Accounting Procedure Regarding Partnership Accounts on Retirement or Death!

The retirement of a partner extinguishes his interest in the Partnership firm and
this leads to dissolution of the firm or reconstitution of the Partnership. A partner,
who goes out of a firm, is called retiring partner or outgoing partner. Causes for
the retirement may be that a retiring partner may be too old or he may have
better opportunity in a different line or he may dislike the co-partners attitude or
any other reasons.
The following are the ways in which a partner can retire:
1. With the consent of all the other partners,
2. In accordance with an express agreement among the partners,
3. By giving a written notice of intention to retire to all the other partners where
partnership is at will.
Various Adjustments on Retirement:
When a partner retires his share in the properties of the firm has to be
ascertained and paid off. Certain adjustments have to be made in order to
ascertain the amount he is to get from the firm.
These adjustments are very similar to those which we saw in connection with
admission of a partner. When a partner retires from the business, it becomes
necessary to prepare the accounts so as to ascertain the amount payable to him.
When a partner retires, the following adjustments must be made:
1. Adjustment of accumulated reserves and undistributed profit and losses.
2. Revaluation of assets and liabilities.
3. Adjustment for goodwill of the firm.
4. Calculation of new profit and loss sharing ratio.
5. Calculation of the amount due to retiring partner and the mode of payment.
We shall discuss these points.
1. Adjustment of Accumulated Reserves and Undistributed Profits and Losses:
Any reserves or undistributed profits appearing on the liability side of the
Balance Sheet, at the time of retirement, are past profits, which are created to
strengthen the financial position of the firm the retiring partner has a right over
such profits. Therefore, it is necessary to divide the accumulated reserve or
undistributed profit among all the partners in their old profit or loss sharing ratio.
When the distribution is over, they do not appear in the Balance Sheet.
The journal entries are:

General Reserve Account Dr.

Profit and Loss Account Dr.
To All Partners Capital Account
(Being transfer of General Reserve and profit in the old profit sharing ratio)
Alternatively, instead of transferring the entire reserve or profit, only the share of
the Retiring Partner may be transferred to the Retiring Partners Capital Account.
The balance in the reserve or profit account continues to appear on the liability
side, at reduced amount.

In case the firm has incurred any losses in the past and the losses were not
adjusted so far to the capital accounts, then such losses, which is found in the
asset side of balance sheet, be transferred to the Retiring Partners Capital
Account, to the extent of his share. By doing so, the losses continue to appear on
asset side of the Balance Sheet, at a reduced amount.
2. Revaluation of Assets and Liabilities:
Revaluation of assets and liabilities is equally necessary at the time of retirement
of a partner, as at admission. The revaluation is done on the same principles as
in case of admission. Even if he Partnership Deed is silent, it is better to revalue
assets and liabilities. If it is agreed to revalue the assets and liabilities on the
retirement of a partner, Profit and Loss Adjustment Account or Revaluation
Account is prepared.
The profit or loss arising out of this account is transferred to all partners
including retiring partner in OLD RATIO. Therefore, the assets and liabilities will
then appear in the books at the revised values.
If the continuing partners decide to maintain the assets and liabilities at their
original value, then a MEMORANDUM REVALUATION ACCOUNT is prepared by
passing reversal entry and the profit or loss of this account is transferred to
continuing partners capital account in their NEW PROFIT SHARING RATIO.
Illustration 1:
A and B are partners in a business sharing profits and losses as A 3/5ths and B
2/5ths.
Their Balance Sheet as on 1st January 2005 is given below:

B decides to retire from the business owing to illness and A takes it over and the
following revaluation are made:
(a) Goodwill of the firm is valued at Rs 15,000.
(b) Depreciate Machinery by 7.5% and Stock by 15%.
(c) A Bad Debts provision is raised against Debtors at 5% and a Discount Reserve
against Creditors at 2.5%.
Journalise the above transaction in the books of the firm; prepare ledger
accounts and the Balance Sheet of A.

Illustration 2:

B retires on that date subject to the following adjustments:

1) The goodwill of the firm to be valued at Rs 18.000.
2) Plant to be depreciated by 10% and Motor vans by 15%.
3) Stock to be appreciated by 20% and Buildings by 10%.
4) Provision for doubtful Debts to be increased by Rs 1.950.
5) Liability for workmens compensation to the extent of Rs 450 is to be brought
into account.
It was agreed that A and C will share profits in future in the ratio of A-3/5th and
C-2/5th.
Pass journal entries; prepare Memorandum revaluation Account, capital account
and balance Sheet when the assets and liabilities are to continue to appear at
their original figures.

3. Adjustment of Goodwill:
The valuation of goodwill may be done according to the provisions of the
Partnership Deed and in the manner as in case of admission by any one of the
following methods:
A. When Goodwill does not appear in the books:

Illustration 1:
A, B and C were partners in a firm with capitals of Rs 10,000, Rs 8,000 and Rs
6,000 respectively and sharing profits and losses in the ratio of 3 : 2 : 1. On 31st
December 2005, B retires. For the purpose of retirement, the goodwill of the firm
was valued at Rs 18,000.
Pass necessary journal entries under the following circumstances and also find
out the amount payable to B:
a) Total goodwill raised and maintained in the books.
b) Total goodwill raised but written off later.
c) Only Bs share of goodwill is raised and maintained in the Books.
d) Only Bs share of goodwill is raised but later on written off.
e) B is given his share of goodwill without raising Goodwill Account.

Illustration 2:
(a) A, B and C are equal partners. Goodwill appears in the books at Rs 10,000. C
retires and goodwill is revalued at Rs 15,000. Now A and B decide to share future
profits and losses m the ratio of 3. 2
(b) X, Y and Z are partners sharing profits in the ratio of 4: 3: 3. Goodwill does
not appear in, the books. Z retires from the firm and his share of goodwill is
estimated to be Rs. 6,000, which was purchased by X and Y in equal proportion.
X and Y decide not to open Goodwill Account.
(c) Ram, Mohan and Moni were partners sharing profits in the ratio of 2: 2: 1. On
1st January 2005, their goodwill was valued at Rs 30,000 and there is no

Goodwill Account appearing m the books. Mohan ordered No goodwill is to

appear in the books.
Pass journal entries:

4. Calculation of New Profit and Loss Sharing Ratio:

When a partner of a firm retires, it is for the continuing partners to agree
amongst themselves as to in what ratio, they shall share the profit and loss of
the firm in future. The ratio so agreed upon is called New Profit Sharing Ratio.
In the absence of any agreement between the partners, the continuing partners
will continue to share the profit or loss in between themselves in the same ratio
in which they were sharing before retirement.
For instance, A, B and C were partners sharing profits in the ratio of 3 : 2 : 1 and
if C retires, nothing is given about the new profit sharing ratio, then the profit
sharing ratio of the continuing partners would be 3 : 2. Ratio of their gain will
also be 3: 2 which was their old profit sharing ratio.
Sometimes, the continuing partners may agree to have a new profit sharing
ratio, by making changes in the existing profit sharing ratio and sometimes, the

remaining partners may agree to purchase the share of the retired partner in a
different ratio.
This is explained below:

Illustration 1:
X, Y and Z were partners sharing profits in the ratio of 2: 2:1. Z retires and his
share was taken up by X and Y in the ratio of 3:2. Calculate new profit sharing
ratio and gaining ratio of X and Y.
Solution:

Illustration 2:
A, B and C are in partnership sharing profit or losses in the ratio of 5: 3:2.
Find the new ratio and gaining ratio in the following cases:
(a) A retires, B and C continue.
(b) B retires, A and C continue.
(c) C retires, A and B continue.
Solution:
In the absence of any agreement between the partners as regards the new profit
sharing ratio, the continuing partners will continue to share the profit or loss in
between themselves, in the same ratio in which they were sharing profits before
retirement of partner.

