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Karnataka class 12 commerce Accountancy Adjustments in connection with retirement of a partner

Karnataka class 12 commerce Accountancy Adjustments in connection with retirement of a partner

Karnataka class 12 commerce Accountancy Adjustments in connection with retirement of a partner

ADJUSTMENT OF REMAINING PARTNER’S CAPITAL ACCOUNT AFTER RETIREMENT

After retirement of a partner the remaining partners may decide to adjust their capital. 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. The total capital of the firm may be more or less than the total of their capital at the time of retirement. The new capitals of the partners are compared with the balance standing to the credit of respective partner’s capital account. If there is a surplus in the capital account, the amount is withdrawn by the concerned partner. The partner brings cash in case the balance in the capital account is less than the calculated amount.

Karnataka class 12 commerce Accountancy Adjustments in connection with retirement of a partner-EXAMPLE

Roopa, Sunder and Shalu are partners sharing profit in the ratio of 5 : 3 : 2. Roopa retired, when their capitals were: Rs.46,000, Rs.42,000 and Rs.38,000 respectively after making all adjustments on retirement. Sunder and Shalu decided to have a total capital of the firm at Rs.84,000 in the proportion of 7 : 5. Calculate actual cash to be paid or brought in by each partner and make necessary journal entries.

Solution: Total Capital of the New firm = Rs.84,000 Sunder’s share in the new capital = Rs.84,000 × 7/12 = Rs.49,000 Shalu’s share in the new capital = Rs.84,000 × 5/12 = Rs.35,000

On comparing Sunder’s share in the new capital of the firm with the amount standing to the credit of his capital, It is observed that he has to bring Rs.7,000 the deficit amount (Rs.49,000 – 42,000) in Cash. Similarly, Shalu’s share in the new capital of the firm is Rs.35,000 while Rs.38,000 stands credited to her capital account. So she is allowed to withdraw Rs.3,000, the surplus amount (Rs.38,000 – Rs.35,000) from the firm so as to make her capital in proportion to her new profit share ratio.

Karnataka class 12 commerce Accountancy Adjustments in connection with retirement of a partner

Karnataka class 12 commerce Accountancy Adjustments in connection with retirement of a partner

Karnataka class 12 commerce Accountancy Adjustments in connection with retirement of a 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.

Karnataka class 12 commerce Accountancy Adjustments in connection with retirement of a partner-EXAMPLE

Sumit, Amit and Neha are partners sharing profit in the ratio of 4 : 3 : 1. when Amit retired , their adjusted capitals were Rs.76,000: Rs.45,000 and Rs.34,000 respectively. Sumit and Neha decided to have their total capital of the firm in the ratio of 3 : 2. The necessary adjustments were to be made in cash only. Calculate actual cash to be paid off or brought in by each partner.

Solution: Total of the adjusted capitals of the remaining partners.

Sumit = Rs. 76,000

Neha = Rs. 34,000

Total = Rs.110,000

Total capital of the firm which is divided in the new ratio of 3 : 2.

New capital of Sumit = 1,10,000 × 3/5 = Rs. 66,000

New Capital of Neha = 1,10,000 × 2/5 = Rs.44,000

Sumit’s share in the new capital of the firm is Rs.66,000 while Rs.76,000 stands credited to his capital account. So he will withdraw Rs.10,000 (Rs.76,000 – Rs.66,000) from the firm so as to make his capital in proportion to his new profit sharing ratio.

Similarly, Neha’s share in the new capital of the firm is Rs.44,000 while Rs.34,000 stands credited to her capital account, She has to bring Rs,10,000 (Rs,44,000 – 34,000) in Cash to make up the deficit in the capital account.

Karnataka class 12 commerce Accountancy Adjustments in connection with retirement of a partner

You have learnt that retirement or death of a partner also leads to reconstitution of a partnership firm. On the retirement or death of a partner, the existing partnership deed comes to an end, and in its place, a new partnership deed needs to be framed whereby, the remaining partners continue to do their business on changed terms and conditions. There is not much difference in the accounting treatment at the time of retirement or in the event of death. In both the cases, we are required to determine the sum due to the retiring partner (in case of retirement) and to the legal representatives (in case of deceased partner) after making necessary adjustments in respect of goodwill, revaluation of a assets and liabilities and transfer of accumulated profits and losses. In addition, we may also have to compute the new profit sharing’s ratio among the remaining partners and so also their gaining ratio, This covers all these aspects in detail.

Karnataka class 12 commerce Accountancy Adjustments in connection with retirement of a partner

Ascertaining the Amount Due to Retiring/ Deceased Partner -The sum due to the retiring partner (in case of retirement) and to the legal representatives/ executors (in case of death) includes:

(i) credit balance of his capital account;

(ii) credit balance of his current account(if any);

(iii) his share of goodwill ;

(iv) his share of accumulated profits (reserves);

(v) his share in the gain of revaluation of assets and liabilities;

(vi) his share of profits up to the date of retirement/death;

(vii) interest on his capital, if involved, up to the date of retirement/death; and

(viii) salary/commission, if any, due to him up to the date of retirement/death.

The following deductions, if any, may have to be made from his share:

(i) debit balance of his current account(if any);

(ii) his share of goodwill to be written off; if necessary;

(iii) his share of accumulated losses;

(iv) his share of loss on revaluation of assets and liabilities;

(v) his share of loss up to the date of retirement/death;

(vi) his drawings up to the date of retirement/death;

(vii) interest on drawings, if involved, up to the date of retirement/death.

Thus, as in the case of admission, the various accounting aspects involved on retirement or death of a partner are as follows:

1. Ascertainment of new profit sharing ratio and gaining ratio;

2. Treatment of goodwill;

3. Revaluation of assets and liabilities;

4. Adjustment in respect of unrecorded assets and liabilities;

5. Distribution of accumulated profits and losses;

6. Ascertainment of share of profit or loss up to the date of retirement/death;

7. Adjustment of capital, if required;

8. Settlement of the amounts due to retired/deceased partner;

Karnataka class 12 commerce Accountancy Adjustments in connection with retirement of a partner

Calculation of profit upto the date of death of a partner.

If the death of a partner occurs during the year, the representatives of the deceased partner are entitled to his/her share of profits earned till the date of his/her death. Such profit is ascertained by any of the following methods:

(i) Time Basis

(ii) Turnover or Sales Basis

(i) Time Basis

In this case, it is assumed that profit has been earned uniformly through out the year. For example: The total profit of previous year is Rs. 2,25,000 and a partner dies three months after the close of previous year, the profit of three months is Rs. 31,250 i.e. 1,25,000 × 3/12, if the deceased partner took 2/10 share of profit, his/her share of profit till the date of death is Rs. 6,250 i.e. Rs. 31,250 × 2/10

(ii) Turnover or Sales Basis

In this method, we have to take into consideration the profit and the total sales of the last year. Thereafter the profit upto the date of death is estimated on the basis of the sale of the last year. Profit is assumed to be earned uniformly at the same rate.

Karnataka class 12 commerce Accountancy Adjustments in connection with retirement of a partner

Must read:

Karnataka class 12 commerce Accountancy Death of a Partner

Karnataka class 12 commerce Accountancy CH4 PARTNERSHIP ACCOUNTS RETIREMENT AND DEATH OF A partner

Karnataka class 12 commerce Accountancy Ratios in connection with retirement of a partner

Karnataka class 12 commerce Accountancy Adjustments in connection with retirement of a partner

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