Overview of Retirement of a Partner and its Effects

Slide Note

Understanding the process of retirement of a partner in a business entity is essential as it involves various adjustments and implications on the firm's financial structure. When a partner retires, it can lead to changes in profit-sharing ratios, adjustments in assets and liabilities, and the treatment of goodwill. The remaining partners might acquire the retiring partner's share, resulting in a new profit-sharing ratio. Proper adjustments need to be made to ensure a smooth transition and accurate representation of the firm's financial position.

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Presentation Transcript

Retirement of a Partner R epresented B y Abdul Hannan

Introduction A P artner m ay retire from the fram e for different reasons such as difference w ith the other partners better business opportunity, old age etc.

Effects of Retirement of a Partner Effects of Retirement of a Partner To terminate and a create a new Partner To terminate and a create a new Partner Adjustment undrawn profit or accumulated losses Adjustment undrawn profit or accumulated losses Revaluated and proper adjustment of assets and liabilities. Revaluated and proper adjustment of assets and liabilities. Combined shares of remaining partners will increased. Combined shares of remaining partners will increased.

Adjustments for Retirement of a Partner Retirement of a Partner C hange in the profit shearing ratio G oodw ill R evolution of assets and L iabilities R everse and Surplus P artners capital

Change in the Profit Shearing Ratio Change in the Profit Shearing Ratio New Profit Shearing Ratio Gaining Ratio

New Profit Sharing Ratio W hen a partner is retiring the share of retiring partner m ay be taken over by the rem aining partners in their old ratio or other ratio D ue to this acquisition the profit sharing ratio betw een the rem aining partners w ill changed The profit shearing ratio betw een the continuing partners w ill rem ain sam e

Gaining Ratio A fter retirem ent of partner the com bine share of rem ining partner w ill be Increased The ratio in w hich the rem aining partners are acquiring the share of the retiring partner is called G aining R atio G aining R atio = N ew R atio Old R atio

Treatment of Goodwill A t the tim e of retirem ent of partner the retiring partner is entitled to his share in the goodw ill of the firm . For share of goodw ill of retiring partner Journal w ill be C ontinuing partners Capital accounts D r ...........(Share of retiring partner) To retiring partner C apital A ccount.

Revolution of Assets and Liabilities Description(Journal) Description(Journal) Notes Notes If the value of the assets increase Sl Sl 1 Assets Account Dr ( Changed Value) To revolution Account Revolution Account Dr ( Changed Value) To Assets Account Revolution Account Dr ( Changed Value) To Liabilities Account Liabilities Account Dr ( Changed Value) To revolution Account Revolution Account Dr To All Partner Capital Account All Partner Capital Account Dr To Revolution Account 2 If the value of the assets decrease 3 If the value of the Liabilities Increase 4 If the value of the Liabilities decrease 5 For Profit on revolution 6 For Loss on revolution

Reverse and Surplus Reverse and Surplus Sl Sl 1 Description(Journal) Description(Journal) For General Reverse , Profit & Loss and other Reserve Notes Notes General Reserve Account Dr. Profit & Loss Account Dr. Other Resevea Account Dr. To All partners Capital Account All partners Capital Account Dr. To Profit & loss Account 2 For Profit & Loss account Dr. Balance