In other words, retiring partners share of profit is shared by remaining partners

in their old profit sharing ratio. For example, take the case of (a) above.
(a) Bs share of profit = 3/10 + (5/10 x 3/5) = 3/10 + 3/10 = 6/10
Cs share of profit = 2/10 + (5/10 x 2/5) 2/10 + 2/10 = 4/10
(Or) Ratio is 6: 4 or 3: 2 Gaining Ratio = 3:2
Similarly, it can be proved with case (b) and (c).
Illustration 3:
X, Y and Z are partners, sharing profit and losses in die ratio of 2:3:1. X retires
and his share is purchased by Y and Z in the ratio of 3: 2. What is new profit
sharing ratio?
Solution:
Old profit faring ratio of X, Y and Z = 2: 3:1
Y and Z purchased Xs share i.e. 2/6 in the ratio of 3: 2.

New Profit Sharing ratio of Y and Z is 7/10 and 3/10 or 7: 3

Gaining Ratio of Y and Z = 3: 2 (given)

(That is the ratio at which they purchased Xs share.)
Illustration 4:
A, B and C are partners in a business, sharing profit and losses in the ratio of 2:
2:1. A retires by selling his share in the business for a sum of Rs 6,000 which is
paid by A and B as to Rs. 4,800 and Rs. 1,200 respectively. Find out the new
profit sharing ratio of B and C.
Solution:
B and C purchased As share in the ratio of 4800: 1200 (or) 4: 1
Bs future share in profits or losses = 2/5 + (2/5 x 4/5) = 2/5 + 8/25 = 18/25
Cs future share in profit or losses = 1/5 + (2/5 x 1/5) = 1/5 + 2/15 = 7/25
The new profit or loss sharing ratio of B and C = 18/25: 7/25 or 18: 7.
5. Calculation of Amount Due to Outgoing Partner:
To find out the amount payable to retiring partner, the following items are
considered:
1. Balance to his Capital Account, as per last Balance Sheet.
2. Proportionate profit on revaluation.
3. Share of goodwill.
4. Interest on capital up to the date of retirement.
5. Salary, if any, payable to him.
6. Share of past profit or loss of the firm.
7. Share of profit till his date of retirement.
8. Share of proceeds of Joint Life Policy
Any withdrawals and interest due thereon should be deducted from the amount
payable to the outgoing partner. The firm is obliged to make payment to the
retiring partners of the firm due to him at the time of retirement. The total
amount so calculated will be transferred to retiring partners loan account by
debiting the retiring partners capital account.
If he is paid in full immediately after retirement, the account is settled.
Sometimes, the agreement may be to settle the share of the retiring partner by
paying him a fixed annual sum (annuity).
Illustration 1:

The Balance Sheet of A, B and c who are sharing profits and losses in the
proportion of one-half, one-third and one-sixth, respectively, was as follows on
30th June 2002:

A retires from the business on 1st July 2002 and his share in the firm is to be
ascertained on a revaluation of the assets as follows:
Stock at Rs 20,000
Furniture Rs 3,000
Plant and Machinery Rs 9,000
Buildings at Rs 20,000
Rs 850 to be provided for Doubtful Debts
The goodwill of the firm is agreed to be valued at Rs 6,000
A is to be paid Rs 11,050 in cash on retirement and the balance in three equal
yearly installments together with interest at 5% p.a.
Show the necessary accounts required giving effect to the above, the Balance
Sheet of the continuing partners and the Account of A till it is finally closed.

Illustration 2:

On 31st March, 2006, Hari desired to retire from the firm and the remaining
partners decided to carry on the same business.
It was agreed to revalue the assets and liabilities on that date on the following
basis:
1. Land and Buildings be appreciated by 30%.

2. Machinery be depreciated by 20%

3. Closing stock to be valued at Rs. 4,50,000
4. Provision for bad debts be made at 5%
5. Old credit balances of sundry creditors Rs. 50,000 be written back.
6. Joint Life Policy of the partners surrendered and cash obtained Rs. 3,50,000
7. Goodwill of the entire firm be revalued at Rs. 6, 30,000 and Haris share of the
goodwill be adjusted in the accounts of Ram and Mohan who share the future
profits and losses in the ratio of 3: 2. No goodwill account be raised.
8. The total capital of the firm is to be the same as before retirement. Individual
capital be in their profit sharing ratio.
9. Amount due to Hari is to be settled on the following basis: 50% on retirement
and the balance 50% within one year.
Prepare revaluation account, capital accounts of partners, cash account and
balance sheet as on 1-4-2006 of M/s Ram and Mohan.

Illustration 3:

A had been suffering from ill-health and gave notice that he wished to retire.
An agreement was, therefore, entered into as on 31st March, 2006, the terms of
which were as follows:

(i) The Profit and Loss Account for the year ended 31st March, 2006, which
showed a net profit of Rs. 48 000 was to be reopened. B was to be credited with
Rs. 4,000 as bonus, in consideration of the extra work which had developed upon
him during the year. The profit sharing ratio was to be revised as from 1st April
2005 to 3: 4: 4.
(ii) Goodwill was to be valued at two years purchase of the average profits of the
preceding five years. The Fixtures were to be valued by an independent value. A
provision of 2% was to be made for doubtful debts and the remaining assets
were to be taken at their book values.
The valuations arising out of the above agreement were Goodwill Rs. 56,800 and
Fixtures Rs. 10,980.
B and C agreed, as between themselves, to continue the business, sharing profits
in the ratio of 3:2 and decided to eliminate goodwill from the Balance Sheet, to
retain the Fixtures on the books at the revised value and to increase the
provision for doubtful debts to 6%.
You are required to submit the journal entries necessary to give effect to the
above arrangements and to draw up the capital account of the partners after
carrying out all adjusting entries as stated above.

Adjustment of Capitals to be Proportionate to the Profit Sharing Ratio:

On the retirement of a partner, sometimes the continuing partners wish to keep
the Capital Accounts to be proportionate to new profit sharing ratio. This implies
determination of overall capital after making all adjustments. Then find out the
total amount of capital and the amount of each partners share, on the basis of
profit sharing ratio.
Then continuing partners will meet their deficiency, if any, by introducing cash
into the firm of the surplus, if any, may be withdrawn or transferred to Current
Accounts, if the Capital Accounts are fixed.
Illustration 1:
The Balance Sheet of A. B and C who were sharing profits in the ratio of 3: 2: 1
respectively stood as follows on 31st December 2005:

B having given notice to retire from the firm, the following adjustments in the
books of the firm were agreed upon:
a) That investment be reduced to 90%.
b) That land and building be appreciated by 10%.
c) That the stock be appreciated by Rs 1,250.
d) That the goodwill of the firm be fixed at Rs 12,000 and Bs share of the same
be adjusted through the Capital Accounts of A and B.
e) That the entire capital of the newly constituted firm be fixed at Rs 60,000 and
be readjusted between A and B in their profit sharing ratio i.e. 3 : 1, by bringing
in or paying out cash.
From the above particulars, prepare Revaluation Account, Partners Capital
Accounts and the Balance Sheet of the new firm showing Bs balance as loan:

Admission and Retirement:

When a partner retires from a firm, there arise the needs for finance. The retiring
partner is to be paid off. If cash is paid, then the working capital is affected.

Therefore, when a partner retires from the firm, the continuing partners feel the
urgency of admitting an outsider as a partner to their firm.
The retiring partner can easily be paid off with the amount contributed by the
incoming partner. But the simultaneous retirement and admission do not
introduce any new principles of accounting. The principles studied under
admission and retirement are combined-the combination of the two sets of
transactions.
Illustration 1: (Retirement-cum-Admission)
A and B were working in partnership sharing profits equally. On 31st December
2004, A decided to retire and in his place, it was decided that C would be
admitted as partner from 1st January 2005 and his share in the profits will be
one-third.
Balance Sheet of the firm as on 31st December 2004 was as follows:

It was further decided as follows:

1. The goodwill should be raised to Rs 40,000.
2. The motor car would be taken over by A at its book value.
3. The value of land and buildings would be increased by Rs 16,560.
4. B and C would introduce sufficient capital to pay off A to leave thereafter a
sum of Rs 14,700 as working capital in a manner that the capitals of the new
partners will be proportional to their profit sharing ratio.
5. The new partners decide to show the goodwill as an asset.
The partners introduced the capital on 10th January 2005. Show the accounts of
the partners and Bank Account with necessary Journal entries. Also prepare the
Balance Sheet of the new firm.

Illustration 2:

On that date, C decides to retire. The value of goodwill to be Rs 15,000 and

sundry assets are taken to have increased in value by Rs 25,000. On Cs
retirement, D is admitted as a partner. He pays no premium for goodwill but
brings in Rs 15,000 as capital. Profits and losses are to be shared in the ratio of
4: 3: 3.
Show Capital Accounts and draw up two Balance Sheets, one after Cs retirement
and the other after Ds admission. The goodwill account is to be wiped off from
the books and restore the sundry assets at its original value after Ds admission.

Illustration 3:

The following adjustments and arrangements have been agreed upon for the
purposes of retirement and admission of partners:
(i) Goodwill to be written up to Rs 30,000 and Plant to Rs 50,000.
(ii) Sufficient money to be introduced so as to leave Rs 11,000 cash after
payment of amount due to Raman.
(iii) Deshpande and Pritam to provide such fund as would make their capitals
proportionate to their share of profit.
Show the journal entries to record the above transactions assuming that
Deshpande and Pritam have paid in cash due on 2nd July 2005 and the amount
due to Raman was paid on the same day.

Illustration 4:

Y retired on 30th September 2005 and X and Y continued in partnership sharing

profits and losses in the ratio of 3: 2. It was agreed that Rs 16,000 of the balance
remaining to him including his earlier loan should remain as loan to the firm and
balance amount will be paid to him on 1st October 2005.
The following adjustments were agreed upon:
(1) The lease was acquired on 1st October 2003 for 15 years. This was to be
written off over the period of lease. Depreciation not provided from the
beginning.
(2) The plant was to be revalued at Rs 11,600.
(3) The provision for bad debts was to be increased by Rs 240.
(4) Creditors for expenses amounting to Rs 1,000 had been omitted from the
books.
(5) Rs 800 were to be written off the stock in respect of obsolete items included
therein.
(6) Provision of Rs 240 was to be made for professional charges in connection
with the revaluation.
The partnership agreement provided that on the retirement of a partner goodwill
was to be valued at an amount equal to the average profit of the three years
expiring on the date of retirement and that in arriving at the profit, a notional
amount of Rs. 16,000 should be charged for partners salaries and that for the
purpose of valuing goodwill, revaluation of the plant and the professional charges
should not be regarded as affecting the profits.
The profits for the years ended on 30th Sept. 2003, 2004 and 2005 were Rs
28,800; Rs 33,600 and Rs 37,640, as shown by the draft accounts, respectively.
No Accounts for goodwill was to be maintained in the books, adjusting entries of
transaction between the partners being made in their Capital Accounts.

Death of a Partner:
The problems arising on the death of a partner are similar to those arising on
retirement. Retirement can be anticipated and planned. Thus the date of
retirement coincides with the date of closing of the firms books of accounts.
The death may occur at any time during the course of trading period In the event
of death of a partner, the Legal Representatives of the Deceased Partner will be
entitled to receive from the firm the amount due on account of the following:
1. Capital Account of the deceased partner as per the last Balance Sheet of the
firm.
2. Interest on capital, if any, to the date of death of the partner.
3. Share in the goodwill of the firm.
4. Share in the revaluation of assets and liabilities.
5. Share in the accumulated reserves.
6. Share in the undistributed profits.
7. Share in the profit of the firm from the last Balance Sheet to the date of his
death.
8. Share in the Joint Life Policy.
9. Salary, if any, due to him till the date of his death.
Further the amount due to the deceased partner as reduced by:
(a) Drawings,
(b) Interest on Drawings and
(c) Undistributed losses, if any, should be transferred to the loan account in the
name of his Executors Account.
Then the amount may be paid immediately or by installments. If payment is
made by installments, it will carry interest @ 6% p.a.
Illustration 1:
A and B were carrying on a business in partnership sharing profits and losses in
the ratio of 3: 2 respectively. They closed their books of account on 31st
December, 2005.
Their balance Sheet was as follows:

B died on 1st May. 2006.

Partnership Deed provided that in the event of death of a partner his heirs would
be entitled to be paid out:
(a) Capital to his credit at the date of death.
(b) His share of reserve at the date of the last balance sheet.
(c) His share of profits at the date of his death based on the average profits of
the last three accounting years.
(d) By way of goodwill his share of total profits for the preceding three
accounting years.
The profits for the three preceding accounting years were:
2003 Rs. 41,800, 2004 Rs. 39,200, and 2005 Rs. 45,000
Prepare Bs capital account transferring the amount due to Bs heirs loan
account. Clearly show your calculations.

Illustration 2:
Ram, Rahim and Robert carry on business sharing the profits in the ratio of 1/2:
1/3: 1/6 respectively.
Capitals as on 31 -3-2006 are Ram Rs. 20,000, Rahim Rs. 15,000 and Robert Rs.
10,000. On 30-6-2006 Robert died and his executors claim the following as per
Partnership Deed:

(i) The joint and several life policies against which premiums are charged to the
Profit and Loss Account are valued at 40% of the sum assured.
The policies of the partners are: Ram Rs. 10,000, Rahim Rs. 7,500 and Robert Rs.
17,000.
(ii) Allow interest on capital at 6% p.a.
(iii) Calculate Roberts share of profits till the date of death on the basis of
average profits of the preceding 3 years.
(iv) Calculate the goodwill of the firm at 2 years purchase of the average profits
of the preceding 5 years.
The annual profit or loss figures of preceding five years were:

Prepare an account for presentation to the executors of Robert. Drawing till the
date of death of Robert was Rs. 5,000.

Illustration 3:

The following arrangements were agreed upon:

(a) Assets be valued at Rs. 29,000; Investments at Rs. 2,350; Stock Rs. 4,700
(b) Goodwill is valued at two years purchase of the average profits of the past
five years.
(c) Sekhars profit to the date of death is calculated on the basis of the average
profits of the past three years.
(d) The profits of the last five years were:

Prepare continuing partners capital accounts and Sekhars account and show the
new Balance Sheet.

Illustration 4:

C died on 31st March 2005.

Under the terms of the Partnership Deed, the Executors of a deceased Partner
were entitled to:
(a) Amount standing to the credit of the Partners Capital Account.
(b) Interest on Capital @ 5% p.a.
(c) Share of goodwill on the basis of twice the average of the past three years
profits.
(d) Share of profits from the closing of the last financial year to the death on the
basis of last years profits.
Profits for 2002 Rs. 9,000; for 2003 Rs. 12,000 and for 2004 Rs. 10,500. Profits
were shared in the ratio of capitals.
Pass the necessary journal entries and find out the amount payable to the heir of
C.

Goodwill = 9,000 + 12,000 + 10,500 x 2/3 = Rs. 21,000

Cs Share = 21,000 x 1 /4 = Rs. 5,250
Profit = Rs. 10,500 x 1/4 x 3/12 = Rs. 656.25
Illustration 5:
It was provided under the Partnership Deed among A, B and C that in the event
of the death of a partner, the survivors would have to purchase his share in the
firm on the following terms:
(a) Deceaseds share of goodwill to be taken at three years purchase of his
share of profits on average of previous four years.
(b) Total amount due to his representatives to be paid by survivors in four equal
and half yearly installments commencing at 6 months after the date of death
with 5% interest on outstanding dues.
They shared profits and losses in the proportion of 9:4:3 and accounts were
drawn up each year at 30th June.
A died on 31st December 2003 and their capital Accounts on that date were:
A Rs. 10,800
B Rs. 6,400

C Rs. 3,600
As Current Account on 31st December 2003 after crediting his share of profit to
that date, however, showed a debit of Rs 960.
Firms profit for the year ended 30th June 2000 Rs. 35,200; 30th June 2001 Rs.
28,160; 30th June 2002 Rs. 24,080 and 30th June 2003 Rs. 8,704.
Show the relevant ledger accounts in the books of the firm recording half-yearly
payments to As estate by surviving partners:

Joint Life Policy:

When a partner dies, the continuing partners are to make payment to the
Executors of the deceased partner. They may desire to settle it without
disturbing the working capital. The relationship among the partners is based on
mutual trust, faith and confidence and as such there is a mutual belief among

themselves. But the relationship with the Executor of deceased partner is

entirely a new one and there exists no relation.
Thus, the entire amount may be payable to the Executor in one lump sum. If so
the working capital of the firm will be depleted and the business will be affected.
In such a similar position, precautionary measures are to be taken to safeguard
the firm from the financial breakdowns.
The step to overcome this is to take a Joint Life Policy on the partners, by paying
a small amount known as premium and in the event of death of any one of the
partners the amount of the policy is payable.
The firm gets the full amount of the policy either on its maturity or on the death
of a partner, whichever is earlier. Thus the deceased partners account can be
settled with the policy amount, without disturbing the business activities.
The Policy may be on individual life or may be on the lives of all the partnersJoint Life Policy.
The accounts relating to the Joint Life Policy can be maintained in any one of the
following methods:
Method I:
When premium is paid on the Joint Life Policy, it is treated as an expense and is
debited to the Profit and Loss Appropriation Account. On happening of death or
maturity or surrender, the amount received from the Insurance Company is
treated as an income and is credited in the partners capital accounts in their
profit sharing ratio. There is no Joint Life Policy Account separately maintained.
The journal entries are:

Method II:
Here, the surrender value of the policy is taken into account. The premium paid
is treated as an asset and is debited to Policy Account. At the end of the year, the

amount of premium in excess of the surrender value is treated as a loss and is

debited to the Profit and Loss Account.
The surrender value is shown on the asset side of the Balance Sheet every year
at its computed value. On the death or maturity, the excess amount received
from the Insurance Company over the accumulated surrender value is credited to
the partners capital accounts in profit sharing ratio.
The journal entries are:

Method III:
Here, a Joint Life Policy and also a Joint Life Policy Reserve or Fund Account is
maintained at surrender value. The Policy Account will then appear at its
surrender value on the asset side of the Balance Sheet and Policy Reserve
Account will appear on the liability side of the Balance Sheet.
The excess of the amount of policy received over the surrender value of the
policy is treated as a profit and credited to partners capital accounts in profit
sharing ratio. This method is similar to that of Depreciation Fund method
The journal entries are:

Illustration 1:
A and B sharing profits and losses in the ratio of 5 : 3 took out a Joint Life Policy
for Rs. 40,000 in January 2002 for 20 years paying an annual premium of Rs.
2,200. The surrender values were: 2002 Rs Nil; 2003 Rs. 500; 2004 Rs. 1.200 and
2005 Rs. 2,050; B died on April 20, 2005 and the claim was received on 25th
May.
Show the necessary accounts in all the methods.
Solution:
First Method:

Note: In the case of policies on the lives of individual partners, the deceased
partner has also a right to share the amount of surrender value, which the other
partners policies acquired at the time of death.

Advertisements:

Related Articles:
What is Positioning Strategy?

What is Positioning Strategy?

Advertisements: Once a target market has been selected, the product/service
marketers must differentiate their item from products already offered to that
target group. This differentiating is called positioning strategy of the product and
is now in widespread use. This section discusses the principles and practices of
positioning followed by the major service providers and product

What are the Measures Taken by the Government to Control Parallel Economy?

What are the Measures Taken by the Government to Control Parallel Economy?
Advertisements: Since black money is a big evil, it is of utmost urgency that we
get rid of it, and make the economy function in a healthy manner. In this regard,
certain measures have already been adopted by the government. 1. Special
Schemes: The government at various times adopted special schemes to
eliminate black money.

Environmental Problems Caused By Dams

Environmental Problems Caused By Dams

Advertisements: The construction of large dams completely change the
relationship of water and land, destroying the existing ecosystem balance, which
in many cases, has taken thousands of years to create. Currently there are
around 40,000 large dams which abstract the Worlds rivers, completing
changing their circulation system this is not going to occur without dire

Interrelationship between Educational Inequality

Interrelationship between Educational Inequality

Advertisements: Though education does not guarantee high status and higher
positions to all people, yet without education, an individual is unlikely to achieve
social mobility. Though it is true that human beings are not equal in ability and

proficiency and though it would be illogical and not ideal to think of a society
which may

5 Major Problems of Micro and Small Enterprises

5 Major Problems of Micro and Small Enterprises

Advertisements: Some of the major problems faced by micro and small
enterprises are as follows: 1. Problem of Raw Material: A major problem that the
micro and small enterprises have to contend with is the procurement of raw
material. The problem of raw material has assumed the shape of: (i) An absolute
scarcity, (ii) A

From Varna to Jati: Ritual Status and Political Power

From Varna to Jati: Ritual Status and Political Power

Advertisements: From Varna to Jati: Ritual Status and Political Power! Vertical
mobility which took place within the Varna and jati schemes did not contradict
the principal rationale behind the Varna scheme, which was based on the myth of
natural superiority. For instance, all powerful monarchs and all landowning
communities were not always of Kshatriya origin.

Funds Flow Statement: Uses and Limitations

Funds Flow Statement: Uses and Limitations

Advertisements: Read this article to learn about the uses and limitations of funds
flow statement. Uses of Funds Flow Statement: By highlighting the changes in
the distribution of the resources of an undertaking, the funds flow statement
enables the financial manager to have a clear perspective of the organizations
financial strengths and weaknesses. It provides

Fiscal Deficit: Risks of High Fiscal Deficit

Fiscal Deficit: Risks of High Fiscal Deficit

Advertisements: Fiscal deficit is a wider concept. It is over and above budgetary

deficit, i.e., if borrowings and other liabilities are added to the budgetary deficit,
we obtain fiscal deficit. It measures addition to liabilities of the Government of
India. It is calculated as: 1st Method: Fiscal Deficit = Budgetary Deficit +
Borrowing and other

Rice Bran Oil: Sources, Description and Uses

Rice Bran Oil: Sources, Description and Uses

Advertisements: Synonyms: Rice oil. Biological source: Rice bran is the cuticle
existing between the rice and the husk of the paddy and consists of embryo
(germ) and endosperm of the seeds of Oryza sativa. It is obtained as a byproduct
in rice mill during polishing of rice obtained after de-husking of paddy. Family:
Graminae. Description:

Psychological Models to Explain Abnormal Behavior

Psychological Models to Explain Abnormal Behavior

Advertisements: The following are the psychological models to explain abnormal
behaviour: (i) Psychological Model: Psychological and interpersonal factors have
a significant role to play in abnormal behaviour. These factors include maternal
deprivation (separation from the mother, or lack of warmth and stimulation
during early years of life), faulty parent-child relationships (rejection,
overprotection, over permissiveness, faulty

What is the Importance of Financial Planning?

What is the Importance of Financial Planning?

Advertisements: Importance of financial planning is as follows: (1) Helps to Face
the Eventualities: It tries to forecast various business situations. On this basis
alternative financial plans are prepared. By doing so, it helps to face the eventual
situation in a better way. (2) Helps in Avoiding Business Shocks and Surprises:
Proper provision regarding shortage

Natural Gas of the World and their Uses (with statistical information)

Natural Gas of the World and their Uses (with statistical information)
Advertisements: Natural Gas of the World and their Uses! Natural gas is the
cheapest source of energy, and is generally associated with petroleum. It is a
special kind of volatile hydrocarbon which consists of propane, ethane, butane,
methane and several other gases. During late 1990s, natural gas has registered
the fastest growth as a source

Sales Process: 8 Steps of Sales Process (With Diagram)

Sales Process: 8 Steps of Sales Process (With Diagram)

Advertisements: Steps in Sales Process: Experts have suggested a five-staged
formula known as A-l-D-A-S for effective selling process. However, this formula is
more closely related to sales presentation (only one step in selling process), and
not the entire selling process. The formula has been briefly discussed here: i. A
Attention calls for drawing attention

Short Notes on the Ohio State Leadership Studies

Short Notes on the Ohio State Leadership Studies

Advertisements: In 1945, the Bureau of Business Research at Ohio State
University initiated a series of studies on leadership. These studies sought to
identify independent dimensions of leader behaviour. The studies started with
the premise that no satisfactory definition of leadership existed and there was no
precise indication of the qualities of a good leader.

