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Retirement or Death of a Partner

Adjustment made on Retirement or Death of Partner:

(1) Change in profit-sharing ratio.

(2) Treatment of Goodwill.
(3) Revaluation & reassessment among assets & liabilities.
(4) Adjustment in accumulated profit, reserve & accumulated losses.
(5) Adjustment in Capital (if required).
(6) Calculation of Amount Payable to Executor of Deceased Partner(only in the case of death of
a partner)

(1) Change in profit-sharing ratio & gaining ratio:

When any partner retires or dies, the whole profit is to be distributed among the remaining partner
in new profit sharing ratio. Share of old partner is distributed among the old partner in the gaining
ratio. There are some types to calculate new profit sharing ratio and gaining ratio:

(2) Treatment of Goodwill:

When a partner retires or dies, his share of profits is taken by the remaining partners for which they
should compensate the retiring or deceased partner. In other words, the retiring or deceased
partner is entitled to his share of goodwill at the time of retirement/death. They get this share
because the goodwill has been earned by the firm at the time when he was a partner.

AS – 10 prescribes that goodwill be recorded in the books only when consideration in money or
money worth has been paid for it. Thus, in case of admission or retirement or death of a partner or
in case of change in profit sharing ratio, goodwill should not be raised in the books.

(1) If goodwill is appearing in Balance Sheet:

Old Partners Capital A/c Dr. *If goodwill is appearing in balance sheet then it
To Goodwill A/c should be write off among old partner in old
ratio.

(2) Compensate outgoing partner (retiring or deceased) in form of share in goodwill:

Gaining Partners Cap. A/c Dr. Remaining ( gaining ) partner compensating to

To Retiring / Deceased Partners A/c retiring, deceased or Sacrificing partner
To Sacrificing Partner Cap. A/c

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(1) Revaluation & Reassessment among Assets & Liabilities:

Transaction Journal Entries

For increase in Assets Assets A/c Dr.

To Revaluation

For decrease in Assets Revaluation A/c Dr.

To Assets

For increase in Liability Revaluation A/c Dr.

To Liability A/c

For decrease in Liability Liability A/c Dr.

To Revaluation A/c

For unrecorded Assets Assets A/c Dr.

To Revaluation A/c

For unrecorded Liability Revaluation A/c Dr.

To Liability A/c

Dr. Revaluation Account Cr.

Particulars Amount Particulars Amount

To ↑ in Liability XXX By ↑ in Assets XXX
To ↓ in Assets XXX By ↓ in Liability XXX
To unrecorded Liability XXX By unrecorded Assets XXX
To Profit tfd. to: By Loss tfd. to:
A’s Capital A/c XXX A’s Capital A/c XXX
B’s Capital A/c XXX XXX B’s Capital A/c XXX XXX

XXX XXX

(4) Adjustment in Accumulated Profit, General Reserve and Accumulated Losses:

In case of reconstitution in partnership firm, we should distribute Accumulated Profit, General

Reserve and Accumulated Losses among partner of old partnership firm.

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Accounting Treatment of Accumulated Profit, General Reserve and Accumulated Losses:

Transaction Journal Entry

For Accumulated Profit Accumulated Profit A/c Dr.

P&L A/c Dr.
To Partner Capital A/c

For General Reserve General Reserve A/c Dr.

To Partner Capital A/c

For Accumulated Losses: Partner Capital A/c Dr.

To Accumulated Loss A/c
To P&L A/c

(5) Adjustment in Capital:

(I) When total capital of new partnership firm is given:

For this the following steps are necessary:

Step (1) Calculate the new profit sharing ratio.

Step (2) Divide capital of the firm among remaining partner in new profit sharing
ratio.

Step (3) Find surplus or deficiency in capital of remaining partner.

(II) When total capital of new partnership firm is not given:

For this the following steps are necessary:

Step (1) Calculate the new profit sharing ratio.

Step(2) Calculate the Capital of old partner after all adjustment such as treatment of
goodwill, accumulated profit or loss etc.

Step (3) Determine total capital of new firm:

Total Capital of new firm = Sum of Capital of all Partner including retiring/ deceased partner

Step (4) Determine capital of remaining partner:

Capital of remaining partner = total capital of new firm X share of remaining partner.

Step (5) Find surplus or deficiency in capital of remaining partner.

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DEATH OF A PARTNER
When a partner dies, his heirs are entitled to all the rights which a relating partner has. The
representative / heirs of deceased partner are entitled to the following.

(i) Capital to the credit of Partner.

(ii) Share in Goodwill.
(iii) Share in General Reserve, Profit & Loss.
(iv) Interest on Capital, Salary, Profit up to the date of his death.
(v) Share in Joint Life Policy.

Dr. Deceased Partner Capital A/c Cr.

Particulars Amt. Particulars Amt.
To Drawing A/c xxx By Bal. B/d xxx
To Int. on Drawing xxx By Gain. Part. Cap. A/c xxx
To Revaluation A/c (Loss) xxx ( for share in goodwill )
To Goodwill A/c (written off ) xxx By General Reserve A/c xxx
To Executor of Deceased Partner xxx By Profit & Loss A/c xxx
(Bal. Fig.) By Interest on Capital A/c xxx
By Salary A/c xxx
By P&L Suspense A/c xxx
By Joint Life Policy A/c xxx
By Revaluation A/c (Profit) xxx

xxxx xxxx

Dr. Executor of Deceased Partner A/c Cr.

Particulars Amt. Particulars Amt.
To Bank A/c (immediately paid) xxx By Deceased Partner Capital A/c xxx
To Bank A/c (1st instalment) xxx By Interest A/c (int. on 1st instalment) xxx
To Balance c/d xxx

xxxx

Calculation of Profit of a Deceased partner:

(1) On Time Basis (2) On Turnover Basis

(1) On Time Basis

(a) Average Profit Method

For example: A, B, and C are partner sharing profit and losses in the ratio of 3:2:1 respectively. B
died 3 months after the last balance sheet. Calculate B’s share in profit on the basis of average profit
method. The profits of last 4 years are:
1st yr Rs.20, 000; 2nd yr Rs.25, 000; 3rd yr Rs.30, 000; 4th yr Rs.25, 000.

Answer: Average Profit = 20, 000 + 25, 000 + 30, 000 + 25, 000
4

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= 1, 00,000
4
= 25, 000
C’s share in profit for 3 months = 25, 000 X 3 X 2
12 6
= Rs. 2,083

(b) Last year’s profit Method

For example: A, B, and C are partner sharing profit and losses in the ratio of 3:2:1 respectively. B
died 3 months after the last balance sheet. Calculate B’s share in profit on the basis of last year’s
profit method. The profit of last year’s was Rs. 30, 000 respectively.

Answer: C’s share in profit for 3 months = 30, 000 X 3 X 2

12 6
= Rs. 2,500

(2) On Turnover Basis

For example: A, B, and C are partner sharing profit and losses in the ratio of 3:2:1 respectively. B
died 3 months after the last balance sheet. Calculate B’s share in profit on Turnover Method if
turnover of last year is Rs. 1, 00,000 and profit Rs. 25, 000 respectively.
Turnover for 3 months is Rs. 33, 000.

Answer: % of profit for previous year = Profit X 100

Turnover
= 25, 000 X 100
1, 00,000
= 25 %
Profit for 3 month = 33, 000 X 25
100
= Rs. 8,250
C’s share in profit for 3 months = 8,250 X 2
6
= Rs. 2,750

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