NCERT Book Class 12 Accountancy Reconstitution of a Partnership Firm Retirement Death of a Partner

Reconstitution of a Partnership Firm – Retirement/Death of a Partner

You have learnt that retirement or death of a partner also leads to reconstitution of a partnership firm. On the retirement or death of a partner, the existing partnership deed comes to an end, and in its place, a new partnership deed needs to be framed whereby, the remaining partners continue to do their business on changed terms and conditions. There is not much difference in the accounting treatment at the time of retirement or in the event of death. In both the cases, we are required to determine the sum due to the retiring partner (in case of retirement) and to the legal representatives (in case of deceased partner) after making necessary adjustments in respect of goodwill, revaluation of a assets and liabilities and transfer of accumulated profits and losses. In addition, we may also have to compute the new profit sharing’s ratio among the remaining partners and so also their gaining ratio, This covers all these aspects in detail.

4.1 Ascertaining the Amount Due to Retiring/ Deceased Partner

The sum due to the retiring partner (in case of retirement) and to the legal representatives/ executors (in case of death) includes:

(i) credit balance of his capital account;

(ii) credit balance of his current account(if any);

(iii) his share of goodwill ;

(iv) his share of accumulated profits (reserves);

(v) his share in the gain of revaluation of assets and liabilities;

(vi) his share of profits up to the date of retirement/death;

(vii) interest on his capital, if involved, up to the date of retirement/death; and

(viii) salary/commission, if any, due to him up to the date of retirement/death.

The following deductions, if any, may have to be made from his share:

(i) debit balance of his current account(if any);

(ii) his share of goodwill to be written off; if necessary;

(iii) his share of accumulated losses;

(iv) his share of loss on revaluation of assets and liabilities;

(v) his share of loss up to the date of retirement/death;

(vi) his drawings up to the date of retirement/death;

(vii) interest on drawings, if involved, up to the date of retirement/death.

Thus, as in the case of admission, the various accounting aspects involved on retirement or death of a partner are as follows:

1. Ascertainment of new profit sharing ratio and gaining ratio;

2. Treatment of goodwill;

3. Revaluation of assets and liabilities;

4. Adjustment in respect of unrecorded assets and liabilities;

5. Distribution of accumulated profits and losses;

6. Ascertainment of share of profit or loss up to the date of retirement/death;

7. Adjustment of capital, if required;

8. Settlement of the amounts due to retired/deceased partner;

4.2 New Profit Sharing Ratio

New profit sharing ratio is the ratio in which the remaining partners will share future profits after the retirement or death of any partner. The new share of each of the remaining partner will consist of his own share in the firm plus the share acquired from the retiring /deceased partner. Consider the following situations :

(a) normally, the continuing partners acquire the share of retiring or deceased partners in the old profit sharing ratio, and there is no need to compute the new profit sharing ratio among them, as it will be same as the old profit sharing ratio among them. In fact, in the absence of any information regarding profit sharing ratio in which the remaining partners acquire the share of retiring/deceased partner, it is assumed that they will acquire it in the old profit sharing ratio and so share the future profits in their old ratio. For example, Asha, Deepti and Nisha are partners in a firm sharing profits and losses in the ratio of 3:2:1. If Deepti retires, the new profit sharing ratio between Asha and Nisha will be 3:1, unless they decide otherwise.

(b) The continuing partners may acquire the share in the profits of the retiring/deceased partner in a proportion other than their old ratio, In that case, there is need to compute the new profit sharing ratio among them,and it will be equal to sum total of their respective old share and the share acquired from the retiring/deceased partner. For example: Naveen, Suresh and Tarun are partners sharing profits and losses in the ratio of 5:3:2. Suresh retires from the firm and his share was required by Naveen and Tarun in the ratio 2:1. In such a case, the new share of profit will be calculated as follows:

Question for Practice

Short Answer Questions

1. What are the different ways in which a partner can retire from the firm.

2. Write the various matters that need adjustments at the time of retirement of a partners.

3. Distinguish between sacrificing ratio and gaining tab. 218 Accountancy – Not-for-Profit Organisation and Partnership Accounts 

4. Why do firm revaluate assets and reassers their liabilities on retirement or on the event of death of a partner.

5. Why a retiring/deceased partner is entitled to a share of goodwill of the firm.

Long Answer Questions

1. Explain the modes of payment to a retiring partner.

2. How will you compute the amount payable to a deceased partner?

3. Explain the treatment of goodwill at the time of retirement or on the event of death of a partner?

4. Discuss the various methods of computing the share in profits in the event of death of a partners.

Please refer to attached file for NCERT Class 12 Accountancy Reconstitution of a Partnership Firm Retirement Death of  a Partner