Admission and retirement of a partner


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Admission and retirement of a partner

  1. 1. Joshua 12 Adeenah 14 Arul 16 Sirish 18 Raunakh 20
  2. 2. Admission Of a Partner  INTRODUCTION  A new partner is admitted in a partnership firm due to the following reasons:  1) Need for additional capital for the expansion of the business as also the need for bringing fresh energy into the business.  2) Sometimes when an old partner retires, then it becomes necessary to admit a new partner in order to help in the proper management of the firm.
  3. 3. Problems  The problem that will-arise on admission of a new partner will be enumerated as follows:  1) New Ratio: The share of the new comer in the future profits must also be determined, as also the new ratio of the old partners.  2) Additional Capital: the new comer also becomes a part-owner of the assets of the firm, for which he is expected to-bring some account towards his capital.
  4. 4.  3) Goodwill: The new partner will have to pay some compensation to the existing partners for the share in the future profits of the firm that he will receive from them. The old partner will have to forego part their share in favor of the new comer. Such payment is known as Good will.  4) Reserves: Reserve Fund or any accumulated balance of Profit and loss must be distributed among the old partner s in their old profit sharing ratio before new partners is admitted.
  5. 5. Revaluation  The true value of some of the assets may be more or less than the book values on the date of admission. Similarly, some of the liabilities, May not have been recorded in the books, e.g. unpaid rent. In such circumstances, if the assets and liabilities are not brought at their true values in the books, either the new partner may suffer of the existing partners may be put to loss. In order that neither party is benefited or put to loss, it is usual to make necessary changes in the values of the assets and liabilities before the new partner is admitted. The changes are brought into the books through an account called ‘Profit and Loss adjustment Account’ or ‘Revaluation Account’. The Balance of this account would show Profit or loss and it must be transferred to the old partner’s capital accounts in their old profit-sharing ratio.
  6. 6. Distribution Of Profits  When a new partner is admitted, there may be accumulated profit in the firms. It may be in the name of Reserve Fund or Profit and loss Account (Cr. Bal). There may be Accumulated Losses also i.e. Profit and loss Account (Dr. Bal) shown on the assets side of the Balance sheet. This profit or loss belongs to the old partners and must be distributed among the old partners in the old profit sharing ratio before the new partner is admitted.
  7. 7. Retirement Of a Partner  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 partner ship 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.  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.  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.
  8. 8. Problems  The following points arise on retirement of a partner:  To revalue the assets and liabilities of the firm.  To distribute general reserve or profit and loss balance among all partners.  To determine the new profit sharing ratio.  To fix up the value of goodwill of the firm.  To ascertain the profit or loss up to the date of retirement  To determine the new capital of the firm and make necessary adjustments  To make payment of the dues of retiring partner.
  9. 9. Amount’s Payable to retiring Partner  The credit balance of his Capital Account. Also the credit balance of his Current Account, if any  Interest on capital from the date of commencement of accounting year till the date of his retirement.  Salary payable to the retiring partner, if any, for taking active part in management of the business.  Partner’s loan, if any and interest on such loan.
  10. 10. Contd...  His drawings and interest on drawings, if chargeable.  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.  His share in profit of the business of the firm till the date of retirement.  His share in the firm’s goodwill.