Retirement/Death of a Partner

When a partner retires or dies, the partnership firm is dissolved or reconstituted. In the case of dissolution, the assets of the firm are sold off, liabilities are paid, and any remaining amount is distributed among the partners in their profit-sharing ratio. In the case of reconstitution, the remaining partners continue the business by settling the accounts with the outgoing partner or their legal heirs.

Settlement of Accounts

The settlement of accounts involves the following steps:

1. Calculation of the amount due to the retiring/deceased partner
2. Adjustment of goodwill
3. Adjustment of revaluation profits or losses
4. Distribution of the remaining balance among the remaining partners

Calculation of Amount Due to Retiring/Deceased Partner

The amount due to the retiring or deceased partner is calculated based on their share in the firm's net assets. The net assets are calculated by deducting the liabilities from the total assets. The share of the retiring or deceased partner is then calculated based on their profit-sharing ratio.

Adjustment of Goodwill

If the partnership firm had goodwill, it needs to be adjusted while settling the accounts. Goodwill is the value of the firm's reputation, brand, and customer base. If the firm's reputation has increased, the goodwill will have a positive value, and if it has decreased, the goodwill will have a negative value. The goodwill amount is adjusted in the capital accounts of the remaining partners.

Adjustment of Revaluation Profits or Losses

If the partnership firm had revalued its assets and liabilities, the revaluation profits or losses need to be adjusted while settling the accounts. The revaluation amount is adjusted in the capital accounts of the remaining partners.

Distribution of Remaining Balance

After adjusting goodwill and revaluation profits or losses, the remaining balance is distributed among the remaining partners in their profit-sharing ratio.

Example

P, Q, and R are partners in a firm sharing profit in the ratio of 5:6:9. R retires, and his share is taken over by P and Q in the ratio of 2:3. The balance sheet of the firm is as follows:

Liabilities Amount Assets Amount
Creditors 20,000 Cash 30,000
Bills Payable 15,000 Stock 25,000
Capital:
P 50,000 Debtors 35,000
Q 60,000 Land and Building 1,00,000
R 90,000 Goodwill 20,000
2,35,000 2,10,000

The value of goodwill is estimated to be 30,000, and the land and building are revalued at 1,20,000. The amount due to R is calculated as follows:

Share of R in net assets = 90,000/20,000 * (2,10,000 - 20,000 - 15,000) = 90,000/20,000 * 1,75,000 = 7,87,500/20,000 = 39,375

Adjustment of goodwill:

Goodwill = 30,000
R's share of goodwill = 30,000 * 9/20 = 13,500
P's share of goodwill = 30,000 * 2/5 = 12,000
Q's share of

R's share of goodwill ₹89100;R's share in loss (for one month) ₹6000; Amount due to R's executors ₹438100.