Retirement of a Partner - Journal Entry

The retirement of a partner is a significant event in a partnership firm that requires proper accounting treatment. A partner may retire from the partnership due to various reasons such as retirement age, health issues, personal reasons, etc. The retirement of a partner results in a change in the profit-sharing ratio of the remaining partners.

Journal Entry for Retirement of a Partner:

The following journal entry is recorded at the time of retirement of a partner:

Bank A/c Dr. (Amount received by retiring partner)
To Partner's Capital A/c (Amount due to retiring partner)
To Goodwill A/c (If any)
To Unexpired Insurance Premium A/c (If any)

Explanation of the Journal Entry:

1. Bank A/c Dr. (Amount received by retiring partner):

This account is debited with the amount paid to the retiring partner. The amount is usually paid by the remaining partners from their personal savings or by taking a loan from a bank.

2. Partner's Capital A/c (Amount due to retiring partner):

This account is credited with the amount due to the retiring partner. The amount due is calculated as per the partnership agreement or as per the provisions of the Partnership Act.

3. Goodwill A/c (If any):

If the partnership firm has goodwill, then it is necessary to revalue the assets and liabilities of the firm and calculate the new value of goodwill. The retiring partner is entitled to a share in the goodwill of the firm. Therefore, the amount due to the retiring partner is credited to the Goodwill account.

4. Unexpired Insurance Premium A/c (If any):

If the partnership firm has paid an insurance premium for the year, and a portion of it is unexpired at the time of retirement of a partner, then the unexpired amount is credited to the Unexpired Insurance Premium account. The amount is already debited to the Profit and Loss account. Hence, it is necessary to adjust it at the time of retirement of a partner.

Conclusion:

The retirement of a partner is a complex process that requires proper accounting treatment. The journal entry for retirement of a partner includes various accounts such as Bank A/c, Partner's Capital A/c, Goodwill A/c, and Unexpired Insurance Premium A/c. It is essential to follow the provisions of the Partnership Act and the partnership agreement while making the journal entry for retirement of a partner.

Pripaid insurance A/c Dr. .................
To Revaluation A/c. ..................