Ascertaining the Amount Due to Retiring/Deceased Partner

When a partner retires or dies, the firm must calculate the total amount payable to that partner (or to their legal representatives). This amount is not simply the capital account balance — it includes several other entitlements and deductions.

The sum due consists of additions (what the partner is owed) and deductions (what the partner owes the firm). The net figure is the final claim.

Items to be Added (Credited to the Partner)

The retiring or deceased partner is entitled to:

• Credit balance of his Capital Account — the starting point.
• Credit balance of his Current Account (if any) — accumulated profits not yet transferred to capital.
• His share of goodwill — the firm’s reputation value built during his tenure.
• His share of accumulated profits (reserves) — e.g., General Reserve, Workmen Compensation Reserve (if no liability exists).
• His share in the gain on revaluation of assets and liabilities — increase in asset values or decrease in liabilities.
• His share of profits up to the date of retirement/death — profit earned in the current period before the event.
• Interest on his capital, if the partnership deed provides for it, up to the date of retirement/death.
• Salary or commission due to him, as per the deed, up to the date of retirement/death.

Items to be Deducted (Debited to the Partner)

The following are subtracted from the above total:

• Debit balance of his Current Account (if any) — accumulated drawings or losses.
• His share of goodwill to be written off — only if the firm decides to write off existing goodwill (rare in practice; usually goodwill is adjusted through gaining partners’ capital accounts).
• His share of accumulated losses — e.g., debit balance of Profit & Loss Account.
• His share of loss on revaluation of assets and liabilities — decrease in asset values or increase in liabilities.
• His share of loss up to the date of retirement/death — if the firm incurred a loss in the current period.
• His drawings up to the date of retirement/death.
• Interest on his drawings, if applicable, up to the date of retirement/death.

The Eight Accounting Steps

The textbook lists the complete sequence of accounting aspects that must be handled on retirement or death. They are identical in spirit to those on admission, but with a key difference: the gaining ratio replaces the sacrificing ratio.

1. Ascertainment of new profit sharing ratio and gaining ratio — the remaining partners’ new ratio and the ratio in which they gain the retiring partner’s share.
2. Treatment of goodwill — the retiring partner’s share of goodwill is credited to him and debited to the gaining partners in their gaining ratio.
3. Revaluation of assets and liabilities — a Revaluation Account is prepared; profit/loss is transferred to all partners (including the retiring one) in the old ratio.
4. Adjustment in respect of unrecorded assets and liabilities — these are brought into the books via the Revaluation Account.
5. Distribution of accumulated profits and losses — reserves and accumulated profits/losses are transferred to all partners’ capital accounts in the old ratio.
6. Ascertainment of share of profit or loss up to the date of retirement/death — calculated on a time basis (e.g., last year’s profit × fraction of year) or using an interim account.
7. Adjustment of capital, if required — the remaining partners may adjust their capitals to a new agreed ratio (optional).
8. Settlement of the amounts due — the net amount is either paid in cash, transferred to a Retiring Partner’s Loan Account (if not paid immediately), or credited to the Deceased Partner’s Executor’s Account.

Journal Entry Format for Settlement

When the amount is finally paid or transferred:

Proforma of a Retiring Partner’s Capital Account

The capital account of the retiring partner is closed by transferring all adjustments through it. A typical format (two-sided) is: