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Retirement of a Partner

Revaluation and Reserves

At the time of retirement or death of a partner, there may be some assets and liabilities which are not recorded in books at their current values. Also, there may be some unrecorded assets and liabilities which we need to record in the books. The profit or loss from Revaluation Reserve profit is transferred to the capital account of all partners including retiring or deceased partners in their old profit sharing ratio.

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Revaluation Reserve

Revaluation Account

In order to ascertain net gain or loss on revaluation of assets and liabilities and bringing unrecorded items into books, partners prepare a Revaluation Account.

Revaluation Reserve

Revaluation Reserve Journal Entries

Particulars   Amount (Dr.) Amount (Cr.)
1. Increase in the value of assets Assets A/c (Individually) Dr.  xxx
     To Revaluation A/c xxx
(Being increase in the value of assets on revaluation)
2. Decrease in the value of assets Revaluation A/c Dr. xxx
     To Assets A/c (Individually) xxx
(Being decrease in the value of assets on revaluation)
3. Increase in the amount of liabilities Revaluation A/c Dr. xxx
     To Liabilities A/c (Individually) xxx
(Being increase in the amount of liabilities on revaluation)
4. Decrease in the amount of liabilities

 

Liabilities A/c (Individually) Dr. xxx
     To Revaluation A/c xxx
(Being decrease in the amount of liabilities on revaluation)
5. For an unrecorded asset Assets A/c Dr.  xxx
     To Revaluation A/c xxx
(Being unrecorded asset recorded in books)
6. For an unrecorded liability Revaluation A/c Dr. xxx
     To Liability A/c xxx
(Being unrecorded liability recorded in books)
7. Transfer profit on revaluation Revaluation A/c Dr. xxx
     To All Partners’ Capital A/c                 (Individually) xxx
(Being Profit on revaluation transferred to all partner’s capital A/c in old ratio)
8. Transfer loss on revaluation All Partners’ Capital A/c (Individually) Dr. xxx
     To Revaluation A/c xxx
(Being Loss on revaluation transferred to partner’s capital A/c in old ratio)

Alternatively, the partners may decide that the revalued figures of assets and liabilities will not appear in the books of the firm.

In this case, the share of retiring or deceased partner of profit or loss from revaluation of assets and liabilities is adjusted in the remaining partners’ capital accounts in their gaining ratio.

Learn more about Adjustment and Revaluation of Assets here in detail.

The Journal entries are:

Particulars   Amount (Dr.) Amount (Cr.)
1. In case of revaluation profit Remaining Partners Capital A/c (Individually)  Dr. xxx
     To Retiring Partners Capital A/c xxx
(Being a share of retiring partner in revaluation profit adjusted in remaining partners capital in gaining ratio)
2. In case of revaluation loss Remaining Partners Capital A/c (Individually)  Dr. xxx
     To Retiring Partners Capital A/c xxx
(Being the share of retiring partner in revaluation profit adjusted in remaining partners’ capital in gaining ratio)

 

Reserves

The retiring partner also has a share in the reserves of the firm. Remaining partners need to pay him this amount also. For this purpose, distribute the amount of the Reserves among all the partners and there will appear no Reserve A/c in the books.

The Journal Entry will be:

Particulars   Amount (Dr.) Amount (Cr.)
1. Distribution of reserves Reserves A/c Dr. xxx
     To All Partners’ Capital A/c xxx
(Being reserves distributed among all the partners in old ratio)

 

Alternatively, the partners may decide to reduce the amount of reserve only to the extent of the retiring partner’s share.

The Journal Entry will be:

Particulars   Amount (Dr.) Amount (Cr.)
1. Distribution of reserves Reserves A/c Dr. xxx  
     To Retiring Partners’ Capital A/c    xxx
(Being retiring partners share of reserves transferred to his capital A/c)

 

Solved Example on Revaluation and Reserve

A, B and C are partners sharing profits and losses in the ratio of 3:2:1 respectively. On 31st March 2018, their Balance Sheet is as under:

                    Liabilities     Amt.                     Assets    Amt.
Capital Accounts: Buildings 100000
                        A            150000 Machinery 90000
                        B            100000 Patents 70000
                        C              50000 300000 Stock 40000
Reserve Fund 36000 Debtors 60000
Sundry Creditors 50000 Cash 26000
386000 386000

 

C retires on the above date. The partners agreed to value Machinery at Rs.1,05,000, Patents at Rs.65,000 and Buildings at Rs.1,20,000. Partners decide to distribute the Reserves and pay C’s share in cash. Pass the necessary journal entries and prepare the Revaluation Account and Partner’s Capital A/Cs.

 

Ans:

                                                                   In the books of A, B, and C

Journal Entries

 

Date                                    Particulars   Amount (Dr.) Amount (Cr).
Mar.31 Machinery A/c Dr. 15000
Buildings A/c Dr. 20000
To Revaluation A/c 35000
(Being increase in the value of machinery and buildings)
Mar. 31 Revaluation A/c Dr. 5000
To Patents A/c 5000
(Being decrease in the value of patents)
Mar. 31 Revaluation A/c Dr. 30000
To A’s Capital A/c 15000
To B’s Capital A/c 10000
To C’s Capital A/c 5000
(Being profit on revaluation distributed among all partners in old ratio)
Mar. 31 Reserve Fund A/c Dr. 36000
To A’s Capital A/c 18000
To B’s Capital A/c 12000
To C’s Capital A/c 6000
(Being reserves distributed among all the partners in old ratio)
Mar. 31 C’s Capital A/c Dr. 61000
To Cash A/c 61000
(Being C’s share paid to him in cash)

 

Revaluation A/c

             Particulars  Amount                Particulars   Amount
To Patents A/c 5000 By Machinery A/c 15000
To A’s Capital A/c 15000 By Buildings A/c 20000
To B’s Capital A/c 10000
To C’s Capital A/c 5000
35000 35000

 

Partners’ Capital A/c

Particulars A B C Particulars A B C
To Cash A/c 61000 By balance b/d 150000 100000 50000
To balance c/d 183000 122000 By Revaluation A/c 15000 10000 5000
By Reserve Fund A/c 18000 12000 6000
183000 122000 61000 183000 122000 61000

 

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