INTRODUCTION When a partner retires due to illness old age - TopicsExpress

INTRODUCTION When a partner retires due to illness old age of any other reason, the partnership comes to an end. But the form may not be dissolved as the other partner continues the business. In such a case, the partnership is reconstituted legally similarly, when one of the partners dies, the partnership comes to an end. From the view point of accounts there is hardly any difference between retirement and death of a partner. Retirement of Partner (1) In case of retirement, the partner decides to retire on some convenient date, generally at the close of the financial year, whereas death occurs on any date. (2) In case of the retirement, the total amount due to the retiring partner is placed to the credit of his loan account, if it is not paid immediately. And in the case of death, it is transferred to his Executor’s Account. Generally, the retiring partner is paid his, dues in cash, if however, accounts are not settled on the date of dissolution and the business is continued, then the retiring partner has a right to get his proportionate profit or he is entitled to get interest on these dues at 6% P.a., whichever is more beneficial to him. PROBLEMS ARISING ON RETIREMENT OR DEATH: The following points arise on retirement of a partner: 1) To revalue the assets and liabilities of the firm. 2) To distribute general reserve or profit and loss balance among all partners. 3) To determine the new profit sharing ratio. 4) To fix up the value of goodwill of the firm. 5) To ascertain the profit or loss up to the date of retirement 6) To determine the new capital of the firm and make necessary adjustments 7) To make payment of the dues of retiring partner. TOTAL AMOUNT TO BE PAID TO A RETIRING PARTNER: The amount payable to a retiring partner includes the following: 1) The credit balance of his Capital Account. Also the credit balance of his Current Account, if any 2) Interest on capital from the date of commencement of accounting year till the date of his retirement. 3) Salary payable to the retiring partner, if any, for taking active part in management of the business. 4) Partner’s loan, if any and interest on such loan. 5) His drawings and interest on drawings, if chargeable. 6) If the assets and liabilities are to be revaluated at the time of retirement, then share in any profit or loss arising out of such revaluation. 7) His share in profit of the business of the firm till the date of retirement. 8) His share in the firm’s goodwill. NEW PROFIT-SHARING RATIO RETIREMENT: The continuing partners may continue to share in their old ratio or they may agree to change their old ration. Retirement of Partner A) If the continuing partners continue to share profit in their old ratio: it is easy to find out the new ratio. Suppose A, B and C are partners sharing profits in the ratio of 2:2:1 Then if nothing is given, then the new ratio of A and C will be 2:1 You just have to simply drop the share of B the share of B (retiring Partner) to find the new ratio of continuing partners. B) When a partner retires, the new ratio may not be specifically given, Instead, it may have been agreed that the continuing partner contribute goodwill to the retiring partner in a particular proportion. In such case, the share of profit of the retiring partner will be shared by the continuing partners in the proportions in which they contribute goodwill. Treatment of goodwill on retirement: A retiring partner should get his share in the goodwill of the firm as he must have also taken pains in bringing the firm to a profitable stage. Secondly, the continuing partner will get an additional share in the profit, which the retiring partner will lose; the latter must be compensated for the same. Hence, goodwill must be paid to him. Let us discuss the treatment of goodwill under two headings. Retirement of Partner When goodwill does not exist in the b