Steps to Convert Single Entry into Double Entry

Steps to Convert Single Entry into Double Entry

Advertisements: Steps to Convert Single Entry into Double Entry! If, at the end of
a trading period, it is desired that the books should be written up so as to give
complete information, as is the case under the Double Entry System, the
following steps will be necessary: (1) Take up the Statement of Affairs

Cooperative form of Business Ownership

Cooperative form of Business Ownership

Advertisements: Cooperative form of Business Ownership! Cooperative is yet
another form of business ownership. The co-operative form of organisation is
based on the philosophy of self-help and mutual help. It differs from the other
three forms of business ownership. The basic line of difference is a cooperative
organisation aims at rendering services in place of

by Taboola by Taboola
Sponsored Links Sponsored Links
Promoted Links Promoted Links
You May Like

Remedist
9 Common Cancer Symptoms You Should Never Ever IgnoreRemedist
Undo

Pirates - Online Game

Are you a strategic thinker? Test your skills with millions of addicted players!
Pirates - Online Game
Undo

Save70
The Ultimate Way to Get Cheap Hotel RoomsSave70
Undo

HealthyPanda
6 Foods For Perfect SkinHealthyPanda
Undo

Universities.AC
OMG. Best College in the World!Universities.AC
Undo

TravelTips4Life
15 Most INSANE Pictures Of The Amazon TravelTips4Life
Undo

TopMensMag
Shocking Facts about 9 Notorious DictatorsTopMensMag
Undo

EnglishRussia
Russians Call It White Swan; Americans Call It Black KnaveEnglishRussia
Undo
Partnership Account: Amalgamation and Sale (Accounting Procedure)
Dissolution of Partnership Firm (Accounting Procedure)
Comments are closed.

Before publishing your articles on this site, please read the following pages:
1. Content Guidelines 2. Prohibited Content 3. Plagiarism Prevention 4. Image
Guidelines 5. Content Filtrations 6. TOS 7. Privacy Policy 8. Disclaimer 9.
Copyright 10. Report a Violation

Advertisements
Latest

Forests Types: Top 4 Types of Forests Found in India January 25, 2016
Essay on Forest Conservation and Afforestation January 25, 2016
Crop Regions in India January 25, 2016
Essay on Green Revolution (With Diagram) January 25, 2016
State-Wise Distribution of Canal Systems in India January 25, 2016
You May Like

Universities.AC
OMG. Best College in the World!Universities.AC
Undo

Remedist
9 Common Cancer Symptoms You Should Never Ever IgnoreRemedist
Undo

Pirates - Online Game

Are you a strategic thinker? Test your skills with millions of addicted players!
Pirates - Online Game
Undo

Save70
The Ultimate Way to Get Cheap Hotel RoomsSave70
Undo

HealthyPanda
6 Foods For Perfect SkinHealthyPanda
Undo

TravelTips4Life

15 Most INSANE Pictures Of The Amazon TravelTips4Life

Undo

by Taboola by Taboola
Sponsored Links Sponsored Links
Promoted Links Promoted Links
Copyright 2015 YourArticleLibrary.com, All rights reserved. Sitemap
<div class="statcounter"><a title="web analytics"
href="http://statcounter.com/" target="_blank"><img class="statcounter"
src="http://c.statcounter.com/8029336/0/a46b3d4f/1/" alt="web
analytics"></a></div>

Top of Form
2ab0df779bb747

v2_e29bba2a50c

2699135d-1229-4 /accounting/partn

-9066256294860

text

1454529978289

rbox-t2m

7,51,90,939

CPAF

EhYxOTQtUkVMR 15:06:19.148

7592

194-RELEASE-${

[{"tii":"~~V1~~502

Bottom of Form
Top of Form
6f6c2fe378bacca v2_e29bba2a50c

2699135d-1229-4 /accounting/partn

-9066256294860

1454529978289

rbox-t2m

7,51,90,939

CMkG

EhYxOTQtUkVMR 15:06:19.252

1321

194-RELEASE-${

[{"tii":"~~V1~~773

Bottom of Form

Top of Form

text

6f6c2fe378bacca v2_e29bba2a50c

1454529978289

rbox-t2m

2699135d-1229-4 /accounting/partn

-9066256294860

~~V1~~-4594908

text,text,text,phot

plariumpiratessc,

CMkG

194-RELEASE-${

text

EhYxOTQtUkVMR 15:06:53.308

791

[{"tii":"~~V1~~773

Bottom of Form

YourArticleLibrary.com: The
Next Generation Library
Navigation
Home
About Us
Publish Now
Content Guidelines
Prohibited Content
Image Guidelines
Plagiarism Prevention

Content Filtrations
Terms of Service
Account Disabled
Copyright
Disclaimer
Privacy Policy
Contact Us
Partnership Accounts on Retirement or Death (Accounting Procedure)
By Puneet Partnership Account
Advertisements:

Accounting Procedure Regarding Partnership Accounts on Retirement or Death!

The retirement of a partner extinguishes his interest in the Partnership firm and
this leads to dissolution of the firm or reconstitution of the Partnership. A partner,
who goes out of a firm, is called retiring partner or outgoing partner. Causes for
the retirement may be that a retiring partner may be too old or he may have
better opportunity in a different line or he may dislike the co-partners attitude or
any other reasons.
The following are the ways in which a partner can retire:
1. With the consent of all the other partners,
2. In accordance with an express agreement among the partners,
3. By giving a written notice of intention to retire to all the other partners where
partnership is at will.
Various Adjustments on Retirement:
When a partner retires his share in the properties of the firm has to be
ascertained and paid off. Certain adjustments have to be made in order to
ascertain the amount he is to get from the firm.
These adjustments are very similar to those which we saw in connection with
admission of a partner. When a partner retires from the business, it becomes
necessary to prepare the accounts so as to ascertain the amount payable to him.
When a partner retires, the following adjustments must be made:
1. Adjustment of accumulated reserves and undistributed profit and losses.

2. Revaluation of assets and liabilities.

3. Adjustment for goodwill of the firm.
4. Calculation of new profit and loss sharing ratio.
5. Calculation of the amount due to retiring partner and the mode of payment.
We shall discuss these points.
1. Adjustment of Accumulated Reserves and Undistributed Profits and Losses:
Any reserves or undistributed profits appearing on the liability side of the
Balance Sheet, at the time of retirement, are past profits, which are created to
strengthen the financial position of the firm the retiring partner has a right over
such profits. Therefore, it is necessary to divide the accumulated reserve or
undistributed profit among all the partners in their old profit or loss sharing ratio.
When the distribution is over, they do not appear in the Balance Sheet.
The journal entries are:
General Reserve Account Dr.
Profit and Loss Account Dr.
To All Partners Capital Account
(Being transfer of General Reserve and profit in the old profit sharing ratio)
Alternatively, instead of transferring the entire reserve or profit, only the share of
the Retiring Partner may be transferred to the Retiring Partners Capital Account.
The balance in the reserve or profit account continues to appear on the liability
side, at reduced amount.

