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CBSE Class 12 Retirement or Death of a Partner. Learning the important concepts is very important for every student to get better marks in examinations. The concepts should be clear which will help in faster learning. The attached concepts made as per NCERT and CBSE pattern will help the student to understand the chapter and score better marks in the examinations.
Retirement/Death of a Partner
Like admission and change in profit sharing ratio, in case of retirement or death also the existing partnership deed comes to an end and the new one comes into existence among the remaining partners. There is not much difference in the accounting treatment at the time of retirement or in the event of death.
Amount due to retiring deceased Partner
(To be credited to his capital account)
1. Credit Balance of his capital.
2. Credit Balance of his current account (if any)
3. Share of Goodwill.
4. Share of Reserves or Undistributed profits.
5. His share in the profit revaluation of assets and liabilities.
6. Share in profits upto the date of Retirement/Death.
7. Interest on capital if involved.
8. Salary if any
Deduction from the above sum (to be debited to the capital account)
1. Debit balance of his current account (if any)
2. Share of Goodwill to be written off.
3. Share of Accumulated loss.
4. Drawings and interest on drawings (if any)
5. Share of loss on account of Revaluation of assets and liabilities.
6. His share of business loss.
1. Calculation of new profit sharing ration and gaining ratio
2. Treatment of goodwill.
3. Revaluation a/c preparation with the adjustment in the respect of unrecorded assets/ liabilities.
4. Distribution of reserves and accumulated profits/loss.
5. Ascertainment of share of profits/loss till the date of retirement/death.
6. Adjustment of capital if required
7. Settlement of the Accounts due to Retired/Deceased partner.
New Profit Sharing Ratio & Gaining Ratio
New Profit Sharing Ratio It is the ratio in which the remaining partners will share further profits after retirement/death.
Gaining ratio It is the ratio in which the continuing partners have acquired the share from the outgoing partner Calulation of the two ratios Following situations may arise.
1. When no information about new ratio or gaining ratio is given in the question In this case it is considered that the share of the retiring partner is acquired by the remaining partners in the old ratio. Then no need to calculate the new ratio/gaining ratio as it will be the same as before.
Example 1 :A
Band C are partners sharing profit and loss in the ratio of 3:2:1 then on retirement of the gaining ratio/new ratio will be
2. Gaining ratio is given which is different than the old ratio In this case
Treatment of Goodwill
According to accounting standard 10, Goodwill account can't be raised. Therefore only adjustment entry is done for goodwill.
Steps to be followed :
1. When old goodwill appears in the books then first of all this is written off in the old ratio. Remember Old Goodwill Old Ratio
All Partners' capital A/c Dr
To Good will A/c
2. After writing off old goodwill adjustment of retiring partner's share of goodwill will be made through the following journal entry.
Remaining Partner's Cap A/c Dr (in gaining ratio)
To Retiring/Deceased Partner's Cap A/c
Example 4 : M, N & P are partners in a firm. P retires & the goodwill of the firm is valued at Rs.30000. M & N decide to share future profits in the ratio of 3:2. Pass necessary adjustment entries.
1 If goodwill A/c already appears in teh books at Rs.18000
2. When no goodwill A/c appears in the books.
Solution : Old ratio of M, N & P = 1:1:1 (since profit sharing ratio is not given it is treated as equal) New ratio= 3:2
M's gain = 3/51/3= 4/15
N's gain = 2/51/3= 1/15
Gaining ratio = 4:1
P's shareof goodwill = 30,000*1/3 = 10,000
1. Old goodwill will be written off in the old ratio i.e. 1:1:1
M's Capital A/c Dr 6000
N's Capital A/c Dr. 6000
P's Capital A/c Dr 6000
To Goodwill A/c 18000
2. Adjustment entry will be done in gaining ratio
M's Capital A/c Dr.8000
N's Capital A/c Dr.2000
To P's Capital A/c 10,000
Case 2. When No goodwill already appears in the books then only second entry will be done. Hidden goodwill
Sometimes goodwill is not given in the question directly. But if a firm agrees to pay a sum which
is more than his balance in capital a/c after making all adjustment with respect to reserves, revaluation of assets and liabilities etc. then excess amount is treated as his share of goodwill (known as hidden goodwill)
EXAMPLE 5 : Let R, S & T are partners in a firm sharing profit & loss in the ratio of 2:2:1. T Retires and his balance in capital a/c after adjustment for reserve & revaluation of assets & liabilities comes out to be Rs.50000. R & S agree to pay him Rs.60000. Give journal entry for the adjustmnet of goodwill.
New ratio between R & S = gaining ratio = 2:2 or 1:1
T's share of goodwill (hidden) = Rs.6000050000=10000
Hence adjustment entry is
R's capital a/c Dr 5000
S's capital a/c Dr 5000
To T's capital a/c 10000
(T's share of goodwill adjusted in gaining ratio i.e. 1:1)
3. Revaluation of Assets and Reassessment Liabilities
Revaluation A/c is prepared in the same way as in the case of admission of a new partner. Profit and loss on revaluation is transferred among all the partners in old ratio.
4. Adjustment of Reserves and Surplus
(Profits) (Appearing in the Balance Sheet Liability Side)
(a) General Reseve A/c Dr.
Reserve Fund A/c Dr.
P& LA/c (Credit Balance) Dr.
