Retirement of a Partner Class 12 Notes

Retirement of a partner means retiring from the firm, i.e., ceasing to be a partner of the firm. Here are the retirement of a partner class 12 notes.

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Accounting Treatment of Goodwill

Gaining Ratio = New Ratio – Old Ratio

The entry of goodwill will be:

Gaining Partner’s Capital A/c Dr.
To Sacrificing Partner’s Capital A/c

Payment to Retiring Partner

If the question states to pay off the retiring partner then the following entry is passed:

Retiring Partner’s Capital A/c Dr.
To Cash/Bank A/c

Note: If the question is silent regarding the payment then the amount due to the retiring partner will be transferred to its loan A/c.

Retiring Partner’s Capital A/c Dr.
To Retiring Partner’s Loan A/c

Gaining Ratio = New Ratio – Old Ratio

Difference between Sacrificing Ratio & Gaining Ratio

Basis	Sacrificing Ratio	Gaining Ratio
Meaning	It is the ratio in which the old partners have agreed to sacrifice their shares in profits in favor of the new or incoming partner.	It is the ratio in which the remaining partners acquire the outgoing(retired or deceased) partner’s share.
Objective	It is calculated to determine the amount of compensation to be paid by the incoming partner to the sacrificing partners as a premium for goodwill.	It is calculated to determine the amount of compensation to be paid by each of the gaining partners to the outgoing partner as a premium for goodwill.
When to Calculate	It is calculated at the time of admission of a new partner and changes in the profit-sharing ratio.	It is calculated at the time of retirement or death of a partner and changes in the profit-sharing ratio.
Method of Calculation	Sacrificing Ratio=Old Ratio-New Ratio	Gaining Ratio=New Ratio-Old Ratio

Sacrificing Ratio Vs. Gaining Ratio

Treatment of Goodwill

Gaining Partner’s Capital/Current A/c Dr.
To Retiring Partner’s Capital/Current A/c

If any goodwill exists in the book then it should be written off among all partner’s capital or current accounts including the retiring or outgoing partner in their old ratio, i.e., the entry will be:

All Partner’s Capital/Current A/c Dr. (In old ratio)
To Goodwill A/c

Adjustment of Capitals

Adjustment of the remaining partner’s capital when the capital of the new firm is given

Step 1: Calculate the capital of each continuing partner in their new profit-sharing ratio as follows:
Total Capital of the new firm * New share of profit of each continuing partner

Step 2: Calculate the cash brought in or paid out to each partner as follows:
Capital of individual partner after all adjustment – New Capital of individual Partner

Death of a Partner Class 12 Notes

Adjustment of the remaining partner’s capital when the capital of the new firm is not given

Step 1: Calculate the total capital of the new firm as under;
The sum of the remaining partner’s capital after all adjustments.

Step 2: Calculate the capital of each continuing partner in their new profit-sharing ratio as under;
Total capital of the new firm * new share of profit of each continuing partner

Step 3: Calculate the cash brought in or paid out to each partner as under;
Capital of individual partner after all adjustments – New capital of individual partner

Hidden Goodwill

If the new firm has agreed to settle the account of the retiring partner by paying him a lump sum amount, then the amount paid to him more than his adjusted capital due shall be treated as his share of goodwill. It is also known as hidden goodwill or inferred goodwill.

Calculation of amount due to retiring partner

The amount due to the retiring partner is ascertained by preparing his capital account after taking into account the following:

a) Items to be Credit

His capital in the firm
His share in the firm’s undistributed profit or losses.
His share of profit or loss on revaluation of assets and liabilities.
His share of profit till the date of retirement. (if any)
His salary or interest on capital on drawing if any till the date of retirement.
His share in the firm’s goodwill.

b) Items to be Debited

Drawing & interest thereon, of the retiring partner
Share in the accumulated losses of the past year/years.
Share in the loss of revaluation A/c, etc.

Note: Partner is entitled to interest on partner’s loan @6% per annum, if not mentioned in question.

This was all about the retirement of a partner class 12 notes. If you have any doubts, you can either join my telegram channel or ask your doubts in the comments section.