Retirement And Death Of A Partner Part 1

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Partnership involves two or more partners. Any partnership firm manages its activities as per partnership deed. In partnership deed all terms and conditions will be mentioned in detail. As we need to adjust all accounts when there is a new partner in the firm, we also need to adjust different aspects when an existing partner retires or deceased.

Retirement:

Image of Retirement of Partner

Image of Retirement of Partner

Image of Retirement of Partner

In partnership firm new partners will add or existing partners may leave as per the situation. If one or more partners leave the firm and the remaining people continue the firm. Due to retirement, the existing partnership comes to an end and the remaining partners form a new agreement firm continues operations with new terms and conditions. So, in order to continue activities as per new terms and conditions, the retiring partner’s clams should be settled as per agreement i.e. partnership deed. If not provided in deed, they are agreed upon by all the partners at the time of retirement. The claims could be done

(i) with the consent of all partners, or

(ii) as per terms of the agreement; or

(iii) at his or her own will.

At the time of retirement, the following accounting issues are dealt:

New Profit-Sharing Ratio and Gaining Ratio:

If someone in the partnership retires the profit-sharing ratios will change. The share of retiring partner will be distributed among the continuing partners either in their existing profit sharing ratio or based on agreed ratio. The ratio in which retiring partner’s share is distributed amongst continuing partners is known as gaining ratio.

Gaining Ratio = New Ratio – Existing Ratio

Various Cases of New Ratio and Gaining Ratio Are Illustrated as Follows:

  • Retiring partner’s share distributed in Existing Ratio: In this case share of retiring partner will be distributed among continuing partners as per their existing sharing ratio.

  • Retiring partner’s share distributed in Specified proportions: In this case, share of retiring partner will be distributed among continuing partners as per agreed ratio (specified proportions)

  • Retiring Partner’s share is taken by one of the partners: In this case, only one continuing partner will take the entire share of retiring partner.

Ex: Neru, Anu and Ashu are partners sharing profit in the ratio of 4: 3: 2. Ashu retires. Find the new ratio of Neru and Anu if terms for retirement provide the following:

(i) ratio is not given

(ii) equal distribution of Ashu’s share

(iii) Ashu’s share is taken by Neru and Anu in the ratio of 2: 1

(iv) Anu take over the share of Ashu.

Solution:

  1. When ratio is not given their existing ratios will be considered for distribution. Therefore, New profit sharing ratio of Neru and Anu is 4:3

  2. Ashu’s share = 2/9

    Neru’s New ratio = (1/2 of 2/9) + 4/9 = 5/9

    Anu’s New ratio = (1/2 of 2/9) + 3/9 = 4/9

    New Profit sharing ratios of Neru and Anu is 5:4

  3. Ashu’s Share = 2/9

    Neru gets = 2/3 of 2/9 = 4/27 and Neru’s New Ratio = 4/9 + 4/27 = 16/27

    Anu gets = 1/3 of 2/9 = 2/27 and Anu’s New Ratio = 3/9 + 2/27 = 11/27

    New Profit sharing Ratios of Neru and Anu is 16:11

  4. Anu takes over Ashu share fully

    Anu takes 2/9 and Anu’s new share = 3/9+2/9 = 5/9

    New Profit sharing Ratios of Neru and Anu is 4:5 (only Anu gains)