In case the firm has incurred any losses in the past and the losses were not
adjusted so far to the capital accounts, then such losses, which is found in the
asset side of balance sheet, be transferred to the Retiring Partners Capital
Account, to the extent of his share. By doing so, the losses continue to appear on
asset side of the Balance Sheet, at a reduced amount.
2. Revaluation of Assets and Liabilities:
Revaluation of assets and liabilities is equally necessary at the time of retirement
of a partner, as at admission. The revaluation is done on the same principles as
in case of admission. Even if he Partnership Deed is silent, it is better to revalue
assets and liabilities. If it is agreed to revalue the assets and liabilities on the

retirement of a partner, Profit and Loss Adjustment Account or Revaluation

Account is prepared.
The profit or loss arising out of this account is transferred to all partners
including retiring partner in OLD RATIO. Therefore, the assets and liabilities will
then appear in the books at the revised values.
If the continuing partners decide to maintain the assets and liabilities at their
original value, then a MEMORANDUM REVALUATION ACCOUNT is prepared by
passing reversal entry and the profit or loss of this account is transferred to
continuing partners capital account in their NEW PROFIT SHARING RATIO.
Illustration 1:
A and B are partners in a business sharing profits and losses as A 3/5ths and B
2/5ths.
Their Balance Sheet as on 1st January 2005 is given below:

B decides to retire from the business owing to illness and A takes it over and the
following revaluation are made:
(a) Goodwill of the firm is valued at Rs 15,000.
(b) Depreciate Machinery by 7.5% and Stock by 15%.
(c) A Bad Debts provision is raised against Debtors at 5% and a Discount Reserve
against Creditors at 2.5%.
Journalise the above transaction in the books of the firm; prepare ledger
accounts and the Balance Sheet of A.

Illustration 2:

B retires on that date subject to the following adjustments:

1) The goodwill of the firm to be valued at Rs 18.000.
2) Plant to be depreciated by 10% and Motor vans by 15%.
3) Stock to be appreciated by 20% and Buildings by 10%.
4) Provision for doubtful Debts to be increased by Rs 1.950.
5) Liability for workmens compensation to the extent of Rs 450 is to be brought
into account.
It was agreed that A and C will share profits in future in the ratio of A-3/5th and
C-2/5th.
Pass journal entries; prepare Memorandum revaluation Account, capital account
and balance Sheet when the assets and liabilities are to continue to appear at
their original figures.

3. Adjustment of Goodwill:
The valuation of goodwill may be done according to the provisions of the
Partnership Deed and in the manner as in case of admission by any one of the
following methods:
A. When Goodwill does not appear in the books:

Illustration 1:
A, B and C were partners in a firm with capitals of Rs 10,000, Rs 8,000 and Rs
6,000 respectively and sharing profits and losses in the ratio of 3 : 2 : 1. On 31st
December 2005, B retires. For the purpose of retirement, the goodwill of the firm
was valued at Rs 18,000.
Pass necessary journal entries under the following circumstances and also find
out the amount payable to B:
a) Total goodwill raised and maintained in the books.
b) Total goodwill raised but written off later.
c) Only Bs share of goodwill is raised and maintained in the Books.
d) Only Bs share of goodwill is raised but later on written off.
e) B is given his share of goodwill without raising Goodwill Account.

Illustration 2:
(a) A, B and C are equal partners. Goodwill appears in the books at Rs 10,000. C
retires and goodwill is revalued at Rs 15,000. Now A and B decide to share future
profits and losses m the ratio of 3. 2
(b) X, Y and Z are partners sharing profits in the ratio of 4: 3: 3. Goodwill does
not appear in, the books. Z retires from the firm and his share of goodwill is
estimated to be Rs. 6,000, which was purchased by X and Y in equal proportion.
X and Y decide not to open Goodwill Account.
(c) Ram, Mohan and Moni were partners sharing profits in the ratio of 2: 2: 1. On
1st January 2005, their goodwill was valued at Rs 30,000 and there is no

Goodwill Account appearing m the books. Mohan ordered No goodwill is to

appear in the books.
Pass journal entries:

4. Calculation of New Profit and Loss Sharing Ratio:

When a partner of a firm retires, it is for the continuing partners to agree
amongst themselves as to in what ratio, they shall share the profit and loss of
the firm in future. The ratio so agreed upon is called New Profit Sharing Ratio.
In the absence of any agreement between the partners, the continuing partners
will continue to share the profit or loss in between themselves in the same ratio
in which they were sharing before retirement.
For instance, A, B and C were partners sharing profits in the ratio of 3 : 2 : 1 and
if C retires, nothing is given about the new profit sharing ratio, then the profit
sharing ratio of the continuing partners would be 3 : 2. Ratio of their gain will
also be 3: 2 which was their old profit sharing ratio.
Sometimes, the continuing partners may agree to have a new profit sharing
ratio, by making changes in the existing profit sharing ratio and sometimes, the

remaining partners may agree to purchase the share of the retired partner in a
different ratio.
This is explained below:

Illustration 1:
X, Y and Z were partners sharing profits in the ratio of 2: 2:1. Z retires and his
share was taken up by X and Y in the ratio of 3:2. Calculate new profit sharing
ratio and gaining ratio of X and Y.
Solution:

Illustration 2:
A, B and C are in partnership sharing profit or losses in the ratio of 5: 3:2.
Find the new ratio and gaining ratio in the following cases:
(a) A retires, B and C continue.
(b) B retires, A and C continue.
(c) C retires, A and B continue.
Solution:
In the absence of any agreement between the partners as regards the new profit
sharing ratio, the continuing partners will continue to share the profit or loss in
between themselves, in the same ratio in which they were sharing profits before
retirement of partner.

In other words, retiring partners share of profit is shared by remaining partners

in their old profit sharing ratio. For example, take the case of (a) above.
(a) Bs share of profit = 3/10 + (5/10 x 3/5) = 3/10 + 3/10 = 6/10
Cs share of profit = 2/10 + (5/10 x 2/5) 2/10 + 2/10 = 4/10
(Or) Ratio is 6: 4 or 3: 2 Gaining Ratio = 3:2
Similarly, it can be proved with case (b) and (c).
Illustration 3:
X, Y and Z are partners, sharing profit and losses in die ratio of 2:3:1. X retires
and his share is purchased by Y and Z in the ratio of 3: 2. What is new profit
sharing ratio?
Solution:
Old profit faring ratio of X, Y and Z = 2: 3:1
Y and Z purchased Xs share i.e. 2/6 in the ratio of 3: 2.

New Profit Sharing ratio of Y and Z is 7/10 and 3/10 or 7: 3

Gaining Ratio of Y and Z = 3: 2 (given)

(That is the ratio at which they purchased Xs share.)
Illustration 4:
A, B and C are partners in a business, sharing profit and losses in the ratio of 2:
2:1. A retires by selling his share in the business for a sum of Rs 6,000 which is
paid by A and B as to Rs. 4,800 and Rs. 1,200 respectively. Find out the new
profit sharing ratio of B and C.
Solution:
B and C purchased As share in the ratio of 4800: 1200 (or) 4: 1
Bs future share in profits or losses = 2/5 + (2/5 x 4/5) = 2/5 + 8/25 = 18/25
Cs future share in profit or losses = 1/5 + (2/5 x 1/5) = 1/5 + 2/15 = 7/25
The new profit or loss sharing ratio of B and C = 18/25: 7/25 or 18: 7.
5. Calculation of Amount Due to Outgoing Partner:
To find out the amount payable to retiring partner, the following items are
considered:
1. Balance to his Capital Account, as per last Balance Sheet.
2. Proportionate profit on revaluation.
3. Share of goodwill.
4. Interest on capital up to the date of retirement.
5. Salary, if any, payable to him.
6. Share of past profit or loss of the firm.
7. Share of profit till his date of retirement.
8. Share of proceeds of Joint Life Policy
Any withdrawals and interest due thereon should be deducted from the amount
payable to the outgoing partner. The firm is obliged to make payment to the
retiring partners of the firm due to him at the time of retirement. The total
amount so calculated will be transferred to retiring partners loan account by
debiting the retiring partners capital account.
If he is paid in full immediately after retirement, the account is settled.
Sometimes, the agreement may be to settle the share of the retiring partner by
paying him a fixed annual sum (annuity).
Illustration 1:

The Balance Sheet of A, B and c who are sharing profits and losses in the
proportion of one-half, one-third and one-sixth, respectively, was as follows on
30th June 2002:

A retires from the business on 1st July 2002 and his share in the firm is to be
ascertained on a revaluation of the assets as follows:
Stock at Rs 20,000
Furniture Rs 3,000
Plant and Machinery Rs 9,000
Buildings at Rs 20,000
Rs 850 to be provided for Doubtful Debts
The goodwill of the firm is agreed to be valued at Rs 6,000
A is to be paid Rs 11,050 in cash on retirement and the balance in three equal
yearly installments together with interest at 5% p.a.
Show the necessary accounts required giving effect to the above, the Balance
Sheet of the continuing partners and the Account of A till it is finally closed.

