Accounting of Partnership Firm-Retirement & Death of Partner

About Accounting of Partnership Firm-Retirement & Death of Partner

Partnership accounting deals with preparation of profit and loss account, balance sheet, capital account of the partnership firm.

Profits and losses of partnership firm are shared between all the partners as per predetermined rates mentioned in partnership deed.

There may be retirement of a partner due to multiple reasons. These reason may be dispute with existing partners, starting of new venture independent by retiring partner, due to ill health, due to lack of interest, due to age factor etc.

Once partner got retired partnership firm continues with existing partners. Whenever partner retires continuing partners make gain in term of their profit sharing ratio.

Example : if old ratio of three partners is 3:2:1 and if third partner retires existing partner’s ratio will be 3:2. Thus earlier, first partner used to get 3/6th share of the profit which now he will get 3/5th share and will thus gain as denominator is less. Same will happen to 2nd partner as well. As earlier ratio was 2/6 and new ratio after retirement will be 2/5.

Once partner got retired remaining partners arrange for amount to be paid to discharge the claims of retiring partner. Assets and liabilities are revalued, value of goodwill is calculated, Revaluation profit and loss is then calculated and transferred to all existing partners including retiring partner in their existing profit sharing ratio. This amount is then transferred to partner capital account and at the end their balances are settled .

Goodwill of retiring partner is transferred to continuing partners in their gain ratio.

This lecture also includes accounting related to partnership firm when partner is died.

All these concepts are learnt in this series.