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Partnership Accounts (Retirement of a Partner) CPT Section A Fundamentals of Accountancy Chapter 8 Unit 4
Prof. Deepak Jaggi
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Learning Objectives
(1) Understand the role of retiring partner in the obligations of the firm.
(2) Logic of treatment of Reserves and Debit Balances in case of retirement of partner.
(3) Techniques of arriving at the various Ratio’s.
(4) Understand the Goodwill adjustment.
(5) To Lay a solid foundation of accounting treatment in case of retirement of partner.
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PARTNERSHIP ACCOUNTS (Retirement of a Partner)
A partner who retires from the existing partnership firm is known as a retiring partner
A partner who retires will be called as outgoing partner
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Conti.. (Retirement of a Partner)
A partner may retire from the business due to one or more of the following reasons:
Old age or Health problems of the partner
Better Opportunity
Difference of opinion among partners
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Accounting Treatment
Not Same • Similar to Admission of Partner
Information given
• 1. Balance Sheet of Old Firm • 2. Adjustments
To Prepare
• 1. Revaluation A/c • 2. Partner’s Capital A/c • 3. Cash /Bank A/c • 4. Balance Sheet of a new Firm
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Difference between Admission and Retirement of a Partner
Admission Retirement
1) 2 Old Partners & 3 New Partners
1) 3 Old Partners & 2 New Partners
2) Old Ratio, New Ratio, Sacrifice Ratio
2) Old Ratio, New Ratio, Gain Ratio (Benefit Ratio)
3) C = Incoming Partner 3) C = Outgoing Partner
4) 2 Cases of Goodwill 4) 1 Case of Goodwill
5) Incoming Partner brings money 5) Outgoing Partner takes money
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Goodwill Adjustment
Goodwill is raised (Old Ratio) Goodwill A/c ….. Dr. To Old Partner’s Capital A/c GO (Old)
Goodwill is written off (New Ratio) New Partner’s Capital A/c ….. Dr. To Goodwill A/c NG(New)
Cont….
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Goodwill Conti..
Net Effect of the above 2 entries In Gain Ratio
New Partner’s Capital A/c….. Dr. To Retiring Partner’s Capital A/c NR (Gain)
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Ratios
Old Ratio = Old Partners
New Ratio = New Partners
Gain / Benefit Ratio = New Partners
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Old Ratio
Given
Otherwise
Equal among Old Partners
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New Ratio
Given
Otherwise
Just Remove the share of Outgoing Partner
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Gain Ratio
Same as Old Ratio if Old Ratio and New Ratio of New Partners is same
Otherwise Formulae
Gain Received = New Ratio – Old Ratio
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Example of Ratios - Question
D 3/6
3/5
R 2/6
2/5
A 1/6
x
OR 3:2:1
NR=3:2
GR=3:2
Deepika , Ranbir , Aditya are Old Partners - Ratio 3:2:1. Aditya retires
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Time Gap
• Partner retires in between the year
• Gap between last Balance Sheet and Date of Retirement.
• Retiring Partner is entitled for share in profits for this Time Gap
• Entry – P&L Suspense A/c……. Dr. • To Retiring Partner’s Capital A/c
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Settlement of Retiring Partner’s Capital A/c
Credit Side – Debit Side
Amount is Payable to Retiring Partner
Either Transfer to Cash / Bank A/c or Retiring Partner’s Loan A/c
Question is Silent - Transfer it to his Loan A/c
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Practical Problem Kareena Kapoor, Karishma Kapoor and Deepika were partners sharing profits in the ratio of 4:3:3:-
Balance Sheet as on 31 st December, 1996 Liabilities Assets
Sundry Creditors
Bills Payable
Reserve Fund
Capital Accounts
Kareena
Karishma
Deepika
38,000
10,000
25,000
80,000
60,000
49,000
Cash at Bank
Debtors 32,000 Less: R.D.D. 2,000
Stock
Motor Van
Plant and Machinery
Factory Building
6,000
30,000
50,000
16,000
70,000
90,000
2,62,000 2,62,000
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Problem no.1 Conti.. Karishma retired on that date on the following terms:-
1. The Goodwill of the firm to be valued at ₹30,000 and Karishma’s share in it
should be raised.
2. Plant to be depreciated by 10% and Motor van y 12.5%. Stock to be
appreciated by 10% and Building by 20%.
3. One workman Shahrukh was injured and compensation of ₹ 6,000 payable
to him is to be recorded in the firm’s book.
4. Provision for doubtful debts is no longer necessary.
5. Both the partners decided that Goodwill should not appear in the books of
accounts of the firm. The amount payable to Karishma shall be kept as Loan.
Prepare: Capital Accounts of the Partners. Profit and Loss Adjustment
Account, Balance Sheet of Kareena and Deepika.
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Solution Revaluation Account
Particulars Amt. Amt. Particulars Amt. Amt.
To Plant A/c
To Motor Van A/c
To Compensation
Payable A/c
To Partners Capital A/c.
Kareena
Karishma
Deepika
4,000
3,000
3,000
7,000
2,000
6,000
10,000
By Stock A/c
By Building A/c
By R.D.D. A/c
5,000
18,000
2,000
25,000 25,000
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Solution Conti..
Cont.……
Partners Capital Account
Particulars Kareena Karishma Deepika Particulars Kareena Karishma Deepika
To Karishma’s A/c
To Karishma’s Loan
A/c
To Balance c/d
5,143
88,857
-
79,500
-
3,857
55,643
By Balance b/d
By Reserve Fund
By Revaluation A/c
By Kareena A/c
By Deepika A/c
80,000
10,000
4,000
60,000
7,500
3,000
5,143
3,857
49,000
7,500
3,000
94,000 79,500 59,500 94,000 79,500 59,500
-
-
- -
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Solution Conti..
