Partnership: Retirement/Death of a Partner
TABLE OF CONTENTS
 

Q.1. What adjustments are required to be made at the time of retirement of a partner?

Answer: The following adjustments are made at the time of retirement of a partner:

  1. Calculations of New Profit Sharing Ratio and Gaining Ratio of remaining partners.
  2. Distribution of Reserves and Undistributed Profits/Losses.
  3. Revaluation of Assets and Liabilities.
  4. Treatment of Goodwill.
  5. Calculation of amount payable to retiring partner.
  6. Adjustment of Capital.

Q.2. Distinguish between sacrificing ratio and gaining ratio.

Answer.

Basis of Difference

Sacrificing Ratio

Gaining Ratio

1. Meaning

Sacrificing Ratio is a ratio in which the old partners have agreed to surrender their share of profit in favour of new partner.

Gaining Ratio is a ratio in which remaining partners’ gain the retiring partner’s share.

2. Objective

The main purpose to calculate the sacrificing ratio is to ascertain the compensation to be paid by incoming partner to the sacrificing partner’s in the form of goodwill.

The main purpose to calculate the gaining ratio is to find out the compensation to be paid by the gaining partner’s to the retiring partner.

3. When to Calculate

Sacrificing Ratio is calculated at the time of admission of a new partner.

Gaining Ratio is calculated at the time of retirement of a partner.

4. Method

Sacrificing Ratio = Old Ratio – New Ratio

Gaining Ratio = New Ratio – Old Ratio



Q.3. Discuss the accounting treatment of Goodwill at the time of retirement of a partner.

Answer: The accounting treatment of goodwill at the time of retirement is as follows:

  1. Calculate retiring partner’s share of Goodwill.
  2. Calculate gaining ratio of remaining partners.
  3. Pass an adjusting entry in the following manner:

Remaining Partner’s Capital A/c Dr.

To Retiring Partner’s Capital A/c

Condition: No goodwill should already appear in the books. In case goodwill already appears in the books it should be written off in old ratio. Entry will be:

All (Old) Partners Capital A/c Dr.

To Goodwill A/c

Example: A, B and C are partners sharing profits in the ratio of 4:3:2. B retires and Goodwill of the firm is valued on that date Rs. 27,000. Pass necessary journal entries when goodwill already appears in the books at Rs. 9,000.

Solution.

Journal

Date

Particulars

L.F.

Dr.

Rs.

Cr.

Rs.

 

A’s Capital A/c Dr.

 

6,000

 
 

C’s Capital A/c Dr.

 

3,000

 
 

To B’s Capital A/c

   

9,000

 

(For B’s share of goodwill credited to him by A and C in gaining ratio of 2:1)

     
 

A’s Capital A/c Dr.

 

4,000

 
 

B’s Capital A/c Dr.

 

3,000

 
 

C’s Capital A/c Dr.

 

2,000

 
 

To Goodwill A/c

   

9,000

 

(For existing goodwill in the books written off in old ratio)

     

Workings:

  1. B’s share of goodwill = 3/9 x Rs. 27,000 = Rs. 9,000.
  2. Gaining Ratio of A and C is 4:2 i.e. 2:1.

 

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