To all partners Capital/Current A/c in old ratio.
Example 6 : X, Y and Z are partners in a firm sharing profits and losses in the ratio of 2:1:1, Y retires on 31st March, 2011. On that date, there was a balance of Rs.24,000 in general reserve and Rs.16,000 in profit and loss A/c of the firm. Give Journal entries.
General Reserve A/c Dr 24,000
P & L A/c Dr 16,000
To X's Cap A/c 20,000
To Y's Cap A/c 10,000
To Z's Cap A/c 10,000
(Reserve & Surplus amount distributed in old ratio on Y's retirement)
b) Specific Funds If the specific funds such as workmen's compensation fund or investment fluctuation fund are in excess of actual requirement, the excess will be transferred to the Capital A/c in old ratio.
Workment Compensation Fund A/c Dr
Investment Fluctuation Fund A/c Dr
To All Partner's Cap A/cs
Example 7 : P, Q and Rare partner's sharing profits and losses in the ration of 3:2:1. P retires and on that date there was workmen's compensation fund amount Rs.30,000 in the Balance Sheet. But actual liability on this account was for Rs.12,000 only on that date. Give Journal Entry.
Excess amount in Workmen's Compensation Fund = Rs.30,000Rs.12,000= Rs.18,000 (Cr)
This will be transferred to all partner's Capital A/c in old ratio
1. W. Compensation Fund A/c Dr 18,000
To P's Cap A/c 9000
To Q's Cap A/c 6000
To R's Cap A/c 3000 (Excess amount in W. Comp. Fund istrfd to partner's Cap A/cs in old ratio)
c) For distributing accumulated losses
(I.e. P & L A/c debit balance shown on the Asset side of Balance Sheet
All partner's Cap/Current A/c Dr (in old ratio) To P & L A/c
Example 8 : A, B and C are equal partner's. A retires and on that date there was a debit balance of Rs.15,000 in P & LA/c. Give Journal entry. Solution
A's Cap A/c Dr 5,000
(Loss in P & L A/c written off in old ratio on A's retirement)
A's Cap A/c Dr 5,000
B's Cap A/c Dr 5,000
C's Cap A/c Dr 5,000
To P & L A/c 15,000
(Loss in P & L A/c written off in old ratio on A's retirement)
JLP means the policy taken by the firm on the lives of the partners. When any of teh partners dies the insurance company pays the whole amount which makes the payment easy to deceased partner's legal representatives in case of death.
5. Adjustmetn of Joint Life Policy (JLP)Introduction
Accounting treatment in case of retirement
Case1. . When premium paid is considered as Revenue Expenditure – In this case the premium paid is debited to P&L A/c and JLP A/c doesn’t appear in the balance sheet. In this case the Retiring partner's share in the surrender value of JLP will be debited to the remaining partners Cap A/c in
I.e. Remaining Partner’s Cap A/c Dr
To Retiring Partner’s Cap A/c
Example 9: D, E and F are partners in a firm sharing profit & losses in the ratio of
3:2:1. F retires on 31st March 2011. The firm had a JLP of Rs.80,000, the surrender value of which was Rs.18,000 on that date annual premium paid on the policy of Rs.10,000 which was debited to P&L A/c every Year. Give adjustment entry if no JLP A/c appears in the Balance Sheet.
F's share in the surrender value = 1/6*18000=Rs.3000
Gaining Ratio b/w D: E=3:2
D's Cap A/c Dr1800
E's Cap A/c Dr1200
To F's Cap A/c 3000
(F’s share in the surrender value of JLP adjusted in gaining ratio)
Case2. . When premium paid is considered as Capital Expenditure In this case the JLP A/c will be already appearing in the Balance Sheet at surrender value. Then no further treatment is required because it means that the retiring partners share is already included in his Cap A/c.
Disposal of the Amount Due to the Retiring Partner
The outgoing partners A/c is settled as per the terms of partnership deed. Three cases maybe there as given below
When the retiring partner is paid full amount either in cash or by cheque. Retiring Partner’s Cap A/c Dr
2. When the retiring partner is paid nothing in cash then the whole amount due is trfd to his loan A/c.
Retiring Partner’s Cap A/c Dr
To retiring partner’s Loan A/c
3. When Retiring Partner is partly paid in cash and the remaining amount is treated as Loan.
Retiring Partner’s Cap A/c Dr (Total Amount due) To Cash/Bank A/c (Amount Paid) To Retiring Partner’s Loan A/c(Amount of Loan)
Settlement of Loan of the Retiring Partner
Loan of the retiring partner is disposed off according to the pre decided terms and conditions among the partners. Normally the Principal amount is paid in few equal installments. In such cases interest is credited to the Loan A/c on the basis of the amount outstanding at the beginning of each year and the amount paid is debited to loan A/c.The following Journal entries are done
a) For interest on Loan.
Interest A/c Dr
To Retiring partner’s Loan A/c
b) For the payment of installment.
Retiring Partner’s Loan A/c Dr
To Cash/ Bank A/c
Example 10: A, B, and C are partners in a firm. B retires from the firm on 1st Jan 2008. On the date of his retirement Rs.66, 000 were due to him. It was decided that the payment will be done in 3 equal yearly installments together with interest @ 10%p.a. on the unpaid balance. Prepare B’s Loan A/c.
To Cash or Bank A/c
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