Revision: Partnership Accounts >> Retirement and Death of a Partner Accounts ISC (Commerce) Class 12 CISCE

New Profit Share = Existing (Old) Profit Share + Gained Profit Share (Share of Retired / Deceased Partner Taken)

New Profit-sharing Ratio = Old Profit - sharing Ratio

New Profit Share of remaining Partner = Old Profit Share + Profit Share Gained

New Profit Share = Old Profit Share + Gained Profit Share

Gaining Ratio = Existing Profit - Sharing Ratio

Gain in Profit Share = New Ratio - Old Ratio

Gaining Profit Share = New Profit Share - Old Profit Share

Retiring/Deceased Partner's Share of Goodwill = Value of Firm’s Goodwill × Share of Profit of Retiring/Deceased Partner

Net Effect = Accumulated Profits + Reserves - Accumulated Losses.

\[\text{Share in Profit}=\frac{\text{Amount due to Retiring Partner}}{\text{Capital of Remaining Partners}}\times
\begin{pmatrix}
\text{Profit from the date of Retirement}/ \\
\text{Death till the date of next Balance Sheet}
\end{pmatrix}\]

Proportionate Capital of a Partner = Total Capital × Partner's New Profit Sharing Ratio

1.Surplus Capital = Adjusted Capital > Proportionate Capital

(Partner needs to withdraw excess or transfer to Current A/c)

2. Deficit Capital = Adjusted Capital < Proportionate Capital

(Partner needs to bring in cash or adjust from Current A/c)

1. When not given directly in the question:

Total Capital = Aggregate of Adjusted Capitals of Remaining Partners

2. When a Retiring Partner is paid by continuing partners:

Total Capital = Aggregate of adjusted capitals of remaining/continuing partners + Shortage of cash to be brought in by partners to pay the retiring partner

\[\begin{aligned} & \text{Share in Profit =} \\ & \frac{\text{Outstanding Amount of Outgoing Partner}}{\text{Capital of all Partners}+\text{Balance of Outgoing Partner}}\times\text{Profit from the date of death of a partner till the date of next Balance Sheet} \\
\end{aligned}\]

(i) On Time Basis

\[\begin{aligned} & \text{Deceased Partner's Share of Profit} \\ & \text{} \\ & =\frac{\text{No.of Days or Months from the date of Last Balance Sheet till the date of Death}}{365\text{ Days or 12 Months}}\times{\text{Previous Year's Profit or Average Profit}}\times{\text{Profit Share of Deceased Partner}}
\end{aligned}\]

(ii) On the Basis of Turnover or Sales

\[\text{Deceased Partner's Share of Profit}=\begin{array}{ccc}\text{Sales till the date of death} \end{array}\times\begin{array}{cc}\text{Last Year's Profit Percentage}\end{array}\times\begin{array}{cc}\text{Profit Share of Deceased Partner }\end{array}\]

• Retirement Right: A partner can retire by agreement or notice; the firm continues with the remaining partners.
• Entitlements: Retiring partner gets a share in goodwill, reserves, revaluations, and the joint life policy.
• Adjustments: Include new profit ratio, goodwill, asset revaluation, reserves, and capital.
• Payment: Amount due is credited to the Capital A/c and paid immediately or later.
• Effect: Retirement causes reconstitution, not dissolution, of the firm.

A. When Goodwill is Raised and Retained in the Business:

Goodwill A/c        ...Dr.

      To All Partners' Capital A/c        (Old Profit Sharing Ratio)

B. When Goodwill is Raised and Then Written Off:

1. Raise Goodwill:

Goodwill A/c        ...Dr.

      To All Partners' Capital A/c        (Old Profit Sharing Ratio)

2. Write Off Goodwill:

Continuing Partners' Capital A/c          ...Dr.

          To Goodwill A/c    (New Profit Sharing Ratio)

C. When Goodwill is Raised Only for Retiring/Deceased Partner’s Share (and Retained)

Goodwill A/c            ...Dr.

     To Retiring/Deceased Partner’s Capital A/c

D. When Goodwill is Raised Only for Retiring/Deceased Partner and Then Written Off:

1. Raise Goodwill

Goodwill A/c       ...Dr.

       To Retiring/Deceased Partner's Capital A/c

2. Write Off Goodwill:

Gaining Partners’ Capital A/c        ...Dr.

       To Goodwill A/c       (Gaining Ratio)

E. When Goodwill Already Exists in the Books (Written Off at Retirement/Death)

All Partners’ Capital/Current A/cs     ...Dr.

