In view of the coronavirus pandemic, we are making LIVE CLASSES and VIDEO CLASSES completely FREE to prevent interruption in studies
Principles and Practice of Accounting > Retirement of a Partner > Final Payment to Retiring Partner
Retirement of a Partner

Final Payment to Retiring Partner

A partner of a firm may decide to retire from the firm due to old age, health issues or any other reasons. At the time of the retirement, the retiring partner is eligible to receive the share of his capital, share of revaluation profit, the share of Goodwill and Reserves. The partners calculate the final payment after adding all these amounts.

Suggested Videos

Play
Play
Arrow
Arrow
ArrowArrow
Objectives of Business
Levels of Management
Slider

Final Payment to Retiring Partner

At the time of retirement of a partner, we need to adjust the following amounts in the Capital Account of the retiring partner:

(i) Reserves

(ii) Goodwill

(iii) Profit or loss on Revaluation

(iv) Any loan by the partner to the firm.

After all these adjustments the amount standing to the credit side of the Capital Account of the Retiring partner is payable to him.

The remaining partners may either decide to pay the whole amount together or may retain some amount in the firm as Partner’s Loan.

Browse more Topics under Retirement Of A Partner

Learn more about Treatment of Partners Loan here in detail.

Journal Entries for Final Payment of Retiring Partner

Particulars Amount (Dr.) Amount (Cr.)
1. Whole amount paid to the retiring partner Retiring Partner’s Capital A/c Dr.
     To Bank A/c
(Being the whole claim of the retiring partner discharged)
2. Some amount is retained as loan Retiring Partner’s Capital A/c Dr.
     To Retiring Partner’s Loan A/c
     To Bank A/c
(Being some portion retained as the loan from partner and remaining amount paid to him)

However, the mode of payment to the retiring partner is as per the Partnership Deed. The following are the ways of payment:

  1. Partners may treat the amount as Partner’s Loan and may repay it in installments along with the outstanding interest.
  2. They may treat the amount as Partner’s Loan and in return, pay a fixed rate of interest or a share in the profit.
  3. They may pay the amount as an annuity for life or for the agreed number of years.

Retiring Partner

Solved Example on Final Payment to Retiring Partner

Ekta, Gopal, and Kavita are partners sharing profits in the ratio of 3:2:1. Kavita retires on 31.3.2018. the Balance Sheet and other information are as under:

Balance Sheet as at 31.03.2018

Liabilities Amount Assets Amount
Partner’s Capital: Fixed Assets 130000
Ekta 120000 Debtors 70000
Gopal 80000 Stock 60000
Kavita 40000 Bank 50000
Reserve Fund 60000 Cash 40000
Creditors 50000
350000 350000

 

Ekta and Gopal agree to share future profits and losses equally. The value of Goodwill is ₹30000. The Goodwill is not to appear in books. Increase the value of fixed assets by ₹18000. Decrease the value of the stock by ₹5000. Record a bill receivable of ₹2000. Ekta and Gopal agree to bring in the cash to pay Kavita and keep capitals in proportion to their profit sharing ratio. They also decide to maintain the bank balance at ₹70000.

Pass necessary journal entries. Also, prepare Revaluation A/c, Partners Capital A/c and Balance Sheet after Kavita’s retirement.

Ans:

Journal Entries

Date Particulars Amount (Dr.) Amount (Cr.)
31 Mar Gopal’s Capital A/c Dr. 5000
     To Kavita’s Capital A/c 5000
(Being Kavita’s share of  Goodwill adjusted in the gaining ratio)
31 Mar Fixed Assets A/c Dr. 18000
     To Revaluation A/c 18000
(Being the value of fixed assets increased)
31 Mar Revaluation A/c Dr. 5000
     To Stock A/c 5000
(Being the value of stock decreased)
31 Mar Bills Receivable A/c Dr. 2000
    To Revaluation A/c 2000
(Being bill receivable omitted, now recorded)
31 Mar Revaluation A/c Dr. 15000
     To Ekta’s Capital A/c 7500
     To Gopal’s Capital A/c 5000
     To Kavita’s Capital A/c 2500
(Being revaluation profit distributed among all the partners in old ratio)
31 Mar Reserve fund A/c Dr. 60000
     To Ekta’s Capital A/c 30000
     To Gopal’s Capital A/c 20000
     To Kavita’s Capital A/c 10000
(Being reserve fund distributed in old ratio among all the partners)
31 Mar Kavita’s Capital A/c Dr.  57500
     To Bank A/c  57500
(Being final payment made to Kavita)

Revaluation A/c

Particulars Amount Particulars Amount
To Stock A/c 5000 By Fixed Assets A/c 18000
To Profit: By Bills Receivables A/c 2000
 Ekta’s Capital A/c 7500
Gopal’s Capital A/c 5000
Kavita’s Capital A/c 2500
20000 20000

Partner’s Capital A/c

Particulars Ekta Gopal Kavita Particulars Ekta Gopal Kavita
To Kavita’s Capital A/c 5000 By Balance b/d 120000 80000 40000
To Bank A/c 57500 By Gopal’s Capital A/c 5000
To Balance c/d 167500 167500 By Revaluation A/c 7500 5000 2500
By Reserve Fund A/c 30000 20000 10000
By Bank A/c 10000 67500
167500  172500 57500 167500 167500 57500

Bank A/c

Date Particulars Amount Date Particulars Amount
31 Mar To Balance b/d 50000 31 Mar By Kavita’s Capital A/c 57500
31 Mar To Ekta’s Capital A/c 10000 31 Mar By Balance c/d 70000
31 Mar To Gopal’s Capital A/c 67500
127500 127500

Revised Balance Sheet

as at 31.03.2018

Liabilities Amount Assets Amount
Partner’s Capital: Fixed Assets 150000
Ekta 167500 Debtors 70000
Gopal 167500 Stock 55000
Bank 70000
Cash 40000
Creditors 50000
385000 385000

Working notes:

Calculation of Gaining ratio:

Particulars Ekta Gopal Kavita
a. New Ratio 1/2 1/2
b. Old Ratio 3/6 2/6 1/6
c. Gaining Ratio (a-b) Nil 1/6

 

Calculation of Goodwill:

30000 x 1/6 = 5000

Calculation of Adjusted Capital:

Fixed Assets              150000

Debtors                      70000

Stock                         55000

Bank                          70000

Cash                          40000

385000

Less: Creditors                50000

New Capital                335000

The share of Ekta and Gopal = 167500 each

Share with friends

Customize your course in 30 seconds

Which class are you in?
5th
6th
7th
8th
9th
10th
11th
12th
Get ready for all-new Live Classes!
Now learn Live with India's best teachers. Join courses with the best schedule and enjoy fun and interactive classes.
tutor
tutor
Ashhar Firdausi
IIT Roorkee
Biology
tutor
tutor
Dr. Nazma Shaik
VTU
Chemistry
tutor
tutor
Gaurav Tiwari
APJAKTU
Physics
Get Started

Leave a Reply

avatar
  Subscribe  
Notify of

Stuck with a

Question Mark?

Have a doubt at 3 am? Our experts are available 24x7. Connect with a tutor instantly and get your concepts cleared in less than 3 steps.
toppr Code

chance to win a

study tour
to ISRO

Download the App

Watch lectures, practise questions and take tests on the go.

Get Question Papers of Last 10 Years

Which class are you in?
No thanks.