Illustration 2:

On 31st March, 2006, Hari desired to retire from the firm and the remaining
partners decided to carry on the same business.
It was agreed to revalue the assets and liabilities on that date on the following
basis:
1. Land and Buildings be appreciated by 30%.

2. Machinery be depreciated by 20%

3. Closing stock to be valued at Rs. 4,50,000
4. Provision for bad debts be made at 5%
5. Old credit balances of sundry creditors Rs. 50,000 be written back.
6. Joint Life Policy of the partners surrendered and cash obtained Rs. 3,50,000
7. Goodwill of the entire firm be revalued at Rs. 6, 30,000 and Haris share of the
goodwill be adjusted in the accounts of Ram and Mohan who share the future
profits and losses in the ratio of 3: 2. No goodwill account be raised.
8. The total capital of the firm is to be the same as before retirement. Individual
capital be in their profit sharing ratio.
9. Amount due to Hari is to be settled on the following basis: 50% on retirement
and the balance 50% within one year.
Prepare revaluation account, capital accounts of partners, cash account and
balance sheet as on 1-4-2006 of M/s Ram and Mohan.

Illustration 3:

A had been suffering from ill-health and gave notice that he wished to retire.
An agreement was, therefore, entered into as on 31st March, 2006, the terms of
which were as follows:

(i) The Profit and Loss Account for the year ended 31st March, 2006, which
showed a net profit of Rs. 48 000 was to be reopened. B was to be credited with
Rs. 4,000 as bonus, in consideration of the extra work which had developed upon
him during the year. The profit sharing ratio was to be revised as from 1st April
2005 to 3: 4: 4.
(ii) Goodwill was to be valued at two years purchase of the average profits of the
preceding five years. The Fixtures were to be valued by an independent value. A
provision of 2% was to be made for doubtful debts and the remaining assets
were to be taken at their book values.
The valuations arising out of the above agreement were Goodwill Rs. 56,800 and
Fixtures Rs. 10,980.
B and C agreed, as between themselves, to continue the business, sharing profits
in the ratio of 3:2 and decided to eliminate goodwill from the Balance Sheet, to
retain the Fixtures on the books at the revised value and to increase the
provision for doubtful debts to 6%.
You are required to submit the journal entries necessary to give effect to the
above arrangements and to draw up the capital account of the partners after
carrying out all adjusting entries as stated above.

Adjustment of Capitals to be Proportionate to the Profit Sharing Ratio:

On the retirement of a partner, sometimes the continuing partners wish to keep
the Capital Accounts to be proportionate to new profit sharing ratio. This implies
determination of overall capital after making all adjustments. Then find out the
total amount of capital and the amount of each partners share, on the basis of
profit sharing ratio.
Then continuing partners will meet their deficiency, if any, by introducing cash
into the firm of the surplus, if any, may be withdrawn or transferred to Current
Accounts, if the Capital Accounts are fixed.
Illustration 1:
The Balance Sheet of A. B and C who were sharing profits in the ratio of 3: 2: 1
respectively stood as follows on 31st December 2005:

B having given notice to retire from the firm, the following adjustments in the
books of the firm were agreed upon:
a) That investment be reduced to 90%.
b) That land and building be appreciated by 10%.
c) That the stock be appreciated by Rs 1,250.
d) That the goodwill of the firm be fixed at Rs 12,000 and Bs share of the same
be adjusted through the Capital Accounts of A and B.
e) That the entire capital of the newly constituted firm be fixed at Rs 60,000 and
be readjusted between A and B in their profit sharing ratio i.e. 3 : 1, by bringing
in or paying out cash.
From the above particulars, prepare Revaluation Account, Partners Capital
Accounts and the Balance Sheet of the new firm showing Bs balance as loan:

Admission and Retirement:

When a partner retires from a firm, there arise the needs for finance. The retiring
partner is to be paid off. If cash is paid, then the working capital is affected.

Therefore, when a partner retires from the firm, the continuing partners feel the
urgency of admitting an outsider as a partner to their firm.
The retiring partner can easily be paid off with the amount contributed by the
incoming partner. But the simultaneous retirement and admission do not
introduce any new principles of accounting. The principles studied under
admission and retirement are combined-the combination of the two sets of
transactions.
Illustration 1: (Retirement-cum-Admission)
A and B were working in partnership sharing profits equally. On 31st December
2004, A decided to retire and in his place, it was decided that C would be
admitted as partner from 1st January 2005 and his share in the profits will be
one-third.
Balance Sheet of the firm as on 31st December 2004 was as follows:

It was further decided as follows:

1. The goodwill should be raised to Rs 40,000.
2. The motor car would be taken over by A at its book value.
3. The value of land and buildings would be increased by Rs 16,560.
4. B and C would introduce sufficient capital to pay off A to leave thereafter a
sum of Rs 14,700 as working capital in a manner that the capitals of the new
partners will be proportional to their profit sharing ratio.
5. The new partners decide to show the goodwill as an asset.
The partners introduced the capital on 10th January 2005. Show the accounts of
the partners and Bank Account with necessary Journal entries. Also prepare the
Balance Sheet of the new firm.

Illustration 2:

On that date, C decides to retire. The value of goodwill to be Rs 15,000 and

sundry assets are taken to have increased in value by Rs 25,000. On Cs
retirement, D is admitted as a partner. He pays no premium for goodwill but
brings in Rs 15,000 as capital. Profits and losses are to be shared in the ratio of
4: 3: 3.
Show Capital Accounts and draw up two Balance Sheets, one after Cs retirement
and the other after Ds admission. The goodwill account is to be wiped off from
the books and restore the sundry assets at its original value after Ds admission.

Illustration 3:

The following adjustments and arrangements have been agreed upon for the
purposes of retirement and admission of partners:
(i) Goodwill to be written up to Rs 30,000 and Plant to Rs 50,000.
(ii) Sufficient money to be introduced so as to leave Rs 11,000 cash after
payment of amount due to Raman.
(iii) Deshpande and Pritam to provide such fund as would make their capitals
proportionate to their share of profit.
Show the journal entries to record the above transactions assuming that
Deshpande and Pritam have paid in cash due on 2nd July 2005 and the amount
due to Raman was paid on the same day.

Illustration 4:

Y retired on 30th September 2005 and X and Y continued in partnership sharing

profits and losses in the ratio of 3: 2. It was agreed that Rs 16,000 of the balance
remaining to him including his earlier loan should remain as loan to the firm and
balance amount will be paid to him on 1st October 2005.
The following adjustments were agreed upon:
(1) The lease was acquired on 1st October 2003 for 15 years. This was to be
written off over the period of lease. Depreciation not provided from the
beginning.
(2) The plant was to be revalued at Rs 11,600.
(3) The provision for bad debts was to be increased by Rs 240.
(4) Creditors for expenses amounting to Rs 1,000 had been omitted from the
books.
(5) Rs 800 were to be written off the stock in respect of obsolete items included
therein.
(6) Provision of Rs 240 was to be made for professional charges in connection
with the revaluation.
The partnership agreement provided that on the retirement of a partner goodwill
was to be valued at an amount equal to the average profit of the three years
expiring on the date of retirement and that in arriving at the profit, a notional
amount of Rs. 16,000 should be charged for partners salaries and that for the
purpose of valuing goodwill, revaluation of the plant and the professional charges
should not be regarded as affecting the profits.
The profits for the years ended on 30th Sept. 2003, 2004 and 2005 were Rs
28,800; Rs 33,600 and Rs 37,640, as shown by the draft accounts, respectively.
No Accounts for goodwill was to be maintained in the books, adjusting entries of
transaction between the partners being made in their Capital Accounts.

