Ascertaining and Settling the Amount Due to the Retiring Partner

Once goodwill, revaluation, and accumulated profits/reserves have all been adjusted through the Capital Accounts, the retiring partner's Capital Account shows a single final balance — the total amount the firm owes him. Working this figure out, and then deciding HOW it will actually be paid, are the last two steps of the whole chapter.

Ascertaining the amount due

The amount due to a retiring partner is built up from: Opening Capital balance + his share of General Reserve/Profit and Loss (credit) + his share of Revaluation profit (or − his share of Revaluation loss) + his share of goodwill credited to him − any drawings already made by him up to the date of retirement − any amount he still owes the firm. This is exactly the balancing figure that emerges once his Capital Account, carrying every one of these additions and deductions, is totalled.

Settling the amount due

The partnership deed, or the partners' mutual agreement at the time of retirement, decides how this amount is actually paid. Three arrangements are common on the MSBSHSE syllabus:

1. Full payment in cash/by bank immediately on retirement — the simplest case, where the retiring partner's Capital Account is debited and Bank is credited for the whole amount.
2. The entire amount transferred to a Retiring Partner's Loan Account — a liability of the reconstituted firm shown in its new Balance Sheet, to be repaid later (in a lump sum or by instalments), usually because the firm's cash position does not allow immediate full payment.
3. Part paid in cash immediately, and the balance transferred to a Loan Account — a common middle path, combining both of the above.

Interest on the retiring partner's loan …