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.

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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

• Calculation of Gaining Ratio
• Revaluation and Reserves
• Treatment of Partners Loan
• Joint Life Policy – Accounting Treatment

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.

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