can be divided into two partns:
- As per Indian Partnership Act.
- Voluntary Retirement of a partner due to his personal reasons.
2. Accounting aspects arising at the time of Retirement of a Partner:
1. Calculation of New Profit-Loss Sharing Ratio and Gaining Ratio:
Due to the retirement or death of a partner, his profit share is distributed among the remaining partners. Therefor it is necessary to calculate the new profit-loss sharing ratio and gaining ratio of continuing partners.
- When the ratio in which the retiring partners’ share is to be distributed among the continuing partners is not given then old ratio of contining partners becomes their new ratio by eleminating retiring partners’ share and same will be a applying in gaining ratio.
- When gaining share of continuing partners is given out of the retiring partners’ share then New profit and loss sharing ratio = Old share + Gain
- When gaining ratio of continuing partners is given out of the retiring partners’ share then gaining share of continuing partner = Share of the retiring partner x Gaining share given to the respective partners. Then New profit and loss ratio = Old share + Gain.
- When old and new profit and loss sharing ratios are given then, Gain of continuing partner = New share – Old share
2. Accounting Treatment of Goodwill:
Because of the death or retirement of a partner the continuing partners’ receive profit and loss share of the retiring or deceased partner. To compensation this gain in profit, continuing partners give the retiring partner his share of goodwill of the firm.
Following points should be considered while giving accounting effects of goodwill.
(i) Goodwill appearing in the balance sheet of the old firm, it will be written off in old profit and loss sharing ratio among all the partners including the deceased or retiring partner, then following entry will be passed:
|All partners’ capital/current A/c Dr.
To Goodwill A/c
(ii) Retiring of deceased partner is given his share of goodwill to continuing partners in their gaining ratio then following entry will be passed:
|Continuing partners’ capital/current A/c Dr.
To Retiring/Deceased partners capital A/c
3. Revaluation of Assets and Liabilities:
At the time of retirement or death of a partner, to record the accounting effects of revaluation of assets and liabilities of a firm, revaluation account is prepared in the books of the firm same as chapter-5. Net profit or loss of Revaluation account is distributed among all the partners in their old profit sharing ratio in their capital/cuurent account.
4. Distribution of Reserves and Accumulated Profit – Losses:
Balances of reserves, undistributed profit or loss and balances of deferred revenue expanditure on the date of retirement or death Eire distributed among all the partners including retiring or deceased partners in their old profit-loss sharing ratio.
5. Determination of amount payable to the Retiring Partner:
Amount payable to the retiring or deceased partner is decided by preparing his capital account. The balance obtained by closing the retiring partners’ capital account is the amount payable to the retiring partner. The amount payable to the retiring partner is paid in cash fully or partly and balance of the unpaid amount is transferred to his loan account, for which following entry will be done:
|Retiring partners’ capital A/c Dr.
To Cash A/c
To Retiring partners’ loan A/c
If a partner died and the amount payable to him is first transferred to his executor then following entry will be passed:
|Deceased partners’ capital A/c Dr.
To Deceased partners’ executor’s A/c
6. Profit share of the Deceased Partner:
Retired or Deseased partner is entitled to receive his share in profit of the firm from the beginning of the year to the date of death or retirement. Therefore his share in profit is calculated on the basis of the past profit or sales as follows:
- On the basis of last years profit
- On the basis of average profit of past few years
- On the basis of previous years sales and profit.
3. Necessary particulars to be prepared at the time of Retirement or Death of a Continuing Partner of a Firm:
- Revaluation Account.
- Capital Accounts of the partners
- Current Accounts of the partners.
- Cash/Bank Account
- Executor’s account of deceased partner
- Balance Sheet after Retirement of a Partner.