     To Goodwill A/c

(Being goodwill existing in the books written off)

F. Direct Adjustment of Goodwill (No Goodwill A/c Raised as per AS-26)

1. Gaining Partners Compensate Retiring/Deceased Partner:

Gaining Partners’ Capital/Current A/cs       ...Dr.

      To Retiring/Deceased Partner’s Capital/Current A/c

(Being the retiring partner’s share of goodwill adjusted)

2. If Sacrificing Partner is also Compensated:

Gaining Partners’ Capital (or Current) A/cs       ...Dr.

     To Retiring Partner’s Capital A/c

     To Sacrificing Partner’s Capital (or Current) A/c

3. General Adjustment Entry (No Goodwill A/c raised):

Continuing Partners’ Capital A/cs      ...Dr.

   To Retiring/Deceased Partner’s Capital A/c  

(Being the retiring/deceased partner's share of goodwill adjusted to the continuing partners)

               Calculation of Gain/(Sacrifice) of each Partner

A. Distribution of Reserves and Accumulated Profits (in Old Ratio):

When distributing accumulated profits (e.g., General Reserve, Reserve Fund, P&L Credit Balance):

General Reserve A/c                          ...Dr.

Reserve Fund A/c                              ...Dr.

Profit & Loss A/c (Credit balance)   ...Dr.

      To Old Partner's Capital A/cs or Current A/cs

B. Distribution of Specific Reserves (Only Surplus):

If only the surplus amount is to be distributed (e.g., Workmen's Compensation Reserve, IFR):

Workmen's Compensation Reserve A/c      ...Dr.

Investment Fluctuation Reserve A/c           ....Dr.

           To All Partners' Capital A/c or Current A/c

C. Distribution of Accumulated Losses (in Old Ratio):

When accumulated losses (e.g., P&L Debit Balance, Advertisement Suspense A/c) are transferred:

All Partners' Capital A/c or Current A/c       ...Dr.

        To Profit & Loss A/c (Debit Balance)

        To Advertisement Suspense/Expenditure A/c

D. Adjustment of Reserves/Profits Through Gaining and Sacrificing Partners:

1. In Case of Net gain (Profit):

Gaining Partners' Capital/Current A/cs     ...Dr.

      To Sacrificing Partner's Capital/Current A/cs

2. In Case of Net Loss:

Sacrificing Partners; Capital/Current A/c     ...Dr.

     To Gaining Partners' Capital/Current A/cs

1. Transfer of Retiring Partner’s Share of Profit to Their Capital/Current Account:

(When profit is calculated up to the date of retirement and transferred)

Profit and Loss Suspense A/c           ...Dr.

        To Retiring Partner's Capital/Current A/c

(Being the retiring partner's share of profit transferred)

2. Transfer of Profit Back to Profit & Loss Suspense A/c (if required):

(This entry is optional and depends on firm policy or adjustment needs)

Retiring Partner's Capital/Current A/c        ...Dr.

         To Profit and Loss Suspense A/c

(Being the retiring partner's share of profit transferred back to P & L Suspense A/c)

1. When Payment is made in a lump sum:

Retiring Partner's Capital A/c    ...Dr.

      To Bank/Cash A/c

2. When payment is to be made in instalments or after an agreed period:

Retiring Partner's Capital A/c     ....Dr.

       To Retiring Partner's Loan A/c

3. When retiring partner is partly paid in cash and the remaining amount is treated as loan:

Retiring Partners’ Capital A/c          ...Dr.      (Total Amount due)

      To Cash/Bank A/c                                     (Amount Paid)

       To Retiring Partners’ Loan A/c                (Amount of Loan)

4. When Interest Allowed on Retiring Partner’s Loan:

Interest A/c    ...Dr.

     To Retiring Partner's Loan A/c

5. Payment of Instalment (with Interest) of Retiring Partner’s Loan:

Retiring Partner's Loan A/c     ...Dr.

        To Bank A/c

A. When There Is a Surplus in Capital (More than Required Capital):

1. Surplus is Paid Back in Cash:

Continuing Partner's Capital A/c       ...Dr.

         To Cash / Bank A/c

2. Surplus is Not Paid but Transferred to Current or Loan A/c:

Continuing Partner's Capital A/c         ...Dr.

        To Continuing Partner's Current / Loan A/c

B. When There Is a Deficit in Capital (Less than Required Capital):

1. Partner Brings in Cash:

Cash / Bank A/c         ...Dr.

