HOW TO CALCULATE NEW PROFIT SHARING RATIO:

CASE I- If the new Profit sharing ratio of the remaining partners are not given in the question, it is
assumed that the remaining partners continue to share profits and losses in the old ratio.
1 New ratio of the remaining partners will be calculated by sticking out the share of the retiring
partner.
2 For instance if A, B and C are partner and their ratio is X : Y : Z. B retires. New ratio between A and C
will be X : Z.

CASE II- Sometimes the remaining partners purchase the share of retiring partner in some specified
proportions. In such cases the fraction of shares purchased by them is added to their old share and
the new ratio is calculated.

1 Calculate Purchased = Retiring Partner share X Purchase (Separately of each partner)

share fraction/Ratio
2 Calculate New PSR =Share of old Partner’s + Purchased Share (Separately of each partner)

3 The Purchase ratio so given is a Gaining Ratio.

Treatment of Goodwill:

At the time of retirement or death of a partner, his share of profit is taken by the continuing partners.
The continuing partners then compensate the retiring or deceased partner in the form of goodwill
contributed in their gaining ratio:
Gaining Partner’s Capital/Current A/c Dr. xxx
To Retiring Partner’s Capital/Current A/c xxx

When goodwill is already appearing in the books:

Old Partner’s Capital/Current A/c Dr. xxx
To Goodwill A/c xxx

Adjustment of Capital: The capital of the continuing partners may be required to be adjusted in the
following cases:

Case I When the total capital of the new firm is given

Step I Calculate the adjusted old capitals of continuing partners(i.e. after all other adjustment)
Step II Calculate the new Capitals of continuing partner
Step III Calculate the surplus/ deficit capital by comparing Step II and Step I

Case II When the total capital of the new firm is not given
Step I Calculate the adjusted old capitals of continuing partners(i.e. after all partners adjustment)
Step II Calculate total Capitals of new firm

Step III Calculate the new Capitals of continuing partner

Step IV Calculate the surplus/ deficit capital by comparing Step II and Step III
Case III When the outgoing partner is to be paid through cash brought by the continuing partner in
such a way as to make their capitals proportionate to their new profit sharing ratio
Step I Calculate the adjusted old capitals of continuing partners(i.e. after all other adjustment)
Step II Calculate total Capitals of new firm
Step III Calculate the new Capitals of continuing partner

Accounting Treatment of Settlement of the amount due to the retiring partner:

(i) If the amount is paid in lumpsum
Retiring Partner’s Capital A/c Dr.
To Cash/Bank A/c
(ii) (a)In case the amount is paid in installments
Retiring Partner’s Capital A/c Dr.
To Retiring Partner’s Loan A/c
(b)On interest being provided
Interest on Loan A/c Dr.
To Retiring Partner’s Loan A/c
(c)On payment of installment with interest
Retiring Partner’s Loan A/c Dr.
To Cash/ Bank A/c
(iii) If payment is partly paid in cash and the remaining amount is to be treated as loan
Retiring Partner’s Capital A/c Dr.
To Cash/ Bank A/c
To Retiring Partner’s Loan A/c

Dr. PARTNERS CAPITAL ACCOUNTS Cr.

Particulars A B C Particulars A B C
To Balance b/d X X X By Balance b/d X X X
(Opening balance-Debit) (Opening balance)
To Undistributed Losses A/c X X X By Undistributed X X X
To Revaluation A/c(loss) Reserves/Profits A/c
To Assets A/c(if assets By Revaluation A/c(Profit) X X X
takeover) X X X By Gaining Partner’s Capital A/c - - X
To Balance c/d X X - (Paid to Retiring Partner)
(Closing Balance- if Cr. By Balance c/d X X -
Balance is in excess of Dr. (Closing Balance-if Dr. Balance X X -
Balance) is in excess of Cr. Balance)
To Cash/Bank A/c(if any sum X
paid to the retiring partner)
To Bills Payable A/c (if bill has X
been accepted by the retiring
partner)
To C’s Loan A/c(Bal. fig) X
Dr. C’s Loan A/c Cr.
Date Particulars Amount Date Particulars Amount
To Balance c/d x By C’s Capital A/c x
To Cash/ Bank A/c X By Balance b/d X
(Principle + Interest) By Interest A/c(on x
To Balance c/d X outstanding balance)
X X
Note: if nothing is mentioned in the question about the payment of the amount due to retiring
partner, it will be transferred to Retiring Partner’s Loan Account.
Calculation of share of profit upto the Date of Death. Following are the two Methods:

1. On the basis of time

a. On the basis of last year profit
b. On the basis of average profit

month
= Previous year profit or Average profit X X Deceased partner’s share
12

2. On the basis of turnover (or sales)

sale till death

= Previous year profit or Average profit X X Deceased partner’s share
Last year sale

In Case of Through Capital Transfer Through Profit and Loss Suspense A/c
Profit Gaining Partner’s Capital A/c s Dr. Profit and Loss suspense a/c * Dr
To Deceased Partner’s Capital A/c To Deceased Partner’s Capital A/c
Loss Deceased Partner’s Capital A/c s Dr. Deceased Partner’s Capital A/c Dr.
To Gaining Partner’s Capital A/c s To Profit and Loss suspense a/c **
* Profit and Loss suspense a/c will be shown in the Assets side of Balance Sheet
** Profit and Loss suspense a/c will be shown in the liability side of the Balance Sheet.

Which method to use?

If there is no change in profit sharing ratio amongst remaining partner than we use Profit & loss
Suspense A/c otherwise use Capital Transfer method.

Accounting Treatment of Goodwill: Retiring partner along with his share in the profit or losses entitled
to his share of goodwill of the firm. Retiring partner’s share of goodwill is calculated as follows:

Value of firm’s goodwill X Share of Partner’s (who sacrifices)

Journal entry:
Continuing Partner’s Capital/Current A/cs Dr. (In gaining ratio)
To Retiring Partner’s Capital/Current A/cs (Share of goodwill)

If any of the remaining partners sacrifice / or gain in the profits of the firm on the retirement of
partner, the following entry should be recorded:

Continuing Partners Capital/ Current A/cs Dr. (Who have gained)

To Retiring Partner’s Capital A/c (Who have sacrificed)
To Continuing Partner’s Capital A/c (Who have sacrificed)
 Dr. Deceased Partner’s Capital A/c Cr.
PARTICULARS Rs. PARTICULARS Rs.
To undistributed losses - By Balance b/d -
To Cash/Bank A/c(Drawing till death) - By Interest on capital A/c -
To revaluation A/c(Loss) - By salary and commission A/c -
To Goodwill A/c written off - By undistributed profits/reserves -
To Drawing A/c - By Revaluation A/c(Profit) -
To Interest on Drawing A/c - By Gaining partner/s capital A/c -
To P/L suspense A/c(loss) - (Share of Goodwill) -
To Deceased partner’s Executor’s A/c x By Joint Life Policy A/c -
(Balancing Figure) By Profit & Loss suspense A/c(profit)
- -

Dr. Deceased Partner’s Executor’s A/c Cr.

Date Particulars Amount Date Particulars Amount
To Balance c/d x By C’s Capital A/c x
To Cash/ Bank A/c (Payment of X By Balance b/d X
Principle + Interest) By Interest A/c(on x
To Balance c/d x outstanding balance)
X X

Settlement of deceased Partners Executors A/c

The amount due to executor of deceased partner is either paid off immediately with or without interest
as per agreement. Sometimes it may be transfer to Deceased Partner’s Loan Account.

If amount is paid in cash

Deceased partner’s executor’s A/c Dr.
To Cash / Bank A/c

When the settlement is made in installments –

For interest due-
Interest on deceased partner’s executor’s A/c Dr.
To Deceased Partner’s Executor’s A/c

For payment of installment with interest

Deceased partner’s executor’s A/c Dr.
To Cash/ Bank A/c