Accountancy · Ch 3 — Reconstitution of a Partnership Firm — Retirement/Death of a Partner
Summary
Summary
- New Profit-Sharing Ratio & Gaining Ratio: On retirement, the remaining partners gain the retiring partner’s share. Gaining Ratio = New Ratio – Old Ratio. If the new ratio is not agreed, it equals the old ratio among them.
- Treatment of Goodwill: The retiring partner is compensated for their share of goodwill. The gaining partners debit their capital accounts in the gaining ratio and credit the retiring partner’s capital account. If goodwill already appears in the books, it is written off among all partners in the old ratio.
- Revaluation of Assets & Liabilities: Assets and liabilities are revalued to their current worth. Any profit or loss on revaluation is transferred to all partners’ capital accounts in the old profit-sharing ratio.
- Accumulated Profits & Reserves: All accumulated profits (e.g., General Reserve, P&L credit balance) are distributed among all partners in the old ratio. Accumulated losses are similarly debited.
- Settlement of Retiring Partner’s Dues: The amount due to the retiring partner (capital + share of goodwill + revaluation profit + reserves – drawings – revaluation loss) is settled either in cash or by transferring to a loan account if paid later.
- Death of a Partner: The deceased partner’s legal heirs receive the same entitlements as on retirement — capital, goodwill share, revaluation profit, reserves, and share of profit up to the date of death. Profit up to death is calculated based on the last year’s profit or an agreed time basis.
- Joint Life Policy: If the firm has a Joint Life Policy, the surrender value or the policy amount received is distributed among partners in the old ratio. The deceased partner’s share is credited to their capital account. …