Unit 2-Retirement of a Partner Adjustment for calculation of new ratio & Gaining Ratio Treatment of Goodwill

1. Higher Financial Accounting
UNIT 2-Retriement of a Partner
Prepared by
Ms.Jissy.C
Assistant Professor

2.  Unit 2
Retirement of a partner – calculation of
gaining ratio- Revaluation of assets &
Liabilities-Treatment of goodwill-Adjustment
of goodwill through capital accounts only-
Settlement of accounts- Retiring partners
loan account with equal installments.

3. Retirement of Partner
 When one or more partners leaves the firm
and the remaining partners continue to do
the business of the firm, it is known as
retirement of a partner.
 Due to some reasons like old age, poor
health, strained relations etc., an existing
partner may decide to retire from the
partnership.

4. According to Section 32 (1) of the Indian
Partnership Act 1932 a partner mar retire
from the firm
 With the consent of all the partners
 In accordance with an express agreement by
the partners
 Where the partnership is at will by giving
notice in writing to all the other partners of
his intention to retire
Retirement of
Partner

5.  Due to retirement, the existing partnership
comes to an end and the remaining partners
form a new agreement and the partnership
firm is reconstituted with new terms and
conditions. At the time of retirement the
retiring partner’s claim is settled.
 The terms and conditions of retirement of a
partner are normally provided in the
partnership deed. If not, they are agreed
upon by the partners at the time of
retirement.
Retirement of Partner

6. Adjustments:
 Adjustments regarding Profit Sharing Ratio
 Adjustment of Goodwill
 Revaluation of Assets & Liabilities
 Adjustments regarding Reserve & other
Undistributed profits
 Payment to the retiring partner

7. As soon as a partner retires the profit sharing
ratio of the continuing partners get changed.
The share of the retiring partner is distributed
amongst the continuing partners. In the
absence of information, the continuing
partners take the retiring partner’s share in
their profit sharing ratio or in an agreed ratio.
Adjustments regarding Profit Sharing
Ratio

8. Gaining Ratio
 The ratio in which retiring partner’s share is
distributed amongst continuing partners is
known as gaining ratio.
Gaining Ratio = New Ratio – Old Ratio

9.  Profit Sharing Ratio
When one partner retries and nothing is
mentioned about the new ratio between the
remaining Partner
1) X, Y and Z are partner sharing P/L in the
ratio of 4:3:3.Z retries, Calculate new ratio.
Solution
Since nothing is given about new ratio of
remaining partners , X & Y will share future
profits in the ratio of 4:3

10. 2)P, Q & R are partners sharing P&L in the ratio of
5:3:2 respectively .Q retires .Q share of profit is
taken up by P &R in their profit sharing
ratio.Calcualte the new ratio
Solution:
Q, Share of profit=3/10
P will take out of his share=3/10 X5/7=15/70
R will take out of his share=3/10 X2/7=6/70
Adding these to their previous share:
P=5/10 + 15/70 =35+ 15/70= 50/70
R=2/10 +6/70 =14+6/70 =20/70
New ratio=50: 20
5:2

11. When the remaining partners purchase the share of
retiring partner in some specific portions
3.X,Y& Z were partners sharing profits in the ratio of
2:2:1.Z retires and his was taken up by X &Y in the ratio
3:2 .Calculate new ratio & Gaining ratio.
Solution
Z,share =1/5
Z,share is taken up by X and Y in 3:2
X=1/5 X 3/5=3/25
Y=1/5 X 2/5 =2/25
X,s New ratio = 2/5 + 3/25=10+3/25 =13/25
Y,s New Ratio = 2/5 + 2/25 =10+2/25= 12/25
Ie, New ratio of X &Y is 13:12
Gaining Ratio= New Ratio –Old Ratio
X=13/25-2/5=13-10/25=3/25
Y=12/25-2/5=12-10/25=2/25 GR=3:2

12. The retiring partner is entitled to his/her
share of goodwill at the time of retirement
because the goodwill is the result of the
efforts of all partners including the retiring
one in the past. The retiring partner is
compensated for his/her share of goodwill.
As per Accounting Standard 26 (AS-26),
goodwill is recorded in the books only when
some consideration in money is paid for it.
Therefore, goodwill is recorded in the books
only when it is purchased and the goodwill
account cannot be raised on its own.
Treatment of Goodwill

