accounts proj retirement of pertnership

8/4/2019 Accounts Proj Retirement of Pertnership

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INTRODUCTION PARTNERSHIP?????

It is a mutual agreement among partners to carryon a legal business. It can be formed at any timewhen two or more persons desire. In other words,partnership is always at WILL of is partners.

RETIREMENT??

When one of the partners express its inability tocontinue in the partnership and request otherpartners to allow him to retire him from the firm. Incase, all partners agree, the retirement takes place.


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RETIREMENTOFAPARTNERISAVERYIMPORTANTEVENTINLIFEOFTHEFIRM. ITCREATESCERTAINPROBLEMS, WHICHREQUIRESPECIAL

ACCOUNTINGTREATMENT. THEPROBLEMSAREENUMERATEDHEREWITH

Calculation of new and gaining ratio

Treatment of goodwill.

Revaluation of assets and liabilities

Treatment of accumulated/undivided profit.

Methods of payment to retiring partners.

Adjustment of capital accounts.


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NEW AND GAINING RATIO

NEW RATIO: It is the ratio, in which the continuingpartners of the firm will share future profits betweenthem, after the retirement of the partner.

GAINING RATIO: It is the ratio in which thecontinuing partners gain out of the share of theretiring partner. Continuing partners are benefited

with the retirement of the partners


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TREATMENTOFGOODWILL

Retiring partner was continuing in the businesssince long.

He has contributed his efforts and energy to thebusiness.

He may have paid his share of goodwill at the timeof admission in the partnership.

Therefore, he must be rewarded for his servicesand sacrifices in the form of GOODWILL.


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REVALUATION OF ASSETS ANDLIABILITIES

Retiring and continuing partners have differentviews about values of assets and liabilities of theexisting firm.

The retiring partners feels that the assets havebeen reduced and liabilities have been increased inthe balance sheet.

As the retiring partner is entitled to receive the profitaccruing due to increase in the value of assets and

decrease in the value of liabilities.

That is why, it should be valued and the partnershould receive his share of profit before retirement.


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TREATMENTOFACCUMULATED/UNDIVIDEDPROFIT

Accumulated profits have been earned in the pastby all the partners of the firm.

It has not been distributed among the partners buthas retained in the name of P/L A/c, Reserve A/c,Reserve fund A/c, general reserve A/c, contingencyreserve A/c, etc. To meet the future uncertainties ofthe business.

Therefore, he would like to have his share of

retained earnings.

In these circumstances, all the undivided profitshould be transferred to all partners capitalaccounts in old profit sharing ratio.


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CALCULATIONOFAMOUNTPAYABLETORETIRINGPARTNER

The procedure to determine the amount payable toretiring partner is to prepare his capital account.The retiring partner is entitled to get his share out ofthe following items.:

1. SHARE OF GOODWILL: The retiring partners share ofgoodwill will be credited to him and continuing partnerscapital accounts will be debited in the gaining ratio.

2. SHARE OF ACCUMULATED PROFITS: If there is anyaccumulated profits, the retiring partners capital account willbe credited with his share of profit, ordinarily available on theliabilities side of the balance sheet.

3. SHARE OF PROFIT ON REVALUATION: the assets andliabilities are revalued, if it results in a profit, the retiringpartners capital account will be credited with his share.


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4. SHARE OF PROFIT ON THE CLOSING OF THE LAST FINAL

ACCOUNT TO THE DATE OF RETIREMENT: retiring partner isentitled to receive a share of profit for the period betweenthe date of preparing of the last final accounts to the date ofretirement. It is difficult to calculate profit for this period, sothey calculate it on the basis of last years profit, or the

average of 3-4 previous years.

5. INTEREST ON CAPITAL: interest on capital for the periodbetween the date of preparing the last final accounts and thedate of agreement will also be credited to retiring partnerscapital account at the agreed rate, if partners have agreed to

it.


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ADJUSTMENTOFCAPITALACCOUNTS

Capital accounts are left at the balance, whatever itis ascertained on the date of the retirement of the

partner. In certain cases partners may agree to aspecified amount to make it into their new profitsharing ratio. Any surplus over the adjusted capitalis then transferred to currents accounts of the

partners.


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ANEXAMPLEPROBLEMFORABETTERUNDERSTANDINGOFTHESUBJECT.

A, B, and C were carrying on partnership businesssharing profits in the ratio of 3:2:1 respectively. On31 December, the balance sheet of the firm stoodas follows:

Liabilities AssetsAmount Amount

CreditorsCapitals:

ABC

13,590

15,00010,00010,000

Cash

DebtorsStockBuildingP/L Account

4,700

8,00011,69023,0001,200


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B retires on the above mentioned date on the followingterms :

1. Building to be appreciated by Rs. 7,000

2. Provision for doubtful debts to be made at 5% ondebtors.

3. Goodwill of the firm is valued at Rs.18,000 andadjustment in this respect to be made in the continuing

partners capital accounts without raising goodwillaccount.

4. Rs. 3000 to be paid to B immediately and the balancein his capital account to be transferred to his loanaccount.

PREPARE RAVALUATION ACCOUNT, PARTNERS CAPITALACCOUNT, AND BALANCE SHEET AFTER BS RETIREMENT.


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PARTICULARS AMOUNT PARTICULARS AMOUNT

To Provision for bad

debtsTo Profit transferredto:As cap A/c 3,300Bs cap A/c 2,200Cs cap A/c 1,100

---------

400

6,600-----------------7,000-----------------

By Building A/c 7,000

----------------7,000----------------

REVALUATION ACCOUNT


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PARTNERS CAPITAL ACCOUNT

PARTICULARS A B C PARTICULARS A B C

To P/L A/cTo Bs cap A/cTo cash A/cTo Bs loan A/cTo bal c/d

6004,500--------13,200

----------18,300----------

400----3,00014,800----

---------18,200----------

2001,500--------9,400

---------11,100---------

By bal b/dBy reval A/cBy As cap A/cBy Cs cap A/c

15,0003,300------

-----------18,300------------

10,0002,2004,5001,500

-----------18,200-----------

10,0001,100--------

---------11,100---------


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BALANCESHEET

Liabilities Amount Assets Amount

CreditorsCapital :

A 13,200C 9,400

Bs loan A/c

13,590

22,60014,800

--------------50,990

--------------

CashDebtors 8,000

less: provision 400-------

StockBuilding

1,700

7,60011,69030,000--------------50,990

--------------


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WORKINGNOTES :

1. Total goodwill = Rs.18,000

Bs share = 2/6

Bs share of goodwill = 18,000 x 2/6 = Rs. 6,000

B will receive from A = 6,000 x = 1,500 x 3 = Rs. 4,500B will receive from C = 6000 x = 1,500 x 1 = Rs. 1,500

2. As gaining share = - 3/6 = 9-6 / 12 = 3/12

Cs gaining share = - 1/6 = 3-2/12 = 1/12

Gaining ratio = 3/12 :1/12 = 3:1


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DONE BY :

ADITI AGARWAL

SUSHANT AGARWAL

ANKITA AGARWAL

OMAIR KHAN


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accounts proj retirement of pertnership

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