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Karnataka class 12 commerce Accountancy Retirement of a partner

Karnataka class 12 commerce Accountancy Retirement of a partner

Karnataka class 12 commerce Accountancy Retirement of a 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. Amit, Sunil and Ashu are partners in a firm. Due to some family problems, Ashu wants to leave the firm. The other partners decide to allow him to withdraw from the partnership. Thus, due to some reasons like old age, poor health, strained relations etc., an existing partner may decide to retire from the partnership. 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.

A partner retires either :

(i) with the consent of all partners, or

(ii) as per terms of the agreement; or

(iii) at his or her own will.

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

(a) New profit sharing ratio and gaining ratio.

(b) Goodwill

(c) Adjustment of changes in the value of Assets and liabilities

(d) Treatment of reserve and accumulated profits.

(e) Settlement of retiring partners dues,

(f) New capital of the continuing partners.

New profit sharing ratio and gaining ratio

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

Karnataka class 12 commerce Accountancy Retirement of a partner

Karnataka class 12 commerce Accountancy Retirement of a partner

Karnataka class 12 commerce Accountancy Retirement of a partner

Various cases of new ratio and gaining ratio are illustrated as follows:

(i) Retiring partner’s share distributed in Existing Ratio :

In this case, retiring partner’s share is distributed in existing ratio amongst the remaining partners. The remaining partners continue to share profits and losses in the existing ratio. The following example illustrates this :

Tanu, Manu and Rena are partners sharing profits and losses in the ratio of = 4 : 3 : 2. Tanu retires and remaining partners decide to take Tanu’s share in the existing ratio i.e. 3 : 2. Calculate the new ratio of Manu and Rena.

Existing Ratio between Manu and Rena = 3/9 and 2/9

Tanu’s Ratio (retiring partner) = 4/9

Tanu’s share taken by the Manu and Rena in the ratio of 3 : 2

Manu’s gets = 4/9 × 3/5 = 12/45

Manu’s New Share = 3/9 + 12/45 = 27/45

Rena’s gets = 4/9 × 2/5 = 8/45

Rena’s New Share = 2/9 + 8/45 = 18/45

New ratio between Manu and Rena is 27/45 : 18/45 = 27 : 18 = 3 : 2.

Gaining Ratio = New Ratio – Existing Ratio Manu Gain = 27/45 – 3/9 = 12/45

Rena Gain = 18/45 – 2/9 = 8/45 12/45 : 8/45 3 : 2

You may note that the new ratio is similar to existing ratio that existed between Manu and Rena before Tanu’s retirement.

Note: In absence of any information in the question, it will be presumed that retiring partner’s share has been distributed in existing ratio.

Karnataka class 12 commerce Accountancy Retirement of a partner

(ii) Retiring partner’s share distributed in Specified proportions: Sometimes the remaining partners purchase the share of the retiring partner in specified ratio. The share purchased by them is added to their old share and the new ratio is arrived at. The following example illustrates this:

A B and C are partners in the firm sharing profits in the ratio of 3 : 2 : 1. B retired and his share was divided equally between A and C. Calculate the new profit sharing ratio of A and C. B’s Share = 2/6

B’s share is divided between A and C in the ratio of 1 : 1.

A gets 1/2 of 2/6 = 2/6 × 1/2 = 1/6

A’s New Share = 3/6 + 1/6 = 4/6

C’s gets 1/2 of 2/6 = 2/6 × 1/2 = 1/6

C’s New share = 1/6+1/6 = 2/6

Gaining Ratio Gaining Ratio = New Ratio – Existing, Ratio

Gain of A = 4/6 – 3/6 = 1/6

Gain of C = 2/6 – 1/6 = 1/6

1/6 : 1/6

1 : 1 i.e, equal.

Karnataka class 12 commerce Accountancy Retirement of a partner

(iii) Retiring Partner’s share is taken by one of the partners

The retiring partner’s share is taken up by one of the remaining partners. In this case, the retiring partner’s share is added to that of partner’s existing share. Only his/her share changes. The other partners continue to share profit in the existing ratio. An example illustrating this point is given below:

Anuj, Babu and Rani share profit in the ratio of 5 : 4 : 2. Babu retires and his share is taken by Rani, So Rani’s share is 2/11 + 4/11 = 6/11, Anuj share will remain unchanged i.e, 5/11. Thus, the new profit sharing ratio of Anuj and Rani is 5 : 6.

Karnataka class 12 commerce Accountancy Retirement of a partner

Illustration 1

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: (i) New profit sharing ratio of Neru and Anu is 4 : 3.

(ii) Ashu’s share = 2/9

Neru gets = 1/2 of 2/9 = 2/9 × 1/2 = 1/9

Neru’s New share = 4/9 + 1/9 = 5/9

Anu gets = 1/2 of 2/9 = 2/9 × 1/2 = 1/9

Anu’s New Share = 3/9 + 1/9 = 4/9

New profit sharing ratio of Neru and Anu is 5/9 : 4/9 or 5 : 4

Gaining ratio is equal 1/9 : 1/9 = 1 : 1

(iii) Ashu’s Share = 2/9

Neru gets = 2/3 of 2/9 = 2/9 × 2/3 = 4/27

Neru’s new share = 4/9 + 4/27 = 16/27

Anu gets = 1/3 of 2/9 = 2/9 × 1/3 = 2/27

Anu’s new share = 3/9 + 2/27 = 11/27

New profit sharing ratio of Neru and Anu is 16 : 11.

Gaining ratio is 4/27 : 2/27 = 4 : 2 = 2 : 1

(iv) Anu takes over Ashu share fully.

Ashu’s share = 2/9

Anu gets = 2/9

Anu’s new share = 3/9 + 2/9 = 5/9

New profit sharing ratio of Neru and Anu is 4 : 5

Only Anu gains

Karnataka class 12 commerce Accountancy Retirement of a partner

Illustration 2

Ashish, Barmon, and Chander are partners sharing profits and losses in the ratio of 2 : 1 : 2 respectively. Chander retires and Ashish and Barman decide to share the profits and losses equally in future. Calculate the gaining ratio.

Solution: Gaining ratio = New Ratio – Existing Ratio

Hence, Ashish gets = 1/2 – 2/5 = 1/10

Barman gets = 1/2 – 1/5 = 3/10

Gaining ratio between Ashish and Barman is 1 : 3

Karnataka class 12 commerce Accountancy Retirement of a partner

Must read:

Karnataka class 12 commerce Accountancy Death of a Partner

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

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

Karnataka class 12 commerce Accountancy Retirement of a partner

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