13. Journal Entries
1.When goodwill is raised at full value and is allowed to
remain the books of the firm.(No goodwill appears in the
balance sheet)
Goodwill a/c Dr
To Partners Capital a/c
2.When goodwill already exists in the balance sheet at part
value(the present value of good exceeds the book value)
Goodwill a/c Dr
To Partners Capital
3.When goodwill appears in the Balance sheet at more then
present value
Partners Capital a/c Dr
To Goodwill(with the decrease in the value of goodwill)
Treatment of goodwill

14. Journal Entries
4.when goodwill is raised in the books but is
then written back to the capital accounts of
the continuing Partner
a)For Raising Goodwill
Goodwill Dr
To All partners Capital a/c
b)For Writing off the goodwill
Continuing Partners Capital a/c Dr
To Retiring Partner Capital

15. Journal Entries
5.When goodwill is raised with the share of the
retiring partners only and is allowed to
remain in the books of the firm
Goodwill a/c Dr
To Retiring partner capital
6. When goodwill is raised with the share of
the retiring partners and then written back to
the capital accounts of the continuing
Partners.
a)For Raising Goodwill
Goodwill a/c Dr
To Retiring partner capital

16. Journal Entries
b)For writing off the goodwill
Continuing Partners Capital A/c Dr
To Goodwill (With the share of Retiring
Partners only)
7.When goodwill account is not raised in the
firm books
Continuing Partners capital a/c
To Retiring partners Capital a/c

17. Treatment of goodwill
1. A, B & C are in partnership sharing P/L in
the ratio of 3:2:1 .A decides to retire from the
business while B &C continue the business
sharing P/L in their previous ratio. The
goodwill of the firm value is Rs24000.Pass
entries when,
a) the unrecorded goodwill is brought into the
books
b) the goodwill is raised and written off
c)A’s share of goodwill is given to him without
raising goodwill account

18.  Solution
a)When the unrecorded goodwill is brought into the books
b)when the goodwill is raised and written off
bi)
Goodwill a/c
To A,s Capital
To B,s Capital
To C,s Capital
(Being the unrecorded Goodwill
brought into the books on the date of
A,s Retirement)
24000
12000
8000
4000
Goodwill a/c
To A,s Capital
To B, s Capital
To C,s Capital
(Being the goodwill raised & Credited
in the Old ratio)
24000
12000
8000
4000

19. bii
c) A’s share of goodwill is given to him without
raising goodwill account
B,s Capital a/c Dr
C,s Capital /c Dr
To Goodwill a/c
(Being the goodwill written off after A,s
Retirement in the new ratio)
16000
8000
24000
B,s Capital a/c
C,s Capital a/c
To A,s Capital
(Being A,s share of goodwill credited to
him on his retirement by debiting
Continuing Partner in their gaining
Ratio)
8000
4000
12000

20. 2.) A ,B & C were partners in a firm with capitals
of rs 20000 ,Rs16000 &Rs 12000 respectively
and sharing Profits in the ratio of 3:2:1. On 31 st
Dec 1992 B retires .from the purpose of
retirement, the amount of the goodwill;; of the
firm was valued at Rs36000.
Pass necessary journal entries under the
following cases:
i) Total goodwill is raised & maintained in the
books
ii) Total goodwill is raised but written off later on
iii) Only B share of goodwill is raised and
maintained in the books
iv) Only B share of goodwill is raised but later on
written off
v) B is given his share of goodwill without raising
goodwill account

21.  Case I
Case 2 (a)
Goodwill a/c Dr
To A,s Capital
To B,s Capital
To C,s Capital
(Being goodwill raised in books at full
value at the of retirement)
36000
18000
12000
6000
Goodwill a/c Dr
To A,s Capital
To B,s Capital
To C,s Capital
(Being goodwill raised at full value in the
old ratio)
36000
18000
12000
6000

22. Case 2 (b)
Case 3
A,s Capital
C,s Capital
To Goodwill a/c
(Being goodwill written off from the
books of continuing firm in new ratio 3:1)
27000
9000
36000
Goodwill a/c
T o B,s Capital
(Being B’s Share of goodwill only raised
in the books)
12000
12000

23.  Case 4 (a)
Case 4 (b)
Goodwill a/c Dr
To B,s Capital
(Being B,s share of goodwill only
raised in the books)
12000
12000
A,s Capital Dr
C,s Capital
To Goodwill a/c
(Being B,s share of goodwill raised in
the time retirement now written off in
the gaining ratio 3:1)
9000
3000
12000

24.  Case 5
A,s Capital
C,s Capital
To B’s Capital
(Being B’s Share of goodwill adjusted to
continuing Partner capital accounts in their
gaining ratio 3:1 without raising goodwill )
9000
3000
12000