Q.What is meant by Retirement of a Partner? State the adjustments required at the time of a partner's retirement.

Retirement is one of the ways a partnership firm is reconstituted, and it brings with it a fixed set of accounting adjustments, just like admission does.

Retirement of a partner means a partner voluntarily leaving the firm, with the consent of the other partners, while the remaining partners continue the business. The adjustments required are: calculating the new profit-sharing ratio and gaining ratio; treating goodwill; revaluing assets and liabilities; distributing accumulated profits and reserves; and ascertaining and settling the amount due to the retiring partner.

Retirement of a Partner means a partner voluntarily leaving the firm, with the consent of the other partners (or as provided in the partnership deed), while the remaining partners continue to carry on the firm's business. The old partnership, as it existed among all the partners including the one now leaving, comes to an end, but the firm itself continues, provided at least two partners remain.

The following adjustments are required at the time of a partner's retirement:

1. New Profit-Sharing Ratio and Gaining Ratio — working out how the continuing partners will share future profits, and in what ratio they have acquired the retiring partner's vacated share.
2. Treatment of Goodwill — the retiring partner's share of the firm's goodwill is credited to his Capital Account and debited to the continuing partners' Capital Accounts in the gaining ratio.
3. Revaluation of Assets and Liabilities — assets and liabilities are restated to their true current worth, and the resulting profit or loss is shared by ALL partners (including the retiring one) in the old ratio.
4. Adjustment of Accumulated Profits, Reserves and Losses — items such as General Reserve or a Profit and Loss credit/debit balance are distributed to all partners, again in the old ratio.
5. Ascertainment and Settlement of the Amount Due — the retiring partner's final Capital Account balance is computed, and paid in cash, transferred to a Loan Account, or a combination of both, as agreed.
6. Preparation of the new Balance Sheet, showing only the continuing partners' capitals (and the retiring partner's Loan Account, if any balance remains unpaid).

Students sometimes describe retirement using only the goodwill or capital-account adjustment, forgetting that revaluation and reserve distribution ALSO apply on retirement — and, unlike at admission, that the retiring partner himself shares in both the revaluation profit/loss and the reserves, not just the continuing partners.