Death of a Partner:
The problems arising on the death of a partner are similar to those arising on
retirement. Retirement can be anticipated and planned. Thus the date of
retirement coincides with the date of closing of the firms books of accounts.
The death may occur at any time during the course of trading period In the event
of death of a partner, the Legal Representatives of the Deceased Partner will be
entitled to receive from the firm the amount due on account of the following:
1. Capital Account of the deceased partner as per the last Balance Sheet of the
firm.
2. Interest on capital, if any, to the date of death of the partner.
3. Share in the goodwill of the firm.
4. Share in the revaluation of assets and liabilities.
5. Share in the accumulated reserves.
6. Share in the undistributed profits.
7. Share in the profit of the firm from the last Balance Sheet to the date of his
death.
8. Share in the Joint Life Policy.
9. Salary, if any, due to him till the date of his death.
Further the amount due to the deceased partner as reduced by:
(a) Drawings,
(b) Interest on Drawings and
(c) Undistributed losses, if any, should be transferred to the loan account in the
name of his Executors Account.
Then the amount may be paid immediately or by installments. If payment is
made by installments, it will carry interest @ 6% p.a.
Illustration 1:
A and B were carrying on a business in partnership sharing profits and losses in
the ratio of 3: 2 respectively. They closed their books of account on 31st
December, 2005.
Their balance Sheet was as follows:

B died on 1st May. 2006.

Partnership Deed provided that in the event of death of a partner his heirs would
be entitled to be paid out:
(a) Capital to his credit at the date of death.
(b) His share of reserve at the date of the last balance sheet.
(c) His share of profits at the date of his death based on the average profits of
the last three accounting years.
(d) By way of goodwill his share of total profits for the preceding three
accounting years.
The profits for the three preceding accounting years were:
2003 Rs. 41,800, 2004 Rs. 39,200, and 2005 Rs. 45,000
Prepare Bs capital account transferring the amount due to Bs heirs loan
account. Clearly show your calculations.

Illustration 2:
Ram, Rahim and Robert carry on business sharing the profits in the ratio of 1/2:
1/3: 1/6 respectively.
Capitals as on 31 -3-2006 are Ram Rs. 20,000, Rahim Rs. 15,000 and Robert Rs.
10,000. On 30-6-2006 Robert died and his executors claim the following as per
Partnership Deed:

(i) The joint and several life policies against which premiums are charged to the
Profit and Loss Account are valued at 40% of the sum assured.
The policies of the partners are: Ram Rs. 10,000, Rahim Rs. 7,500 and Robert Rs.
17,000.
(ii) Allow interest on capital at 6% p.a.
(iii) Calculate Roberts share of profits till the date of death on the basis of
average profits of the preceding 3 years.
(iv) Calculate the goodwill of the firm at 2 years purchase of the average profits
of the preceding 5 years.
The annual profit or loss figures of preceding five years were:

Prepare an account for presentation to the executors of Robert. Drawing till the
date of death of Robert was Rs. 5,000.

Illustration 3:

The following arrangements were agreed upon:

(a) Assets be valued at Rs. 29,000; Investments at Rs. 2,350; Stock Rs. 4,700
(b) Goodwill is valued at two years purchase of the average profits of the past
five years.
(c) Sekhars profit to the date of death is calculated on the basis of the average
profits of the past three years.
(d) The profits of the last five years were:

Prepare continuing partners capital accounts and Sekhars account and show the
new Balance Sheet.

Illustration 4:

C died on 31st March 2005.

Under the terms of the Partnership Deed, the Executors of a deceased Partner
were entitled to:
(a) Amount standing to the credit of the Partners Capital Account.
(b) Interest on Capital @ 5% p.a.
(c) Share of goodwill on the basis of twice the average of the past three years
profits.
(d) Share of profits from the closing of the last financial year to the death on the
basis of last years profits.
Profits for 2002 Rs. 9,000; for 2003 Rs. 12,000 and for 2004 Rs. 10,500. Profits
were shared in the ratio of capitals.
Pass the necessary journal entries and find out the amount payable to the heir of
C.

Goodwill = 9,000 + 12,000 + 10,500 x 2/3 = Rs. 21,000

Cs Share = 21,000 x 1 /4 = Rs. 5,250
Profit = Rs. 10,500 x 1/4 x 3/12 = Rs. 656.25
Illustration 5:
It was provided under the Partnership Deed among A, B and C that in the event
of the death of a partner, the survivors would have to purchase his share in the
firm on the following terms:
(a) Deceaseds share of goodwill to be taken at three years purchase of his
share of profits on average of previous four years.
(b) Total amount due to his representatives to be paid by survivors in four equal
and half yearly installments commencing at 6 months after the date of death
with 5% interest on outstanding dues.
They shared profits and losses in the proportion of 9:4:3 and accounts were
drawn up each year at 30th June.
A died on 31st December 2003 and their capital Accounts on that date were:
A Rs. 10,800
B Rs. 6,400

C Rs. 3,600
As Current Account on 31st December 2003 after crediting his share of profit to
that date, however, showed a debit of Rs 960.
Firms profit for the year ended 30th June 2000 Rs. 35,200; 30th June 2001 Rs.
28,160; 30th June 2002 Rs. 24,080 and 30th June 2003 Rs. 8,704.
Show the relevant ledger accounts in the books of the firm recording half-yearly
payments to As estate by surviving partners:

Joint Life Policy:

When a partner dies, the continuing partners are to make payment to the
Executors of the deceased partner. They may desire to settle it without
disturbing the working capital. The relationship among the partners is based on
mutual trust, faith and confidence and as such there is a mutual belief among

themselves. But the relationship with the Executor of deceased partner is

entirely a new one and there exists no relation.
Thus, the entire amount may be payable to the Executor in one lump sum. If so
the working capital of the firm will be depleted and the business will be affected.
In such a similar position, precautionary measures are to be taken to safeguard
the firm from the financial breakdowns.
The step to overcome this is to take a Joint Life Policy on the partners, by paying
a small amount known as premium and in the event of death of any one of the
partners the amount of the policy is payable.
The firm gets the full amount of the policy either on its maturity or on the death
of a partner, whichever is earlier. Thus the deceased partners account can be
settled with the policy amount, without disturbing the business activities.
The Policy may be on individual life or may be on the lives of all the partnersJoint Life Policy.
The accounts relating to the Joint Life Policy can be maintained in any one of the
following methods:
Method I:
When premium is paid on the Joint Life Policy, it is treated as an expense and is
debited to the Profit and Loss Appropriation Account. On happening of death or
maturity or surrender, the amount received from the Insurance Company is
treated as an income and is credited in the partners capital accounts in their
profit sharing ratio. There is no Joint Life Policy Account separately maintained.
The journal entries are:

Method II:
Here, the surrender value of the policy is taken into account. The premium paid
is treated as an asset and is debited to Policy Account. At the end of the year, the

amount of premium in excess of the surrender value is treated as a loss and is

debited to the Profit and Loss Account.
The surrender value is shown on the asset side of the Balance Sheet every year
at its computed value. On the death or maturity, the excess amount received
from the Insurance Company over the accumulated surrender value is credited to
the partners capital accounts in profit sharing ratio.
The journal entries are:

Method III:
Here, a Joint Life Policy and also a Joint Life Policy Reserve or Fund Account is
maintained at surrender value. The Policy Account will then appear at its
surrender value on the asset side of the Balance Sheet and Policy Reserve
Account will appear on the liability side of the Balance Sheet.
The excess of the amount of policy received over the surrender value of the
policy is treated as a profit and credited to partners capital accounts in profit
sharing ratio. This method is similar to that of Depreciation Fund method
The journal entries are:

Illustration 1:
A and B sharing profits and losses in the ratio of 5 : 3 took out a Joint Life Policy
for Rs. 40,000 in January 2002 for 20 years paying an annual premium of Rs.
2,200. The surrender values were: 2002 Rs Nil; 2003 Rs. 500; 2004 Rs. 1.200 and
2005 Rs. 2,050; B died on April 20, 2005 and the claim was received on 25th
May.
Show the necessary accounts in all the methods.
Solution:
First Method:

Note: In the case of policies on the lives of individual partners, the deceased
partner has also a right to share the amount of surrender value, which the other
partners policies acquired at the time of death.