       To Continuing Partner's Capital A/c

2. Deficit is Adjusted Through Current or Loan A/c:

Continuing Partner’s Current / Loan A/c        ...Dr.

        To Continuing Partner's Capital A/c

1. When Profit-Sharing Ratio of Continuing Partners Does Not Change:

Profit & Loss Suspense A/c     ...Dr.    [With profit share of retiring partner]

     To Retiring Partner’s Capital A/c

2. When Profit-Sharing Ratio of Continuing Partners Changes:

Continuing Partners’ Capital/Current A/cs     ...Dr.    [In gaining ratio]

       To Retiring Partner’s Capital A/c

• On a partner’s death, the firm may continue with the remaining partners.
• The amount due is paid to the legal heirs or executor of the deceased partner.
• The deceased partner’s account is credited with capital, goodwill, reserves, revaluation profit, life policy, etc.
• It is debited with drawings, interest on drawings, revaluation loss, and accumulated losses.
• Profit up to the date of death is calculated on a time basis or turnover basis.

1. For a decrease in the value of assets : 

Revaluation A/c or Profit & Loss Adjustment A/c     ...Dr. 

           To Assets A/c

(Decrease in the value of assets) 

2. For an increase in the value of assets :

Assets A/c      ...Dr.

       To Revaluation A/c or Profit & Loss Adjustment A/c

(Increase in the value of assets) 

3. For an increase in the value of liabilities:

Revaluation A/c or Profit & Loss Adjustment A/c     ...Dr.

         To Liabilities A/c

(Increase in the value of liabilities) 

4. For a decrease in the value of liabilities : 

Liabilities A/c                          ...Dr.

      To Revaluation A/c or Profit & Loss Adjustment A/c

(Decrease in the value of liabilities)

5. For accounting unrecorded assets

Unrecorded Assets A/c          ...Dr.

       To Revaluation A/c

(accounting of unrecorded assets)

6. For accounting unrecorded liabilities

Revaluation A/c               ...Dr.

      To Unrecorded Liabilities A/c

(Accounting of unrecorded liabilities)

7. For transferring Gain (Profit):

Revaluation A/c              ...Dr.

     To Old Partner's Capital A/cs

(Gain on revaluation credited to Old Partner's Capital A/cs) 

8. For transferring loss: 

Old Partner's Capital A/cs       ...Dr.

      To Revaluation A/c

(Loss on revaluation debited to Old Partner's Capital A/cs)

                                             Deceased Partner's Capital Account

Dr.                                                                                                                                                                                         Cr.

Deceased Partner’s Capital A/c          ...Dr.

     To Deceased Partner’s Executor’s A/c

(Being the balance in the Capital Account transferred to the executor of the deceased partner)

A. Payment or Settlement of Amount Payable to the Deceased Partner:

1. When Payment is Made in Lump Sum:

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

       To Bank A/c

2. When Payment is Made in Instalments:

(i) When Interest is Due on Outstanding Balance:

Interest A/c                 ...Dr.

      To Deceased Partner’s Executor’s A/c

(ii) When Instalment is Paid:

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

       To Bank A/c

B. Share of Profit of the Deceased Partner:

1. When Profit Share is Estimated:

(i) If Profit-Sharing Ratio Does Not Change:

Profit & Loss Suspense A/c         ...Dr.

      To Deceased Partner’s Capital A/c

(ii) If Profit-Sharing Ratio Changes:

Continuing (Gaining) Partners’ Capital/Current A/cs     Dr.   [In Gaining Ratio]

       To Deceased Partner’s Capital A/c

C. When Loss is Estimated:

1. If Profit-Sharing Ratio Does Not Change:

Deceased Partner’s Capital A/c        ...Dr.

      To Profit & Loss Suspense A/c

2. If Profit-Sharing Ratio Changes:

Deceased Partner’s Capital A/c        ...Dr.

       To Continuing (Gaining) Partners’ Capital/Current A/cs   [In Gaining Ratio]

D. When Profit or Loss is Determined (Based on Interim Financial Statements):

1. In Case of Profit:

Profit & Loss Appropriation A/c       ...Dr.

      To Partners’ Capital A/cs                [In their Profit-Sharing Ratio]

2. In Case of Loss:

Partners’ Capital A/cs         ...Dr.     [In their Profit-Sharing Ratio]

       To Profit & Loss Appropriation A/c