Meaning of Retirement of a Partner

A partnership is not a permanent, unchanging arrangement — partners retire from a firm just as they once joined it, whether from old age, ill health, disagreement with the other partners, or simply the wish to withdraw from active business. When a partner retires, the partnership as it existed till that date comes to an end, but the firm itself continues its business, provided at least two partners remain (a partnership, by definition, needs a minimum of two persons). The Maharashtra HSC (MSBSHSE) Book-Keeping and Accountancy syllabus studies this event as a further form of Reconstitution of a Partnership firm, using the same fundamental principles already met in the chapters on Partnership Final Accounts and Admission of a Partner.

Retirement is, in a sense, the mirror image of admission. At admission, an outsider comes IN and the old partners make room by SACRIFICING part of their own share; at retirement, an existing partner goes OUT and the continuing partners make up for the lost partner by GAINING a larger share of future profits. This is exactly why the ratio central to this chapter is called the Gaining Ratio, and never the sacrificing ratio.

On the retirement of a partner, the following matters must be settled before the continuing partners can carry on the business on a fresh footing:

1. Calculation of the new profit-sharing ratio of the continuing partners, and the gaining ratio in which they acquire the retiring partner's share.
2. Proper treatment of goodwill, so that the retiring partner is fairly compensated for the value of the firm he helped build.
3. Revaluation of assets and liabilities, so that any change in their value up to the date of retirement is shared by ALL partners — including the one retiring — and not left for the continuing partners to discover (and bear) later.
4. Distribution of accumulated profits, reserves and losses already appearing in the Balance Sheet, again among all partners in the old ratio.
5. Ascertainment of the exact amount due to the retiring partner, and a decision on HOW that amount will actually be paid or settled.
6. Preparation of a fresh Balance Sheet of the reconstituted firm, showing only the continuing partners' capitals (and, if any balance is left unpaid, the retiring partner's Loan Account as a liability).