A Partner has the right to retire from the firm after giving due notice in advance. A new partnership comes into existence between the remaining partners.
A retiring partner is entitled to get the following:
1) Share in goodwill; Goodwill of the firm is valued and the retiring partners share of goodwill is credited to his capital account.
2) Share in Reserves: Reserves are the undistributed profits and it is also credited to the capital account of retiring partner.
3) Share in revaluation of assets and liabilities: Assets and liabilities are revalued on the date of retirement and retiring partner’s share of profit is credited or the loss is debited to his capital account.
Accounting problems:
1) Calculation of new profit sharing ratio and gaining ratio of the continuing partners.
2) Treatment of goodwill.
3) Accounting treatment for revaluation of assets and liabilities.
4) Accounting treatment of reserves, accumulated profits and losses.
5) Accounting treatment of joint life policy.
6) Payment to retiring partner.
7) Adjustment of capitals in proportion to profit sharing ratios.
Calculation of new profit sharing ratio:
.1) If the new profit sharing ratios of the remaining partners are not given in the question ,it will be assumed that the remaining partners continue to share profits and losses in the old ratio.
2) Sometimes the remaining partners purchase the share of retiring partner in some specified proportion .In such cases the fraction of shares purchased by them is added to their old share and the new ratio is calculated as follows:-
New ratio = old ratio + gain
Calculation of Gaining Ratio:
- Meaning of Gaining Ratio: Gaining ratio is the ratio in which the remaining partners will pay the amount of goodwill to the retiring partners.
- Calculation of Gaining Ratio:
1) If the new profits sharing ratios of the remaining partners are not given in the question, it will be assumed that the remaining partners continue to gain in the old ratio.
2) If the new profit sharing ratio of the remaining partners is given in the question, gaining ratio is calculated by deducting old ratio from the new ratio.
Gaining Ratio = New Ratio – Old Ratio
Difference between sacrificing Ratio and Gaining Ratio:
Basis
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Sacrificing Ratio
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Gaining Ratio
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1) Meaning:
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The ratio in which the old partners surrender a part of their share in favour of a new partner.
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The ratio in which the remaining partner’s acquire the outgoing partners share.
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2)When calculated
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Calculated at the time of the admission of a new partner.
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Calculated at the time of the retirement or death of a partner.
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3)Formula for calculation
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Sacrificing Ratio=Old Ratio-New Ratio
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Gaining Ratio=New Ratio-Old Ratio
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4) Purpose
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New partners share of goodwill is divided between the old partners in sacrificing ratio.
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Goodwill paid to retiring partner is paid by the remaining partners in their gaining ratio.
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Accounting Treatment of Goodwill:
1) Remaining partner’s capital A/c Dr . (In gaining ratio)
To Retiring/Deceased partner’s capital A/c ( with his share of goodwill)
2) When the goodwill A/c is already appearing in the books:
i) All partner’s capital A/c Dr. ( in old ratio )
To Goodwill A/c (goodwill existing in the books)
ii) Remaining partner’s capital A/c Dr . (in the gaining ratio)
To Retiring/Deceased partner’s capital A/c
Adjustment of Accumulated profits and reserves:
1) For distributing reserves and accumulated profits-
Reserve Fund A/c Dr .
Profit and loss A/c (cr.) Dr.
To All partners capital or current A/c (in old ratio)
2) For distributing accumulated losses:
All partner’s capital or current A/c Dr. (in old ratio)
To Profit and loss A/c
3) For distributing surplus of specific funds:
Workmen compensation fund A/c Dr .
Investment fluctuation fund A/c Dr .
To All partner’s capital or current A/c (in old ratio)
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