Accounting: Retirement and Death of a Partner: Adjustment of Remaining Partner's Capital Account after Retirement

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Once the claim of retired partner is done, adjustments to the remaining partner’s capital accounts are to be done. Often the remaining partners determine the total amount of capital of the reconstituted firm and decide to keep their respective capital accounts in proportion to the new profit sharing ratio. New capital of the partnership firm after adjustments may be more or less than the total capital at the time of retirement. If there is a surplus in the capital account of the partner, the amount is withdrawn by the concerned partner. If there is deficit in the capital account of the partner, the amount will be provided by the concerned partner.

Adjustment of Remaining Partner’S Capital in Their Profit Sharing Ratio, when the Total Capital of the New Firm is Not Pre-Determined

In this case the total amount of adjusted capital of the remaining partners is rearranged as per agreed proportion in which they share profit of the reconstituted firm. The following steps may be adopted:

(i) Add the balance standing to the credit of the remaining partners’ capital accounts.

(ii) The total so obtained is the total capital of the firm.

(iii) This capital is divided according to the new profit sharing ratio.

Example:

Chauhan Triphati and Gupta are partners in a firm sharing profit and losses in the ratio of 1/2, 1/6 and 1/3 respectively. The Balance Sheet on March 31, 2006 was as follows:

Table 1 Supporting: Adjustment of remaining partner’s capital in their profit sharing ratio, when the total capital of the new firm is not pre-determined

Tablutation of: Liabilities, Amount (Rs.), Assets, Amount (Rs.)

Liabilities

Amount (Rs.)

Assets

Amount (Rs.)

Sundry Creditors

Reserve Fund

Bills payable

Capital:

Chauhan 60,000

Triphati 60,000

Guptha 56,000

36,000

24,000

24,000

1,76,000

Freehold Premises

Machinery

Furniture

Debtors 40,000

Less: Provisions for 2,000

Bad debts

Stock

Cash

80000

60000

24000

38000

44000

14000

2,60,000

2,60,000

Gupta retires from the business and the partners agree to the following revaluation:

(a) Freehold premises and stock are to be appreciated by 20% and 15%. Respectively

(b) Machinery and furniture are to be depreciated by 10% and 7% respectively

(c) Bad debts reserve is to be increased to Rs.3,000.

(d) On Gupta retirement, the goodwill is valued at Rs.42,000.

(e) The remaining partners have decided to adjust their capitals in their new profit sharing ratio after retirement of Gupta. Surplus/deficit, if any in their capital account will be adjusted through cash. Prepare necessary ledger accounts and Balance Sheet of reconstituted firm.

Solution: Revaluation Account

Dr. Cr.

Table 2 Supporting: Adjustment of remaining partner’s capital in their profit sharing ratio, when the total capital of the new firm is not pre-determined

Tablutation of: Particulars, Amount (Rs.), Particulars, Amount (Rs.)

Particulars

Amount (Rs.)

Particulars

Amount (Rs.)

Provision for Bad debts

Machinery

Furniture

Profit transferred to

Nutan’s Capital 6,960

Sumit’s Capital 2,320

Shiba’s Capital 4,640

1,000

6000

1680

13,920

Freehold premises

Stock

16,000

6,600

22,600

22,600

Capital Account

Dr. Cr.

Table 3 Supporting: Adjustment of remaining partner’s capital in their profit sharing ratio, when the total capital of the new firm is not pre-determined

Tablutation of: Particulars, Chauhan (Rs.), Tripathi (Rs.), Gupta (Rs.), Particulars, Chauhan (Rs.), Tripati (Rs.), Gupta (Rs.)

Particulars

Chauhan (Rs.)

Tripathi (Rs.)

Gupta (Rs.)

Particulars

Chauhan (Rs.)

Tripati (Rs.)

Gupta (Rs.)

Gupta Capital

Gupta Loan

Cash

Balance c/d

10,500

98,460

3500

30,000

32,820

--

82,640

Balance b/d

General Reserve

Revaluation (profit)

Chauhan’s Capital

Triphati Capital

Cash

60000

12009

6960

--

30000

60000

4000

2320

--

56000

8000

4640

10500

3500

1,08,960

66,320

82,640

1,08,960

66,320

82,640

Balance Sheet as on March 31, 2006

Table 4 Supporting: Adjustment of remaining partner’s capital in their profit sharing ratio, when the total capital of the new firm is not pre-determined

Tablutation of: Liabilities, Amount (Rs.), Assets, Amount (Rs.)

Liabilities

Amount (Rs.)

Assets

Amount (Rs.)

Sundry Creditors

Bills payable

Gupta’s Loan

Capital:

Chauhan 98,460

Triphati 32,820

36,000

24,000

82,640

1,31,280

Freehold Premises

Machinery

Furniture

Debtors 40,000

Less: Provisions for 3,000

Bad debts

Stock

Cash

96000

54000

22320

37000

50600

14000

2,73,920

2,73,920

Working Note

(a) In the absence of agreement, retiring partner’s capital account is transferred to his loan account.

(b) In the absence of agreement, existing ratio of remaining partners is gaining ratio i.e. 3: 1

(c) Calculation of Cash brought in (or paid off) by remaining partner.

Chauhan Tirphati

(a) Total Capital of Chauhan and Tirphati

(Rs.68,460 + 62,820 = Rs.1,31,280 in the

Ratio of 3: 1) 98,460 32,820

Adjusted existing Capital 68,460 62,820

Excess or Deficit (Excess) 30,000 (Deficit) 30,000

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