(After Retirement) Balance Sheet
Liabilities Amt. Amt. Assets Amt. Amt.
Partner’s Capital A/c Kareena Deepika Compensation Payable Creditors Bills Payable Karishma’s Loan
88,857 55,643 1,44,500
6,000 38,000 10,000 79,500
Machinery Motor Van Cash Stock Building Debtors
63,000 14,000 6,000
55,000 1,08,000
32,000
2,78,000 2,78,000
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MCQ’s
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MCQ.1
Q.1. X, Y and Z are partners with profits sharing ratio 4:3:2. Y retires and Goodwill ₹10,800 shown in books of account. If X and Z shares profits new ratio in 5:3, then find the gain profit sharing ratio.
a) 13:11
b) 17 : 11
c) 31 : 11
d) 14 : 21
Ans. a) 13:11
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MCQ.2
Q.2. The Capitals of X, Y and Z are ₹1,00,000, ₹75,000 and ₹50,000 , profits are shared in the ratio of 3:2:1. Y retires on the basis of firm purchased by other partners in the new ratio between X and Z is 3:1. Find the capital of X and Z.
a) ₹1,50,000 and ₹1,00,000
b) ₹1,46,250 and ₹42,000
c) ₹1,56,250 and ₹68,750
d) ₹86,250 and ₹46,250
Ans. c) ₹1,56,250 and ₹68,750
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MCQ.3
Q.3. Outgoing partner is compensated for parting with firm’s future profits in favour of remaining partners. In what ratio do the remaining partners contribute to such compensation amount
a) Gaining Ratio
b) Capital Ratio
c) Sacrificing Ratio
d) Profit Sharing Ratio
Ans. a) Gaining Ratio
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MCQ.4
Q.4. Claim of the retiring partner is payable in the following form
a) Fully in cash
b) Fully transferred to loan account to be paid later with some interest on it
c) Partly in cash and partly as loan repayable later with agreed interest
d) Any of the above method
Ans. d) Any of the above method
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MCQ.5 Q.5. X, Y and Z were partners in a firm sharing profits and losses in the ratio of 2:2:1 respectively with the capital balance of ₹50,000 for X and Y, for Z ₹25,000. Y declared to retire from the firm and balance in reserve on the date was ₹15,000. If goodwill of the firm was valued as ₹30,000 and profit on revaluation was ₹7,050, then what amount will be transferred to the loan account of Y.
a) ₹70,820
b) ₹50,820
c) ₹25,820
d) ₹60,000
Ans. a) ₹70,820
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MCQ.6
Q.6. Aman , Raman and Sunit are partners sharing profits and losses in the ratio of 5:4:3. Sunit retires and if Aman and Raman shares profits of Sunit in 4:3, then new profit sharing ratio will be :
a) 4 : 3
b) 47 : 37
c) 5 : 4
d) 5 : 3
Ans. b) 47 : 37
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MCQ.7
Q.7. X, Y and Z were partners sharing profits and losses in the ratio of 3:2:1 . X retired Goodwill of the firm is to be valued at ₹24,000 & Goodwill Account is to be raised which is not appearing in the balance sheet. What will be the treatment for goodwill ?
a) Credited to Revaluation Account at ₹24,000
b) Credited to partners capital account ₹24,000 in profit sharing ratio
c) Only X’s capital A/c Credited with ₹12,000
d) Only X’s capital A/c credited with ₹24,000.
Ans. b) Credited to partners capital account ₹24,000 in profit sharing ratio
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MCQ.8
Q.8. X, Y and Z are partners sharing profits in the ratio 2:2:1. On retirement of Y, goodwill was valued as ₹30,000. Find the contribution of X and Z to compensate Y.
a) ₹20,000 and ₹10,000
b) ₹8,000 and ₹4,000
c) They will not contribute anything.
d) Only X’s capital A/c credited with ₹24,000.
Ans. b) ₹8,000 and ₹4,000
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MCQ.9
Q.9. A, B and C are partners sharing profits and losses in he proportion of 1/2, 1/3 and 1/6. B retired and the new profit sharing ratio between A and C is 3 : 2 and the Reserve of ₹12,000 is divided amount the partners in the ratio:
a) 2,000 : 4,000 : 6,000
b) 5,000 : 5,000 : 2,000
c) 4,000 : 6,000 : 2,000
d) 6,000 : 4,000 : 2,000
Ans. d) 6,000 : 4,000 : 2,000
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MCQ.10
Q.10. Retiring or outgoing partner :
a) To be liable for firm’s liabilities.
b) Not liable for any liabilities of the firm.
c) Is liable for obligation incurred before his retirement.
d) Is liable for obligations incurred with his consent only.
Ans. c) Is liable for obligation incurred before his retirement
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Lesson Summary
Partner goes out
Accounting Treatment similar to Admission but not same
Gain Ratio / Benefit Ratio = New Ratio of New Partners, Otherwise Gain Received = New Ratio-Old Ratio
Also Gain Received + Old Ratio = New Ratio
For New Ratio, Just Remove, the share of Outgoing Partner
Time Gap between Balance Sheet date and Date of Retirement - P & L Suspense A/c …… Dr. To Retiring Partner’s Capital A/c
Settlement = Cash or Loan , If Question Silent then Loan
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Thank You